Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2008**

** **

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from              to              **

 
| **Commission********File Number** | ** ** | **Registrant, State of  Incorporation,********Address and Telephone Number** | ** ** | **I.R.S.  Employer********Identification  No.** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
|                              |       |                                                                         |       |                                            |       |
| **1-9052**                        | ** ** | **DPL INC.**                                                                 | ** ** | **31-1163136**                                  |       |
|                              |       | (An Ohio Corporation)                                                        |       |                                            |       |
| ** **                        |       | 1065 Woodman Drive                                                           | ** ** | ** **                                      | ** ** |
| ** **                        |       | Dayton, Ohio 45432                                                           | ** ** | ** **                                      | ** ** |
|                              |       | 937-224-6000                                                                 |       |                                            |       |
|                              |       |                                                                         |       |                                            |       |
| **1-2385**                        | ** ** | **THE DAYTON POWER AND LIGHT COMPANY**                                       | ** ** | **31-0258470**                                  |       |
| ** **                        |       | (An Ohio Corporation)                                                        | ** ** | ** **                                      | ** ** |
| ** **                        |       | 1065 Woodman Drive                                                           | ** ** | ** **                                      | ** ** |
| ** **                        |       | Dayton, Ohio 45432                                                           | ** ** | ** **                                      | ** ** |
| ** **                        |       | 937-224-6000                                                                 |       |                                            |       |

 

Indicate by check mark whether each registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 
| DPL Inc.                           |   | Yes x |   | No o |
|------------------------------------|--------|-------|--------|------|
| The Dayton Power and Light Company |   | Yes x |   | No o |

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| ** **                         | ** ** | **Large**       | ** ** | ** **      | ** ** | ** **          | ** ** | **Smaller**   | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|---------------------|------------|---------------|------------|
| ** **                         | ** ** | **accelerated** | ** ** | **Accelerated** | ** ** | **Non-accelerated** | ** ** | **reporting** | ** ** |
| ** **                         | ** ** | **filer**       | ** ** | **filer**       | ** ** | **filer**           | ** ** | **company**   | ** ** |
| DPL Inc.                           |       | x               |       | o               |       | o                   |       | o             |       |
| The Dayton Power and Light Company |       | o               |       | o               |       | x                   |       | o             |       |

 

Indicate by check mark whether each registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 
| DPL Inc.                           |   | Yes o |   | No x |
|------------------------------------|--------|-------|--------|------|
| The Dayton Power and Light Company |   | Yes o |   | No x |

 

As of July 22, 2008, each registrant had thefollowing shares of common stock outstanding:

 
| **Registrant**                         | ** ** | **Description**                   | ** ** | **Shares Outstanding** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------------------|
|                                   |       |                              |       |                        |
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value** |       | 113,609,122                 |
| ** **                             | ** ** | ** **                        | ** ** | ** **                  |
| **The Dayton Power and Light Company** | ** ** | **Common Stock, $0.01 par value** |       | 41,172,173                  |

 

This combined Form 10-Q is separatelyfiled by DPL Inc. and The Dayton Power and Light Company.  Information contained herein relating to anyindividual registrant is filed by such registrant on its own behalf.  Each registrant makes no representation as toinformation relating to a registrant other than itself.

 

 

 

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**DPL Inc.and The Dayton Power and Light Company**

 

**Index**

 
| ** **                            | ** **                                                                                  | **Page No.** |
|---------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
| ** **                            | ** **                                                                                  |              |
| **Part I Financial Information** |                                                                                        |
|                                  |                                                                                        |              |
| Item  1                               | Financial Statements – **DPL** and **DP&L**                                        | ** **        |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Statements of Results of Operations – **DPL**                   | 4                 |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Statements of Cash  Flows – **DPL**                             | 5                 |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Balance Sheets – **DPL**                                        | 6                 |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Statements of Results  of Operations – **DP&L**             | 8                 |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Statements of Cash Flows  – **DP&L**                        | 9                 |
|                                  |                                                                                        |              |
|                                  | Condensed Consolidated Balance Sheets – **DP&L**                                   | 10                |
|                                  |                                                                                        |              |
|                                  | Notes to  Condensed Consolidated Financial Statements                                       | 12                |
|                                  |                                                                                        |              |
| Item 2                                | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 29                |
|                                  |                                                                                        |              |
|                                  | Electric Sales and Revenues                                                                 | 51                |
|                                  |                                                                                        |              |
| Item 3                                | Quantitative and Qualitative Disclosures  about Market Risk                                 | 51                |
|                                  |                                                                                        |              |
| Item 4                                | Controls and Procedures                                                                     | 51                |
|                                  |                                                                                        |              |
| **Part II Other  Information**   |                                                                                        |
|                                  |                                                                                        |              |
| Item 1                                | Legal Proceedings                                                                           | 52                |
|                                  |                                                                                        |              |
| Item 1a                               | Risk Factors                                                                                | 52                |
|                                  |                                                                                        |              |
| Item 2                                | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 53                |
|                                  |                                                                                        |              |
| Item 3                                | Defaults Upon Senior Securities                                                             | 53                |
|                                  |                                                                                        |              |
| Item 4                                | Submission of Matters to a Vote of Security  Holders                                        | 54                |
|                                  |                                                                                        |              |
| Item 5                                | Other Information                                                                           | 54                |
|                                  |                                                                                        |              |
| Item 6                                | Exhibits                                                                                    | 55                |
|                                  |                                                                                        |              |
| **Other**                             |                                                                                        |
|                                  |                                                                                        |              |
| Signatures                            |                                                                                        | 56                |
|                                  |                                                                                        |              |
| Certifications                        |                                                                                        |              |
|                                       |                                                                                             |                   |  |

 

2

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**DPL Inc.** and **The Dayton Power and Light Company** filecurrent, annual and quarterly reports, proxy statements (**DPL Inc.**only),and other information required by the Securities Exchange Act of 1934, asamended, with the Securities and Exchange Commission (SEC).  You may read and copy any document we file atthe SEC’s public reference room located at 100 F Street N.E., Washington, D.C.20549, USA.  Please call the SEC at (800)SEC-0330 for further information on the public reference room.  Our SEC filings are also available to thepublic from the SEC’s web site at http://www.sec.gov.

 

Our public internet site is http://www.dplinc.com.  We make available, free of charge, throughour internet site, our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of ourdirectors and executive officers, and amendments to those reports filed orfurnished pursuant to the Securities Exchange Act of 1934, as amended, as soonas reasonably practicable after we electronically file such material with, orfurnish it to, the SEC.

 

In addition, our public internet siteincludes other items related to corporate governance matters, including, amongother things, our governance guidelines, charters of various committees of theBoard of Directors and our code of business conduct and ethics applicable toall employees, officers and directors. You may obtain copies of these documents, free of charge, by sending arequest, in writing, to DPL Investor Relations, 1065 Woodman Drive, Dayton,Ohio 45432.

 

**Part I– Financial Information**

 

This report includes the combined filing of DPL Inc.**(DPL)** and The Dayton Power and Light Company **(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 94% of **DPL’s**totalconsolidated asset base.  Throughout thisreport, the terms “we,” “us,” “our,” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in the section.

 

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**Item 1 – Financial Statements**

 

**DPL INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                               | ** ** | **Three Months Ended** |       | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**                |       | **June 30,**              | ** ** |
| **$ in millions except per share amounts** | ** ** | **2008**                         | ** ** | **2007**                       |       | **2008** | ** ** | **2007** | ** ** |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Revenues**                                                             | ** ** | **$**                            | **378.8**  |                           | $          | 343.1 |   | **$** | **794.9** | ** ** | $ | 722.8 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Cost of revenues:**                                                    |       |                             |       |                           |       |   | ** ** |   |   |
| Fuel                                                                     | ** ** | **68.4**                         |       | 63.5                           |       | **130.3** | ** ** | 153.8 |   |
| Purchased power                                                          | ** ** | **86.1**                         |       | 83.2                           |       | **169.1** | ** ** | 135.4 |   |
| Total cost of revenues                                                   | ** ** | **154.5**                        |       | 146.7                          |       | **299.4** | ** ** | 289.2 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Gross margin**                                                         | ** ** | **224.3**                        |       | 196.4                          |       | **495.5** | ** ** | 433.6 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Operating expenses:**                                                  |       |                             |       |                           |       |   | ** ** |   |   |
| Operation and maintenance                                                | ** ** | **69.8**                         |       | 61.5                           |       | **132.2** | ** ** | 130.8 |   |
| Depreciation and amortization                                            | ** ** | **34.0**                         |       | 35.5                           |       | **67.2** | ** ** | 69.0 |   |
| General taxes                                                            | ** ** | **32.5**                         |       | 27.5                           |       | **62.3** | ** ** | 55.5 |   |
| Amortization of regulatory assets                                        | ** ** | **2.4**                          |       | 2.5                            |       | **5.5** | ** ** | 5.4 |   |
| Total operating expenses                                                 | ** ** | **138.7**                        |       | 127.0                          |       | **267.2** | ** ** | 260.7 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Operating income**                                                     | ** ** | **85.6**                         |       | 69.4                           |       | **228.3** | ** ** | 172.9 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| Net gain on settlement of executive  litigation                          | ** ** | **—**                       |       | 31.0                           |       | **—** | ** ** | 31.0 |   |
| Investment income                                                        | ** ** | **0.9**                          |       | 5.3                            |       | **2.6** | ** ** | 8.3 |   |
| Interest expense                                                         | ** ** | **(25.0**                        | **)**      | (19.4                          | )          | **(46.0** | **)** | (42.5 | ) |
| Other income (deductions)                                                | ** ** | **0.2**                          |       | (0.2                           | )          | **(0.5** | **)** | 0.6 |   |
| Total other income/(expense)                                             |       | **(23.9**                        | **)**      | 16.7                           |       | **(43.9** | **)** | (2.6 | ) |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Earnings from continuing operations before  income tax**               | ** ** | **61.7**                         |       | 86.1                           |       | **184.4** | ** ** | 170.3 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| Income tax expense                                                       | ** ** | **14.1**                         |       | 32.5                           |       | **59.5** | ** ** | 65.5 |   |
| ** **                                                               | ** ** | ** **                       |       |                           |       | ** ** | ** ** |   |   |
| **Earnings from continuing operations**                                  | ** ** | **47.6**                         |       | 53.6                           |       | **124.9** | ** ** | 104.8 |   |
| **Earnings from discontinued operations, net  of tax**                   | ** ** | **—**                       |       | 5.1                            |       | **—** | ** ** | 10.0 |   |
| ** **                                                               | ** ** | ** **                       |       |                           |       | ** ** | ** ** |   |   |
| **Net Income**                                                           | ** ** | **$**                            | **47.6**   |                           | $          | 58.7 |   | **$** | **124.9** | ** ** | $ | 114.8 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Average number of common shares outstanding  (millions)**              |       |                             |       |                           |       |   | ** ** |   |   |
| Basic                                                                    | ** ** | **109.4**                        |       | 107.9                          |       | **109.4** | ** ** | 107.7 |   |
| Diluted                                                                  | ** ** | **117.3**                        |       | 119.5                          |       | **116.8** | ** ** | 119.4 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Earnings per share of common stock**                                   |       |                             |       |                           |       |   | ** ** |   |   |
| Basic:                                                                   |       |                             |       |                           |       |   | ** ** |   |   |
| Earnings from continuing operations                                      | ** ** | **$**                            | **0.43**   |                           | $          | 0.50 |   | **$** | **1.14** | ** ** | $ | 0.98 |   |
| Earnings from discontinued operations                                    | ** ** | **—**                       |       | 0.04                           |       | **—** | ** ** | 0.09 |   |
| Total Basic                                                              | ** ** | **$**                            | **0.43**   |                           | $          | 0.54 |   | **$** | **1.14** | ** ** | $ | 1.07 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| Diluted:                                                                 |       |                             |       |                           |       |   | ** ** |   |   |
| Earnings from continuing operations                                      | ** ** | **$**                            | **0.41**   |                           | $          | 0.45 |   | **$** | **1.07** | ** ** | $ | 0.88 |   |
| Earnings from discontinued operations                                    | ** ** | **—**                       |       | 0.04                           |       | **—** | ** ** | 0.08 |   |
| Total Diluted                                                            | ** ** | **$**                            | **0.41**   |                           | $          | 0.49 |   | **$** | **1.07** | ** ** | $ | 0.96 |   |
|                                                                     |       |                             |       |                           |       |   | ** ** |   |   |
| **Dividends paid per share of common stock**                             | ** ** | **$**                            | **0.275**  |                           | $          | 0.260 |   | **$** | **0.550** | ** ** | $ | 0.520 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| **$  in millions**                                                  | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from operating activities:**                                          |       |                           | ** ** |   |   |
| Net income                                                                         | ** ** | **$**                          | **124.9**  | ** ** | $ | 114.8 |   |
| Less: Earnings from discontinued  operations, net of tax                           | ** ** | **—**                     | ** ** | (10.0 | ) |
| Earnings from continuing operations                                                | ** ** | **124.9**                      | ** ** | 104.8 |   |
|                                                                               |       |                           | ** ** |   |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           | ** ** |   |   |
| Depreciation and amortization                                                      | ** ** | **67.2**                       | ** ** | 69.0 |   |
| Net gain on settlement of executive  litigation                                    | ** ** | **—**                     | ** ** | (31.0 | ) |
| Gain on sale of aircraft                                                           | ** ** | **—**                     | ** ** | (6.0 | ) |
| Amortization of regulatory assets                                                  | ** ** | **5.5**                        | ** ** | 5.4 |   |
| Deferred income taxes                                                              | ** ** | **28.5**                       | ** ** | 14.0 |   |
| Captive insurance provision                                                        | ** ** | **(0.5**                       | **)**      | 0.3 |   |
| Changes in certain assets and liabilities:                                         |       |                           | ** ** |   |   |
| Accounts receivable                                                                | ** ** | **(12.2**                      | **)**      | (42.2 | ) |
| Accounts payable                                                                   | ** ** | **36.1**                       | ** ** | 28.1 |   |
| Accrued taxes payable                                                              | ** ** | **(38.6**                      | **)**      | (30.8 | ) |
| Accrued interest payable                                                           | ** ** | **(0.8**                       | **)**      | (6.1 | ) |
| Prepayments                                                                        | ** ** | **(0.1**                       | **)**      | (0.2 | ) |
| Inventories                                                                        | ** ** | **(0.9**                       | **)**      | (11.4 | ) |
| Deferred compensation assets                                                       | ** ** | **(3.8**                       | **)**      | 4.6 |   |
| Deferred compensation obligations                                                  | ** ** | **(6.7**                       | **)**      | 1.3 |   |
| Other                                                                              | ** ** | **1.8**                        | ** ** | 20.3 |   |
| **Net cash provided by operating activities**                                      | ** ** | **200.4**                      | ** ** | 120.1 |   |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from investing activities:**                                          |       |                           | ** ** |   |   |
| Capital expenditures                                                               | ** ** | **(118.4**                     | **)**      | (178.9 | ) |
| Proceeds from the sale of peaking units,  net                                      | ** ** | **—**                     | ** ** | 151.0 |   |
| Proceeds from the sale of aircraft                                                 | ** ** | **—**                     | ** ** | 7.4 |   |
| Investment funds held in trust                                                     | ** ** | **—**                     | ** ** | (2.2 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(118.4**                     | **)**      | (22.7 | ) |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from financing activities:**                                          |       |                           | ** ** |   |   |
| Exercise of stock options                                                          | ** ** | **1.1**                        | ** ** | 14.5 |   |
| Tax impact related to exercise of stock  options                                   | ** ** | **0.1**                        | ** ** | 0.5 |   |
| Retirement of long-term debt                                                       | ** ** | **(100.0**                     | **)**      | (225.0 | ) |
| Withdrawal of restricted funds held in  trust, net                                 | ** ** | **20.5**                       | ** ** | 10.1 |   |
| Dividends paid on common stock                                                     | ** ** | **(59.9**                      | **)**      | (55.8 | ) |
| Repurchase of pollution control bonds                                              | ** ** | **(90.0**                      | **)**      | — |   |
| Withdrawals from revolving credit facility                                         | ** ** | **90.0**                       | ** ** | 95.0 |   |
| Repayment of borrowings from revolving  credit facility                            |       | —                         | ** ** | (95.0 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(138.2**                     | **)**      | (255.7 | ) |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash and cash equivalents:**                                                     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(56.2**                      | **)**      | (158.3 | ) |
| Balance at beginning of period                                                     | ** ** | **134.9**                      | ** ** | 262.2 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                          | **78.7**   | ** ** | $ | 103.9 |   |
|                                                                               |       |                           | ** ** |   |   |
| **Supplemental cash flow information:**                                            |       |                           | ** ** |   |   |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                          | **43.4**   | ** ** | $ | 47.2 |   |
| Income taxes paid, net                                                             | ** ** | **$**                          | **70.4**   | ** ** | $ | 79.3 |   |
| Non-cash financing and investing  activities:                                      |       |                           | ** ** |   |   |
| Restricted funds held in trust                                                     | ** ** | **$**                          | **16.5**   | ** ** | $ | 2.2 |   |
| Accruals for capital expenditures                                                  | ** ** | **$**                          | **36.2**   | ** ** | $ | 59.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At**            | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                    | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                                                           |       |              |        |                  |       |
| **ASSETS**                                                                                     |       |              |        |                  |       |
|                                                                                           |       |              |        |                  |       |
| **Current assets:**                                                                            |       |              | ** **  |                  |       |
| Cash and cash equivalents                                                                      | ** ** | **$**             | **78.7**    | ** **            | $          | 134.9 |   |
| Restricted funds held in trust                                                                 | ** ** | **16.5**          | ** **  | 37.0                  |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.3 and $1.5, respectively |       | **248.2**         | ** **  | 241.2                 |       |
| Inventories, at average cost                                                                   | ** ** | **105.9**         | ** **  | 105.0                 |       |
| Taxes applicable to subsequent years                                                           | ** ** | **27.4**          | ** **  | 48.0                  |       |
| Other current assets                                                                           | ** ** | **18.0**          | ** **  | 11.8                  |       |
| Total current assets                                                                           | ** ** | **494.7**         | ** **  | 577.9                 |       |
|                                                                                           |       |              | ** **  |                  |       |
| **Property:**                                                                                  |       |              | ** **  |                  |       |
| Property, plant and equipment                                                                  | ** ** | **5,113.9**       | ** **  | 5,011.6               |       |
| Less: Accumulated depreciation and amortization                                                | ** ** | **(2,292.1**      | **)**       | (2,234.6              | )          |
| Total net property                                                                             | ** ** | **2,821.8**       | ** **  | 2,777.0               |       |
|                                                                                           |       |              | ** **  |                  |       |
| **Other noncurrent assets:**                                                                   |       |              | ** **  |                  |       |
| Regulatory assets                                                                              | ** ** | **160.4**         | ** **  | 165.2                 |       |
| Other deferred assets                                                                          | ** ** | **49.5**          | ** **  | 46.5                  |       |
| Total other noncurrent assets                                                                  | ** ** | **209.9**         | ** **  | 211.7                 |       |
|                                                                                           |       |              |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**             | **3,526.4** |                  | $          | 3,566.6 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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| ** **                                                      | ** ** | **At**             | ** **  | **At**                 | ** ** |
|-----------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|
| ** **                                                      | ** ** | **June 30,**  | ** **  | **December 31,**  | ** ** |
| **$ in millions**                                     | ** ** | **2008**           | ** **  | **2007**               | ** ** |
|                                                            |       |               | ** **  |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                   |       |               | ** **  |                   |       |
|                                                            |       |               | ** **  |                   |       |
| **Current liabilities:**                                        |       |               | ** **  |                   |       |
| Current portion - long-term debt                                | ** ** | **$**              | **175.7**   | ** **             | $          | 100.7 |   |
| Accounts payable                                                | ** ** | **189.9**          | ** **  | 163.1                  |       |
| Accrued taxes                                                   | ** ** | **111.7**          | ** **  | 110.8                  |       |
| Accrued interest                                                | ** ** | **25.2**           | ** **  | 25.8                   |       |
| Revolving credit borrowings                                     | ** ** | **90.0**           | ** **  | —                 |       |
| Other current liabilities                                       | ** ** | **27.7**           | ** **  | 27.2                   |       |
| Total current liabilities                                       | ** ** | **620.2**          | ** **  | 427.6                  |       |
|                                                            |       |               | ** **  |                   |       |
| **Noncurrent liabilities:**                                     |       |               | ** **  |                   |       |
| Long-term debt                                                  | ** ** | **1,276.4**        | ** **  | 1,541.5                |       |
| Deferred taxes                                                  | ** ** | **403.7**          | ** **  | 374.9                  |       |
| Unamortized investment tax credit                               | ** ** | **39.4**           | ** **  | 40.7                   |       |
| Insurance and claims costs                                      | ** ** | **19.5**           | ** **  | 20.0                   |       |
| Other deferred credits                                          | ** ** | **198.7**          | ** **  | 266.3                  |       |
| Total noncurrent liabilites                                     | ** ** | **1,937.7**        | ** **  | 2,243.4                |       |
|                                                            |       |               | ** **  |                   |       |
| Cumulative preferred stock not subject to  mandatory redemption | ** ** | **22.9**           | ** **  | 22.9                   |       |
|                                                            |       |               | ** **  |                   |       |
| Commitments and contingencies (Note 10)                         |       |               | ** **  |                   |       |
|                                                            |       |               | ** **  |                   |       |
| **Common shareholders’ equity:**                           | ** ** | ** **         | ** **  | ** **             | ** ** |
| Common stock, at par value of $0.01 per  share:                 |       |               | ** **  |                   |       |
| ** **                                                      | ** ** | **June 2008** | ** **  | **December 2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shares authorized                                               |       | 250,000,000        |        | 250,000,000            |       |   | ** ** |   |   |
| Shares issued                                                   |       | 163,724,211        |        | 163,724,211            |       |   | ** ** |   |   |
| Shares outstanding                                              |       | 113,609,122        |        | 113,558,444            | ** ** | **1.1** | ** ** | 1.1 |   |
| Warrants                                                        | ** ** | **50.0**           | ** **  | 50.0                   |       |
| Common stock held by employee plans                             | ** ** | **(29.0**          | **)**       | (39.7                  | )          |
| Accumulated other comprehensive loss                            | ** ** | **(11.9**          | **)**       | (9.2                   | )          |
| Retained earnings                                               | ** ** | **935.4**          | ** **  | 870.5                  |       |
| Total common shareholders’ equity                          | ** ** | **945.6**          | ** **  | 872.7                  |       |
|                                                            |       |               | ** **  |                   |       |
| **Total Liabilities and Shareholders’ Equity**             | ** ** | **$**              | **3,526.4** | ** **             | $          | 3,566.6 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                     | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Revenues**                                    | ** ** | **$**                            | **376.4**  | ** **                     | $          | 341.2 | ** ** | **$** | **790.3** | ** ** | $ | 718.7 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Cost of revenues:**                           |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| Fuel                                            | ** ** | **65.9**                         | ** ** | 62.3                           | ** ** | **126.6** | ** ** | 151.8 |   |
| Purchased power                                 | ** ** | **87.8**                         | ** ** | 83.8                           | ** ** | **171.7** | ** ** | 136.5 |   |
| Total cost of revenues                          | ** ** | **153.7**                        | ** ** | 146.1                          | ** ** | **298.3** | ** ** | 288.3 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Gross margin**                                | ** ** | **222.7**                        | ** ** | 195.1                          | ** ** | **492.0** | ** ** | 430.4 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Operating expenses:**                         |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| Operation and maintenance                       | ** ** | **66.0**                         | ** ** | 72.4                           | ** ** | **125.6** | ** ** | 131.8 |   |
| Depreciation and amortization                   | ** ** | **31.5**                         | ** ** | 33.1                           | ** ** | **62.2** | ** ** | 63.8 |   |
| General taxes                                   | ** ** | **32.3**                         | ** ** | 27.4                           | ** ** | **61.8** | ** ** | 55.0 |   |
| Amortization of regulatory assets               | ** ** | **2.4**                          | ** ** | 2.5                            | ** ** | **5.5** | ** ** | 5.4 |   |
| Total operating expenses                        | ** ** | **132.2**                        | ** ** | 135.4                          | ** ** | **255.1** | ** ** | 256.0 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Operating income**                            | ** ** | **90.5**                         | ** ** | 59.7                           | ** ** | **236.9** | ** ** | 174.4 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| Net gain on settlement of executive  litigation | ** ** | **—**                       | ** ** | 35.3                           | ** ** | **—** | ** ** | 35.3 |   |
| Investment income                               | ** ** | **4.2**                          | ** ** | 4.7                            | ** ** | **5.7** | ** ** | 6.2 |   |
| Interest expense                                | ** ** | **(11.2**                        | **)**      | (4.8                           | )          | **(17.8** | **)** | (10.2 | ) |
| Other income (deductions)                       | ** ** | **0.1**                          | ** ** | (0.2                           | )          | **(0.6** | **)** | 0.6 |   |
| Total other income/(expense)                    | ** ** | **(6.9**                         | **)**      | 35.0                           | ** ** | **(12.7** | **)** | 31.9 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Earnings before income tax**                  | ** ** | **83.6**                         | ** ** | 94.7                           | ** ** | **224.2** | ** ** | 206.3 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| Income tax expense                              | ** ** | **20.3**                         | ** ** | 35.6                           | ** ** | **71.9** | ** ** | 77.4 |   |
| ** **                                      | ** ** | ** **                       | ** ** |                           | ** ** | ** ** | ** ** |   |   |
| **Net income**                                  | ** ** | **63.3**                         | ** ** | 59.1                           | ** ** | **152.3** | ** ** | 128.9 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| Preferred dividends                             | ** ** | **0.2**                          | ** ** | 0.2                            | ** ** | **0.4** | ** ** | 0.4 |   |
|                                            |       |                             | ** ** |                           | ** ** |   | ** ** |   |   |
| **Earnings on common stock**                    | ** ** | **$**                            | **63.1**   | ** **                     | $          | 58.9 | ** ** | **$** | **151.9** | ** ** | $ | 128.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| **$ in millions**                                                        | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from operating activities:**                                          |       |                           | ** ** |   |   |
| Net income                                                                         | ** ** | **$**                          | **152.3**  | ** ** | $ | 128.9 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           | ** ** |   |   |
| Depreciation and amortization                                                      | ** ** | **62.2**                       | ** ** | 63.8 |   |
| Net gain on settlement of executive  litigation                                    | ** ** | **—**                     | ** ** | (35.3 | ) |
| Amortization of regulatory assets                                                  | ** ** | **5.5**                        | ** ** | 5.4 |   |
| Deferred income taxes                                                              | ** ** | **27.2**                       | ** ** | 14.0 |   |
| Changes in certain assets and liabilities:                                         |       |                           | ** ** |   |   |
| Accounts receivable                                                                | ** ** | **(13.7**                      | **)**      | (42.1 | ) |
| Accounts payable                                                                   | ** ** | **34.5**                       | ** ** | 30.0 |   |
| Accrued taxes payable                                                              | ** ** | **(37.3**                      | **)**      | (31.9 | ) |
| Accrued interest payable                                                           | ** ** | **—**                     | ** ** | 0.2 |   |
| Prepayments                                                                        | ** ** | **0.2**                        | ** ** | 0.7 |   |
| Inventories                                                                        | ** ** | **(0.9**                       | **)**      | (12.4 | ) |
| Deferred compensation assets                                                       | ** ** | **1.3**                        | ** ** | 4.7 |   |
| Deferred compensation obligations                                                  | ** ** | **(6.7**                       | **)**      | 1.3 |   |
| Other                                                                              | ** ** | **(11.7**                      | **)**      | 18.3 |   |
| **Net cash provided by operating activities**                                      | ** ** | **212.9**                      | ** ** | 145.6 |   |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from investing activities:**                                          |       |                           | ** ** |   |   |
| Capital expenditures                                                               | ** ** | **(117.7**                     | **)**      | (177.0 | ) |
| **Net cash used for investing activities**                                         | ** ** | **(117.7**                     | **)**      | (177.0 | ) |
|                                                                               |       |                           | ** ** |   |   |
| **Cash flows from financing activities:**                                          |       |                           | ** ** |   |   |
| Short-term loan from parent                                                        | ** ** | **—**                     | ** ** | 105.0 |   |
| Withdrawals from revolving credit facility                                         | ** ** | **90.0**                       | ** ** | 95.0 |   |
| Repurchase of pollution control bonds                                              | ** ** | **(90.0**                      | **)**      | — |   |
| Repayment of borrowings from revolving  credit facility                            | ** ** | **—**                     | ** ** | (95.0 | ) |
| Withdrawal of restricted funds held in  trust, net                                 | ** ** | **20.5**                       | ** ** | 10.1 |   |
| Dividends paid on preferred stock                                                  | ** ** | **(0.4**                       | **)**      | (0.4 | ) |
| Repayment of short-term loan from parent                                           | ** ** | **(20.0**                      | **)**      | — |   |
| Dividends paid on common stock held by  parent                                     | ** ** | **(80.0**                      | **)**      | (125.0 | ) |
| **Net cash used for financing activities**                                         | ** ** | **(79.9**                      | **)**      | (10.3 | ) |
|                                                                               |       |                           | ** ** |   |   |
| **Cash and cash equivalents:**                                                     |       |                           | ** ** |   |   |
| Net change                                                                         | ** ** | **15.3**                       | ** ** | (41.7 | ) |
| Balance at beginning of period                                                     | ** ** | **13.2**                       | ** ** | 46.1 |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                          | **28.5**   | ** ** | $ | 4.4 |   |
|                                                                               |       |                           | ** ** |   |   |
| **Supplemental cash flow information:**                                            |       |                           | ** ** |   |   |
| Interest paid, net of amounts capitalized                                          | ** ** | **$**                          | **15.2**   | ** ** | $ | 9.7 |   |
| Income taxes paid, net                                                             | ** ** | **$**                          | **69.9**   | ** ** | $ | 78.5 |   |
| Non-cash financing and investing  activities:                                      |       |                           | ** ** |   |   |
| Restricted funds held in trust                                                     | ** ** | **$**                          | **16.5**   | ** ** | $ | — |   |
| Accruals for capital expenditures                                                  | ** ** | **$**                          | **36.2**   | ** ** | $ | 59.5 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At**            | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                    | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                                                           |       |              |        |                  |       |
| **ASSETS**                                                                                     |       |              |        |                  |       |
|                                                                                           |       |              |        |                  |       |
| **Current assets:**                                                                            |       |              |        |                  |       |
| Cash and cash equivalents                                                                      | ** ** | **$**             | **28.5**    |                  | $          | 13.2 |   |
| Restricted funds held in trust                                                                 | ** ** | **16.5**          |        | 37.0                  |       |
| Accounts receivable, less provision for  uncollectible accounts of $1.3 and $1.5, respectively |       | **232.5**         |        | 221.8                 |       |
| Inventories, at average cost                                                                   | ** ** | **104.5**         |        | 103.6                 |       |
| Taxes applicable to subsequent years                                                           | ** ** | **27.3**          |        | 48.0                  |       |
| Other current assets                                                                           | ** ** | **19.5**          |        | 13.4                  |       |
| Total current assets                                                                           | ** ** | **428.8**         |        | 437.0                 |       |
|                                                                                           |       |              |        |                  |       |
| **Property:**                                                                                  |       |              |        |                  |       |
| Property, plant and equipment                                                                  | ** ** | **4,858.8**       |        | 4,757.0               |       |
| Less: Accumulated depreciation and  amortization                                               | ** ** | **(2,211.8**      | **)**       | (2,159.1              | )          |
| Total net property                                                                             | ** ** | **2,647.0**       |        | 2,597.9               |       |
|                                                                                           |       |              |        |                  |       |
| **Other noncurrent assets:**                                                                   |       |              |        |                  |       |
| Regulatory assets                                                                              | ** ** | **160.4**         |        | 165.2                 |       |
| Other deferred assets                                                                          | ** ** | **65.2**          |        | 76.6                  |       |
| Total other noncurrent assets                                                                  | ** ** | **225.6**         |        | 241.8                 |       |
|                                                                                           |       |              |        |                  |       |
| **Total Assets**                                                                               | ** ** | **$**             | **3,301.4** |                  | $          | 3,276.7 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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| ** **                                                      | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                     | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                            |       |              |        |                  |       |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                   |       |              |        |                  |       |
|                                                            |       |              |        |                  |       |
| **Current liabilities:**                                        |       |              |        |                  |       |
| Current portion - long-term debt                                | ** ** | **$**             | **0.7**     |                  | $          | 0.7 |   |
| Accounts payable                                                | ** ** | **187.1**         |        | 161.9                 |       |
| Accrued taxes                                                   | ** ** | **116.8**         |        | 112.7                 |       |
| Accrued interest                                                | ** ** | **13.1**          |        | 12.9                  |       |
| Revolving credit borrowings                                     | ** ** | **90.0**          |        | —                |       |
| Short-term debt owed to parent                                  | ** ** | **—**        |        | 20.9                  |       |
| Other current liabilities                                       | ** ** | **27.7**          |        | 26.9                  |       |
| Total current liabilities                                       | ** ** | **435.4**         |        | 336.0                 |       |
|                                                            |       |              |        |                  |       |
| **Noncurrent liabilities:**                                     |       |              |        |                  |       |
| Long-term debt                                                  | ** ** | **784.3**         |        | 874.6                 |       |
| Deferred taxes                                                  | ** ** | **390.5**         |        | 367.0                 |       |
| Unamortized investment tax credit                               | ** ** | **39.4**          |        | 40.7                  |       |
| Other deferred credits                                          | ** ** | **198.5**         |        | 266.2                 |       |
| Total noncurrent liabilities                                    | ** ** | **1,412.7**       |        | 1,548.5               |       |
|                                                            |       |              |        |                  |       |
| Cumulative preferred stock not subject to  mandatory redemption | ** ** | **22.9**          |        | 22.9                  |       |
|                                                            |       |              |        |                  |       |
| Commitments and contingencies (Note 10)                         |       |              |        |                  |       |
|                                                            |       |              |        |                  |       |
| **Common shareholder’s equity:**                           |       |              |        |                  |       |
| Common stock, at par value of $0.01 per  share                  | ** ** | **0.4**           |        | 0.4                   |       |
| Other paid-in capital                                           | ** ** | **782.6**         |        | 784.8                 |       |
| Accumulated other comprehensive (loss)  income                  | ** ** | **(2.0**          | **)**       | 6.5                   |       |
| Retained earnings                                               | ** ** | **649.4**         |        | 577.6                 |       |
| Total common shareholder’s equity                          | ** ** | **1,430.4**       |        | 1,369.3               |       |
|                                                            |       |              |        |                  |       |
| **Total Liabilities and Shareholder’s Equity**             | ** ** | **$**             | **3,301.4** |                  | $          | 3,276.7 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

*These interim statements are unaudited.*

 

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** **

**Notes toCondensed Consolidated Financial Statements**

**(unaudited)**

 

**1.     Basis of Presentation**

 

**Descriptionof Business**

 

**DPL**isa diversified regional energy company organized in 1985 under the laws ofOhio.  Our executive offices are locatedat 1065 Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.

 

**DPL’s**principal subsidiary is The DaytonPower 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 governmentalcustomers in a 6,000 square mile area of West Central Ohio.  **DP&L** alsosells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy theelectric requirements of their retail customers.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 514,000 retailcustomers.  **DP&L** also purchases retail peak load requirements from DPLEnergy LLC (DPLE), one of **DPL’s** whollyowned subsidiaries.  Principal industriesserved include automotive, food processing, paper, plastic manufacturing, anddefense.

 

**DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area.  **DP&L** sells any excess energy and capacity into thewholesale market.

 

**DPL’s** significantsubsidiaries (all of which are wholly owned) include DPLE, which engages in theoperation of peaking generating facilities; DPLER, which sells retail electricenergy under contract to major industrial and commercial customers in WestCentral Ohio; and Miami Valley Insurance Company (MVIC), our captive insurancecompany that provides insurance sources to us and our subsidiaries.  ** DP&L**has one significantsubsidiary, DPL Finance Company, Inc., which is wholly owned and providesfinancing to **DPL**, **DP&L,** and other affiliated companies.

 

**DPL** and **DP&L** conduct their principal businessin one business segment - Electric.

 

**FinancialStatement Presentation**

 

We prepareconsolidated financial statements in accordance with Generally AcceptedAccounting Principles (GAAP) in the United States of America.  The condensed consolidated financialstatements include the accounts of **DPL**and **DP&L** and their majority-ownedsubsidiaries.  Investments that are notmajority owned are accounted for using the equity method when our investmentallows us the ability to exert significant influence, as defined by GAAP.  Undivided interests in jointly ownedgeneration facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation. Interim results for the three months and six months ended June 30,2008 may not be indicative of our results that will be realized for the fullyear ending December 31, 2008.

 

Pursuant to the Securities and ExchangeCommission (SEC) rules, certain information and footnote disclosures normallyincluded in the annual financial statements prepared in accordance with GAAPhave been omitted from interim reports. Therefore, our interim financialstatements in this report should be read along with the annual financialstatements included in our Annual Report of Form 10-K for the fiscal yearended December 31, 2007.  In theopinion of our management, the condensed consolidated financial statements inthis report contain all adjustments necessary to fairly state our financialcondition as of June 30, 2008; our results of operations for the threemonths and six months ended June 30, 2008; and our cash flows for the sixmonths ended June 30, 2008 in accordance with GAAP.  Certain amounts from prior periods have beenreclassified to conform to the current reporting presentation.

 

**Estimatesand Judgments**

 

The preparation of financial statements in conformity with GAAPrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements, and the revenue and expenses of theperiods reported.  We record liabilities for probable estimated losses inaccordance with Statement of Financial Accounting Standards No. 5 (SFAS5), “Accounting for Contingencies.”  To the extent a probable loss canonly be estimated by reference to a range of equally probable outcomes and noamount within the range appears to be a better estimate than any other amount,we accrue for the low end of the range.  Because of uncertainties relatedto these matters, accruals are based on the best information available at thetime.  We evaluate the potential liability related to probable lossesquarterly and may revise our estimates.  

 

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Judgments and uncertainties affecting the application of theseestimates may result in materially different amounts being reported underdifferent conditions or circumstances that may affect our financial positionand results of operations.  Significant items subject to such estimatesand judgments include: the carrying value of property, plant and equipment;unbilled revenues; the valuation of derivative instruments; the valuation ofinsurance and claims costs; the valuation of allowances for receivables anddeferred income taxes; regulatory assets and liabilities; reserves recorded forincome tax exposures; litigation; contingencies; and assets and liabilitiesrelated to employee benefits.

 

**Reclassifications**

 

During the quarter ended December 31, 2007, we identifiedimmaterial changes in certain accounts payable balances that had not beencorrectly presented in our prior period cash flow statements.  Changes inaccounts payable balances representing capital expenditures had previously beenclassified with cash flows from operating activities and should have beenclassified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statements of Cash Flows for allperiods presented have been reclassified to conform to the currentpresentation.  As a result of these reclassifications, cash provided byoperating activities for **DPL**increased by $7.7 million from $112.4 million to $120.1 million for the sixmonths ended June 30, 2007. This same adjustment also increased cash usedfor capital expenditures to $178.9 million from $171.2 million for the sixmonths ended June 30, 2007.  Cash provided by operating activitiesfor **DP&L** increased by $7.7million from $137.9 million to $145.6 million for the six months ended June 30,2007.  This same adjustment also increased cash used for capitalexpenditures to $177.0 million from $169.3 million for the six months ended June 30,2007.  The reclassifications did notimpact operating income or net income, working capital, any earnings per sharemeasures, or net change in cash and cash equivalents as previously reported.

 

**Taxes Collected from Customers and Remitted to Governmental Authorities**

 

**DP&L** collects certain excise taxes leviedby state or local governments from its customers.  **DP&L’s**excise taxes are accounted for on a gross basis and recorded as revenues in theaccompanying Condensed Consolidated Statements of Results of Operations for thethree months and six months ended June 30, 2008 and 2007, respectively, asfollows:

** **
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| State/local excise taxes    | ** ** | **$**                            | **11.7**   |                           | $          | 12.2 | ** ** | **$** | **26.1** |   | $ | 26.4 |   |
|                             |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Recently Adopted Accounting Standards**

 

**Accounting for Fair Value Measurements**

 

We adopted Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (SFAS 157), on January 1, 2008.  SFAS 157 applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value.  SFAS 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing the asset or liability.  Insupport of this principle, SFAS 157 establishes a fair value hierarchy thatprioritizes the information used to develop those standards.  The fair value hierarchy gives the highestpriority to quoted prices in active markets and the lowest priority tounobservable data, for example, the reporting entity’s own data.  Under SFAS 157, fair value measurements wouldbe separately disclosed by level within the fair value hierarchy.  SFAS 157 does not expand the use of fairvalue in any new circumstances.  SFAS 157did not have a material effect on our overall results of operations, financialposition, or cash flows.  See Note 8 ofNotes to Condensed Consolidated Financial Statements.

 

**Amendment of FASB Interpretation No. 39 “Offsetting of AmountsRelated to Certain Contracts”**

 

We adopted Staff Position FIN 39-1, “Amendment of FASB Interpretation39” (FSP FIN 39-1), on January 1, 2008. FSP FIN 39-1 amends paragraph 10 of FIN 39 to “permit a reporting entityto offset fair value amounts recognized for the right to reclaim cashcollateral (a receivable) or the obligation to return cash collateral (apayable) against fair value amounts recognized for derivative instrumentsexecuted with the same counterparty under the same master netting arrangementthat have been offset in accordance with that paragraph.”  We do not have receivables or payables inrelation to cash collateral.  Allcollateral either posted or received is in the form of a letter of credit orparental guarantee.  FSP FIN 39-1 did nothave a material effect on our overall results of operations, financialposition, or cash flows.

 

13

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**Accounting for Income Tax Benefits of Dividends on Share-Based PaymentAwards**

 

We adopted EITF Issue No. 06-11, “Accounting for Income TaxBenefits of Dividends on Share-Based Payment Awards” (EITF 06-11), on January 1,2008.  The FASB ratified the EITFconsensus that a realized income tax benefit from dividends that are charged toretained earnings, and are paid to employees for equity classified non-vestedequity shares, should be recognized as an increase in additional paid-incapital and should be included in the pool of excess tax benefits available toabsorb potential future tax deficiencies on share-based payment awards.  EITF 06-11 did not have a material effect onour overall results of operations, financial position, or cash flows.

 

**Recently Issued Accounting Standards**

 

**Business Combinations**

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141R, “Business Combinations” (SFAS 141R),effective for fiscal years beginning after December 15, 2008.  Under SFAS 141R, an acquiring entity in abusiness combination is required to recognize all assets acquired andliabilities assumed in the transaction. The revised standard also establishes the acquisition-date fair value asthe measurement objective for all assets acquired and liabilities assumed.  The rule requires an acquirer todisclose all of the information users may need to evaluate and understand thenature and financial effect of the business combination.  We have evaluated the impact of adopting SFAS141R and have determined it will not have a material impact on our overallresults of operations, financial position, or cash flows.

 

**Non-controlling Interests in Consolidated Financial Statements**

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements – an amendment of ARB No. 51” (SFAS 160), effectivefor fiscal years beginning after December 15, 2008.  SFAS 160 requires all entities to reportnon-controlling (minority) interests in subsidiaries as equity in theconsolidated financial statements.  Itsintention is to eliminate the diversity in practice regarding the accountingfor transactions between an entity and non-controlling interests.  We have evaluated the impact of adopting SFAS160 and have determined it will not have a material impact on our overallresults of operations, financial position, or cash flows.

 

**Disclosures about Derivative Instruments and Hedging Activities**

 

In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “Disclosures about Derivative Instruments and HedgingActivities-an amendment to FASB Statement No. 133” (SFAS 161), effectivefor fiscal years beginning after November 15, 2008.  SFAS 161 requires an entity to provideenhanced disclosures about: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  We are currently evaluating SFAS 161 and donot expect these new rules to have a material impact on our overallresults of operations, financial position, or cash flows.

 

**GAAP Hierarchy**

 

In May 2008, the FASB issued Statement of Financial AccountingStandards No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (SFAS 162), effective for fiscal years beginning after December 15,2008.  SFAS 162 identifies a consistentframework for selecting accounting principles to be used in preparing financialstatements that are presented in conformity with U.S. GAAP for nongovernmentalentities.  We have evaluated the impactof adopting SFAS 162 and have determined it will not have a material impact onour overall results of operations, financial position, or cash flows.

 

**Participating Securities and Earnings per Share (EPS)**

 

In June 2008, the FASB issued Staff Position EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP EITF 03-6-1), effective for fiscal yearsbeginning after December 15, 2008.  FSPEITF 03-6-1 clarifies that unvested share-based awards that contain nonforfeitablerights to dividends or dividend equivalents (whether paid or unpaid) areparticipating securities and must be included in the computation of EPSpursuant to the two-class method. We are currently evaluating the impact ofadopting FSP EITF 03-6-1 and have not yet determined the significance of thesenew rules on our overall results of operations, financial position, or cashflows.

 

14

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**2.     Supplemental Financial Information**

** **

**DPL Inc.**

** **
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$  in millions**                   | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                |       |              |        |                  |       |
| **Accounts receivable, net:**                       |       |              |        |                  |       |
| Retail customers                                    | ** ** | **$**             | **63.0**    |                  | $          | 71.7 |   |
| Unbilled revenue                                    | ** ** | **74.0**          |        | 68.4                  |       |
| Partners in commonly-owned plants                   | ** ** | **60.1**          |        | 56.7                  |       |
| PJM including financial transmission rights         | ** ** | **23.1**          |        | 23.2                  |       |
| Wholesale customers                                 | ** ** | **9.3**           |        | 12.7                  |       |
| Refundable franchise tax                            | ** ** | **—**        |        | 5.2                   |       |
| Other                                               | ** ** | **20.0**          |        | 4.8                   |       |
| Provision for uncollectible accounts                | ** ** | **(1.3**          | **)**       | (1.5                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**             | **248.2**   |                  | $          | 241.2 |   |
|                                                |       |              |        |                  |       |
| **Inventories, at average cost:**                   |       |              |        |                  |       |
| Fuel and emission allowances                        | ** ** | **$**             | **70.3**    |                  | $          | 70.5 |   |
| Plant materials and supplies                        | ** ** | **35.4**          |        | 34.1                  |       |
| Other                                               | ** ** | **0.2**           |        | 0.4                   |       |
| **Total inventories, at average cost**              | ** ** | **$**             | **105.9**   |                  | $          | 105.0 |   |
|                                                |       |              |        |                  |       |
| **Other current assets:**                           |       |              |        |                  |       |
| Prepayments                                         | ** ** | **$**             | **6.1**     |                  | $          | 5.9 |   |
| Current deferred income taxes                       | ** ** | **3.0**           |        | 2.1                   |       |
| Deposits and other advances                         | ** ** | **1.6**           |        | 1.1                   |       |
| Other                                               | ** ** | **7.3**           |        | 2.7                   |       |
| **Total other current assets**                      | ** ** | **$**             | **18.0**    |                  | $          | 11.8 |   |
|                                                |       |              |        |                  |       |
| **Property, plant and equipment:**                  |       |              |        |                  |       |
| Construction work in process                        | ** ** | **$**             | **208.7**   |                  | $          | 364.5 |   |
| Property, plant and equipment                       | ** ** | **4,905.2**       |        | 4,647.1               |       |
| **Total property, plant and equipment**             | ** ** | **$**             | **5,113.9** |                  | $          | 5,011.6 |   |
|                                                |       |              |        |                  |       |
| **Other deferred assets:**                          |       |              |        |                  |       |
| Master Trust assets                                 | ** ** | **$**             | **13.0**    |                  | $          | 9.6 |   |
| Prepaid pension                                     | ** ** | **12.2**          |        | 9.9                   |       |
| Unamortized debt expense                            | ** ** | **8.7**           |        | 10.9                  |       |
| Investments                                         | ** ** | **8.4**           |        | 8.8                   |       |
| Commercial activities tax benefit                   | ** ** | **6.8**           |        | 6.8                   |       |
| Other                                               | ** ** | **0.4**           |        | 0.5                   |       |
| **Total other deferred assets**                     | ** ** | **$**             | **49.5**    |                  | $          | 46.5 |   |
|                                                |       |              |        |                  |       |
| **Accounts payable:**                               |       |              |        |                  |       |
| Trade payables                                      | ** ** | **$**             | **75.6**    |                  | $          | 65.6 |   |
| Fuel accruals                                       | ** ** | **59.0**          |        | 34.4                  |       |
| Other                                               | ** ** | **55.3**          |        | 63.1                  |       |
| **Total accounts payable**                          | ** ** | **$**             | **189.9**   |                  | $          | 163.1 |   |
|                                                |       |              |        |                  |       |
| **Other current liabilities:**                      |       |              |        |                  |       |
| Customer security deposits                          | ** ** | **$**             | **19.6**    |                  | $          | 19.2 |   |
| Low income service plan                             | ** ** | **2.3**           |        | 2.2                   |       |
| Pension and retiree benefits payable                | ** ** | **0.8**           |        | 0.8                   |       |
| Other                                               | ** ** | **5.0**           |        | 5.0                   |       |
| **Total other current liabilities**                 | ** ** | **$**             | **27.7**    |                  | $          | 27.2 |   |
|                                                |       |              |        |                  |       |
| **Other deferred credits:**                         |       |              |        |                  |       |
| Asset retirement obligations - regulated  property  | ** ** | **$**             | **94.2**    |                  | $          | 91.5 |   |
| Pension and retiree benefits                        | ** ** | **39.4**          |        | 40.6                  |       |
| SECA net revenue subject to refund                  | ** ** | **20.1**          |        | 20.1                  |       |
| Deferred compensation obligations                   | ** ** | **16.0**          |        | 20.4                  |       |
| Asset retirement obligations - generation  property | ** ** | **12.6**          |        | 12.5                  |       |
| Litigation and claims reserve                       | ** ** | **4.8**           |        | 4.3                   |       |
| Employee benefit reserves                           | ** ** | **4.3**           |        | 4.3                   |       |
| Customer advances in aid of construction            | ** ** | **3.4**           |        | 3.5                   |       |
| Taxes payable                                       | ** ** | **—**        |        | 65.3                  |       |
| Other                                               | ** ** | **3.9**           |        | 3.8                   |       |
| **Total other deferred credits**                    | ** ** | **$**             | **198.7**   |                  | $          | 266.3 |   |

 

15

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**2.     Supplemental Financial Information(continued)**

 

**DP&L**

 
| ** **                                          | ** ** | **At**            | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$  in millions**                   | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                |       |              |        |                  |       |
| **Accounts receivable, net:**                       |       |              |        |                  |       |
| Retail customers                                    | ** ** | **$**             | **65.7**    |                  | $          | 71.8 |   |
| Unbilled revenue                                    | ** ** | **63.0**          |        | 60.5                  |       |
| Partners in commonly-owned plants                   | ** ** | **60.1**          |        | 56.7                  |       |
| PJM including financial transmission rights         | ** ** | **23.1**          |        | 23.1                  |       |
| Wholesale customers                                 | ** ** | **1.9**           |        | 3.5                   |       |
| Refundable franchise tax                            | ** ** | **—**        |        | 3.1                   |       |
| Other                                               | ** ** | **20.0**          |        | 4.6                   |       |
| Provision for uncollectible accounts                | ** ** | **(1.3**          | **)**       | (1.5                  | )          |
| **Total accounts receivable, net**                  | ** ** | **$**             | **232.5**   |                  | $          | 221.8 |   |
|                                                |       |              |        |                  |       |
| **Inventories, at average cost:**                   |       |              |        |                  |       |
| Fuel and emission allowances                        | ** ** | **$**             | **70.3**    |                  | $          | 70.5 |   |
| Plant materials and supplies                        | ** ** | **34.0**          |        | 32.7                  |       |
| Other                                               | ** ** | **0.2**           |        | 0.4                   |       |
| **Total inventories, at average cost**              | ** ** | **$**             | **104.5**   |                  | $          | 103.6 |   |
|                                                |       |              |        |                  |       |
| **Other current assets:**                           |       |              |        |                  |       |
| Prepayments                                         | ** ** | **$**             | **7.4**     |                  | $          | 7.5 |   |
| Current deferred income taxes                       | ** ** | **3.0**           |        | 2.1                   |       |
| Deposits and other advances                         | ** ** | **1.6**           |        | 0.9                   |       |
| Other                                               | ** ** | **7.5**           |        | 2.9                   |       |
| **Total other current assets**                      | ** ** | **$**             | **19.5**    |                  | $          | 13.4 |   |
|                                                |       |              |        |                  |       |
| **Property, plant and equipment:**                  |       |              |        |                  |       |
| Construction work in process                        | ** ** | **$**             | **208.3**   |                  | $          | 363.8 |   |
| Property, plant and equipment                       | ** ** | **4,650.5**       |        | 4,393.2               |       |
| **Total property, plant and equipment**             | ** ** | **$**             | **4,858.8** |                  | $          | 4,757.0 |   |
|                                                |       |              |        |                  |       |
| **Other deferred assets:**                          |       |              |        |                  |       |
| Master Trust assets                                 | ** ** | **$**             | **44.4**    |                  | $          | 56.0 |   |
| Prepaid pension                                     | ** ** | **12.2**          |        | 9.9                   |       |
| Unamortized debt expense                            | ** ** | **7.7**           |        | 9.6                   |       |
| Other                                               | ** ** | **0.9**           |        | 1.1                   |       |
| **Total other deferred assets**                     | ** ** | **$**             | **65.2**    |                  | $          | 76.6 |   |
|                                                |       |              |        |                  |       |
| **Accounts payable:**                               |       |              |        |                  |       |
| Trade payables                                      | ** ** | **$**             | **75.6**    |                  | $          | 64.8 |   |
| Fuel accruals                                       | ** ** | **56.5**          |        | 34.1                  |       |
| Other                                               | ** ** | **55.0**          |        | 63.0                  |       |
| **Total accounts payable**                          | ** ** | **$**             | **187.1**   |                  | $          | 161.9 |   |
|                                                |       |              |        |                  |       |
| **Other current liabilities:**                      |       |              |        |                  |       |
| Customer security deposits                          | ** ** | **$**             | **19.6**    |                  | $          | 19.2 |   |
| Low income service plan                             | ** ** | **2.3**           |        | 2.2                   |       |
| Pension and retiree benefits payable                | ** ** | **0.8**           |        | 0.8                   |       |
| Other                                               | ** ** | **5.0**           |        | 4.7                   |       |
| **Total other current liabilities**                 | ** ** | **$**             | **27.7**    |                  | $          | 26.9 |   |
|                                                |       |              |        |                  |       |
| **Other deferred credits:**                         |       |              |        |                  |       |
| Asset retirement obligations - regulated  property  | ** ** | **$**             | **94.2**    |                  | $          | 91.5 |   |
| Pension and retiree benefits                        | ** ** | **39.3**          |        | 40.5                  |       |
| SECA net revenue subject to refund                  | ** ** | **20.1**          |        | 20.1                  |       |
| Deferred compensation obligations                   | ** ** | **16.0**          |        | 20.4                  |       |
| Asset retirement obligations - generation  property | ** ** | **12.6**          |        | 12.5                  |       |
| Litigation and claims reserve                       | ** ** | **4.8**           |        | 4.3                   |       |
| Employee benefit reserves                           | ** ** | **4.3**           |        | 4.3                   |       |
| Customer advances in aid of construction            | ** ** | **3.4**           |        | 3.5                   |       |
| Taxes payable                                       | ** ** | **—**        |        | 65.3                  |       |
| Other                                               | ** ** | **3.8**           |        | 3.8                   |       |
| **Total other deferred credits**                    | ** ** | **$**             | **198.5**   |                  | $          | 266.2 |   |

 

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**2.     Supplemental Financial Information(continued)**

** **

**DPL Inc.**

 
| ** **                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| **$ in  millions**      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash flows - other:**      |       |                                              |       |   |   |
| Deposits and other advances  | ** ** | **$**                                             | **0.2**    |   | $ | 17.0 |   |
| Other                        | ** ** | **1.6**                                           |       | 3.3 |   |
| **Total cash flows - other** | ** ** | **$**                                             | **1.8**    |   | $ | 20.3 |   |

 
| ** **                                                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Comprehensive income:**                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                               | **47.6**   |                                              | $          | 58.7 | ** ** | **$** | **124.9** |   | $ | 114.8 |   |
| Net change in unrealized gains (losses) on  financial instruments               |       | **(0.2**                                            | **)**      | (1.9                                              | )          | **(0.4** | **)** | (1.5 | ) |
| Net change in deferred gains (losses) on  cash flow hedges                      | ** ** | **(1.3**                                            | **)**      | (0.8                                              | )          | **(4.7** | **)** | (4.4 | ) |
| Net change in unrealized gains (losses) on  pension and postretirement benefits |       | **0.6**                                             | ** ** | 0.6                                               |       | **1.0** | ** ** | 1.1 |   |
| Deferred income taxes related to unrealized  gains and (losses)                 | ** ** | **0.3**                                             |       | 0.8                                               | ** ** | **1.4** |   | 1.9 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                               | **47.0**   |                                              | $          | 57.4 | ** ** | **$** | **122.2** |   | $ | 111.9 |   |

 

**DP&L**

 
| ** **                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| **$  in millions** | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                              |       |                                              |       |   |   |
| **Cash flows - other:**           |       |                                              |       |   |   |
| Deposits and other advances       | ** ** | **$**                                             | **—** |   | $ | 16.4 |   |
| Other                             | ** ** | **(11.7**                                         | **)**      | 1.9 |   |
| **Total cash flows - other**      | ** ** | **$**                                             | **(11.7**  | **)** | $ | 18.3 |   |

 
| ** **                                                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Comprehensive income:**                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                                      | ** ** | **$**                                               | **63.3**   |                                              | $          | 59.1 | ** ** | **$** | **152.3** |   | $ | 128.9 |   |
| Net change in unrealized gains (losses) on  financial instruments               |       | **(2.1**                                            | **)**      | (8.8                                              | )          | **(10.3** | **)** | (0.4 | ) |
| Net change in deferred gains (losses) on  cash flow hedges                      | ** ** | **(1.3**                                            | **)**      | (0.8                                              | )          | **(4.7** | **)** | (4.4 | ) |
| Net change in unrealized gains (losses) on  pension and postretirement benefits |       | **0.5**                                             | ** ** | 0.5                                               |       | **1.0** | ** ** | 1.1 |   |
| Deferred income taxes related to unrealized  gains and (losses)                 | ** ** | **1.0**                                             |       | 3.5                                               |       | **5.5** |   | 2.1 |   |
| **Comprehensive income**                                                        | ** ** | **$**                                               | **61.4**   |                                              | $          | 53.5 | ** ** | **$** | **143.8** |   | $ | 127.3 |   |

 

**3.     Discontinued Operations**

 

On February 13, 2005, **DPL’s** subsidiaries, MVE, Inc. (MVE)and MVIC, entered into an agreement to sell their respective interests inforty-six private equity funds to AlpInvest/Lexington 2005, LLC, a jointventure of AlpInvest Partners and Lexington Partners, Inc.  During 2005, MVE and MVIC completed the saleof their interests in forty-three funds and a portion of another of thoseprivate equity funds.  During 2005, MVEentered into alternative closing arrangements with AlpInvest/Lexington 2005,LLC for funds where legal title to said funds could not be transferred until alater time.  Pursuant to thesearrangements, MVE transferred the economic aspects of the remaining privateequity funds, consisting of two funds and a portion of one fund, toAlpInvest/Lexington 2005, LLC without a change in ownership of theinterests.  The ownership interest inthese funds was transferred in 2006 and 2007, at which time **DPL** recognized previously deferred gains.  During the three months ended March 31,2007, the remaining $7.9 million ($4.9 million after tax) of deferred gains (netof associated expenses) relating to this transaction were recorded indiscontinued operations.

 

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As a result of the May 21, 2007settlement of the litigation with three former executives (see Note 11 of Notesto Condensed Consolidated Financial Statements), the three former executivesrelinquished all of their rights to certain deferred compensation, restrictedstock units, MVE incentives, stock options, and reimbursement of legal fees.  The reversal of accruals related to theperformance of the financial asset portfolio was recorded in discontinuedoperations.  Additionally, a portion ofthe $25 million settlement expense was allocated to discontinued operations.  These transactions resulted in a gain of $8.1million, net of associated expenses ($5.1 million after tax), on the settlementof litigation being recorded in discontinued operations during the three monthsended June 30, 2007.

 

There were no discontinued operationsrecorded during the three months and six months ended June 30, 2008.

 

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** **

**4.     Long-term Debt**

 

**DPL Inc.**

 
| ** **                                                             | ** ** | **At**            | ** **  | **At**                | ** ** |
|------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                             | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| **$  in millions**                                      | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| DP&L - First mortgage bonds maturing 2013  - 5.125%                |       | **$**             | **470.0**   |                  | $          | 470.0 |   |
| DP&L - Pollution control series  maturing 2036 - 4.80%             |       | **100.0**         |        | 100.0                 |       |
| DP&L - Pollution control series  maturing 2040 - variable rate     |       | **—**        |        | 90.0                  |       |
| DP&L - Pollution control series  maturing through 2034 - 4.78% (a) |       | **214.4**         |        | 214.4                 |       |
| ** **                                                             |       | **784.4**         |        | 874.4                 |       |
|                                                                   |       |              |        |                  |       |
| DPL Inc. - Note to Capital Trust II 8.125%  due 2031                   |       | **195.0**         | ** **  | 195.0                 |       |
| DPL Inc. - Senior Notes 6.875%  Series due 2011                   |       | **297.4**         | ** **  | 297.4                 |       |
| DPL Inc. - Senior Notes 8.00%  Series due 2009                    |       | **—**        | ** **  | 175.0                 |       |
| DP&L -    Obligations  for capital leases           |       | **0.9**           | ** **  | 1.3                   |       |
| Unamortized debt discount                                              | ** ** | **(1.3**          | **)**       | (1.6                  | )     |
| Total                                                                  | ** ** | **$**             | **1,276.4** |                  | $          | 1,541.5 |   |

 

----

*(a)  Weighted average interest rate at June 30, 2008 and December 31,2007, respectively.*

 

**DP&L**

 
| ** **                                                             | ** ** | **At**            | ** ** | **At**                | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| **$  in millions**                                      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| DP&L - First mortgage bonds maturing 2013  - 5.125%                |       | **$**             | **470.0**  |                  | $          | 470.0 |   |
| DP&L - Pollution control series  maturing 2036 - 4.80%             |       | **100.0**         |       | 100.0                 |       |
| DP&L - Pollution control series  maturing 2040 - variable rate     |       | **—**        |       | 90.0                  |       |
| DP&L - Pollution control series  maturing through 2034 - 4.78% (a) |       | **214.4**         |       | 214.4                 |       |
| ** **                                                             |       | **784.4**         |       | 874.4                 |       |
|                                                                   |       |              |       |                  |       |
| DP&L - Obligations for capital leases                              |       | **0.9**           | ** ** | 1.3                   |       |
| Unamortized debt discount                                              | ** ** | **(1.0**          | **)**      | (1.1                  | )     |
| Total                                                                  | ** ** | **$**             | **784.3**  |                  | $          | 874.6 |   |

 

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*(a)  Weighted average interest rate at June 30, 2008 and December 31,2007, respectively.*

 

At June 30, 2008,**DPL’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $175.7 million through June 30, 2009; $0.7 million from July 1,2009 through June 30, 2010; $0.2 million from July 1, 2010through June 30, 2011; $297.4 million from July 1, 2011 through June 30,2012; and none from July 1, 2012 through June 30, 2013.

 

At June 30, 2008,**DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.7 million through June 30, 2009; $0.7 million from July 1,2009 through June 30, 2010; $0.2 million from July 1, 2010 through June 30,2011; and none from July 1, 2011 through June 30, 2013.  Substantially all property of **DP&L** is subject to the mortgage liensecuring the first mortgage bonds.

 

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At June 30, 2008,the $175 million 8.00% Senior Notes due March 31, 2009 are reflectedwithin the current portion of long-term debt in **DPL’s**Condensed Consolidated Balance Sheet.

 

On March 1, 2007, pursuant to our strategyof reducing long-term debt, **DPL** redeemedthe $225 million 8.25% Senior Notes when they became due.  On May 15, 2008, **DPL**redeemed the $100 million 6.25% Senior Notes when they became due.

 

During the three months ended March 31,2006, the Ohio Department of Development (ODOD) awarded **DP&L**the ability to issue, over the next three years, up to $200 million ofqualified tax-exempt financing from the ODOD’s 2005 volume capcarryforward.  The financing is to beused to partially fund ongoing flue gas desulfurization (FGD) capitalprojects.  The Public UtilitiesCommission of Ohio (PUCO) approved **DP&L’s**application for this additional financing on July 26, 2006.

 

On September 13, 2006, the Ohio Air QualityDevelopment Authority (OAQDA) issued $100 million of 4.80% fixed interest rateOAQDA Revenue Bonds 2006 Series A due September 1, 2036.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the Bonds, when due, is insured by aninsurance policy issued by Financial Guaranty Insurance Company.  **DP&L** usedthe proceeds from these borrowings to assist in financing its portion of thecosts of acquiring, constructing, and installing certain solid waste disposaland air quality facilities at Miami Fort, Killen, and Stuart generatingstations.

 

On November 15, 2007, the OAQDA issued $90million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thevariable interest rate on these bonds had been determined via a Dutch-auctionthat was reset every 35 days.  On April 4,2008, these OAQDA Revenue bonds were converted from 35-day auction ratesecurities to 7-day variable rate demand notes (VRDNs).  At that time, the trustee, on behalf of **DP&L,** purchased all of the issued and outstanding bondsfrom the bondholders at par value and placed them in a custody account.  These bonds have not been legally cancelledand can be re-issued at the discretion of **DP&L** at anytime.  These VRDNs were purchased usingfunds provided by **DP&L’s**revolving line of credit at a borrowing rate of LIBOR plus 0.27% and will beheld in trust while we continue to evaluate market conditions and exploresuitable long-term financing alternatives. Accordingly, at June 30, 2008, the $90 million variable rate OAQDARevenue bonds are not treated as being outstanding in the CondensedConsolidated Balance Sheets for both **DPL** and **DP&L**.

 

On November 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement replacing its$100 million facility.  This agreementhas a five-year term that expires November 21, 2011 and provides **DP&L** with the ability to increase the size of thefacility by an additional $50 million at any time.  The facility contains one financialcovenant:  **DP&L’s**total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of June 30, 2008,****theoutstanding borrowings under this credit facility amounted to $90 million.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest rate.  This revolving creditagreement also contains a $50 million letter of credit sub-limit.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel, andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of June 30, 2008, **DP&L** had no outstanding letters of credit against thefacility.  As reviewed in the precedingparagraph, on April 4, 2008, $90 million was drawn on this facility topurchase the VRDNs.

 

During the second quarter ended June 30, 2007, **DPL** provided a short-term loan to **DP&L**for $105 million.  **DP&L**paiddown $15 million of this loan during the third quarter ended September 30,2007, an additional $70 million during the fourth quarter ended December 31,2007, and the final $20 million during the first quarter ended March 31,2008.  This short-term loan did notviolate any covenants in our other debt instruments.  There are no other intercompany debtcollateralizations or debt guarantees between **DPL**,**DP&L,**and their affiliates.  None of the debt obligations of **DPL** or **DP&L** areguaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

 

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**5.     IncomeTaxes**

 

On June 27,2008, we entered into a $42.0 million settlement agreement with the OhioDepartment of Taxation (ODT) resolving all outstanding audit issues andappeals, including uncertain tax positions for tax years 1998 through2006.  The $42 million payment will bemade to the ODT by July 31, 2008. Due to this settlement agreement, the balance of our unrecognized statetax liabilities recorded at March 31, 2008, in the amount of $56.3million, was reversed resulting in a recorded income tax benefit of $8.5million, net of federal tax impact, during the three months ended June 30,2008.

 

**DPL’s** effective income tax rate for the threemonths ended June 30, 2008 was 22.9% as compared to 37.7% for the threemonths ended June 30, 2007.  **DPL’s** effective income tax rate for the sixmonths ended June 30, 2008 was 32.3% as compared to 38.5% for the sixmonths ended June 30, 2007.

 

**DP&L’s**effective income tax rate for the threemonths ended June 30, 2008 was 24.3% as compared to 37.6% for the threemonths ended June 30, 2007.  **DP&L’s** effective income tax rate forthe six months ended June 30, 2008 was 32.1% as compared to 37.5% for thesix months ended June 30, 2007.

 

Thedecreases in the effective tax rates for **DPL**and **DP&L** in both periods wasprimarily the result of the $8.5 million income tax benefit discussed above.

 

We currentlyhave no uncertain tax positions but will continue to examine tax positions takenin accordance with FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes.”

 

We recognizeinterest and penalties related to unrecognized tax positions in incometaxes.  As of June 30, 2008, we donot have any interest accrued related to uncertain tax positions.

 

**6.     Pension and Postretirement Benefits**

 

We sponsor a defined benefit plan for substantially all employees.  For collective bargaining employees, thedefined benefits are based on a specific dollar amount per year ofservice.  For all other employees, thedefined benefit plan is based primarily on compensation and years of service.We fund pension plan benefits as accrued in accordance with the minimum fundingrequirements of the Employee Retirement Income Security Act of 1974 (ERISA).  In addition, we have a Supplemental ExecutiveRetirement Plan (SERP) for certain active and retired key executives.  We****also haveunfunded liabilities related to retirement benefits for certain active,terminated, and retired key executives. These liabilities totaled approximately $1.0 million at June 30,2008 and $0.9 million at December 31, 2007.

 

Qualified employees who retired prior to 1987 and their dependents areeligible for health care and life insurance benefits, while qualified employeeswho retired after 1987 are eligible for life insurance benefits.  We have funded the union-eligible healthbenefit using a Voluntary Employee Beneficiary Association Trust.

 

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The net periodic benefit cost of the pension andpostretirement benefit plans for the three months ended June 30, 2008 and2007 was:

 

**Net periodic benefit cost**

 
| ** **                        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|
| **$  in millions** | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                      | ** ** | **$**       | **0.8**    |               | $          | 1.1 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                     | ** ** | **4.1**     |       | 4.1                | ** ** | **0.4** |   | 0.3 |   |
| Expected return on assets (a)     | ** ** | **(6.0**    | **)**      | (5.4               | )          | **(0.1** | **)** | (0.1 | ) |
|                              |       |        |       |               |       |   | ** ** |   |   |
| Amortization of unrecognized:     |       |        |       |               |       |   | ** ** |   |   |
| Actuarial (gain) loss             | ** ** | **0.7**     |       | 0.9                | ** ** | **(0.2** | **)** | (0.3 | ) |
| Prior service cost                | ** ** | **0.6**     |       | 0.6                | ** ** | **—** |   | — |   |
| Transition obligation             | ** ** | **—**  |       | —             | ** ** | **—** |   | 0.1 |   |
| Net periodic benefit cost         | ** ** | **$**       | **0.2**    |               | $          | 1.3 | ** ** | **$** | **0.1** |   | $ | — |   |

 

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*(a)**      **The market-related value of assets is equal to the fairvalue of assets at implementation with subsequent asset gains and lossesrecognized in the market-value systematically over a three-year period.*

 

The net periodic benefit cost of the pension andpostretirement benefit plans for the six months ended June 30, 2008 and2007 was:

 

**Net periodic benefit cost**

 
| ** **                        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|
| **$  in millions** | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                      | ** ** | **$**       | **1.6**    |               | $          | 2.2 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                     | ** ** | **8.2**     |       | 8.2                | ** ** | **0.8** |   | 0.7 |   |
| Expected return on assets (a)     | ** ** | **(12.0**   | **)**      | (10.9              | )          | **(0.2** | **)** | (0.2 | ) |
|                              |       |        |       |               |       |   | ** ** |   |   |
| Amortization of unrecognized:     |       |        |       |               |       |   | ** ** |   |   |
| Actuarial (gain) loss             | ** ** | **1.4**     |       | 1.8                | ** ** | **(0.4** | **)** | (0.5 | ) |
| Prior service cost                | ** ** | **1.2**     |       | 1.2                | ** ** | **—** | ** ** | — |   |
| Transition obligation             | ** ** | **—**  |       | —             | ** ** | **—** |   | 0.1 |   |
| Net periodic benefit cost         | ** ** | **$**       | **0.4**    |               | $          | 2.5 | ** ** | **$** | **0.2** |   | $ | 0.1 |   |

 

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*(a)**      **The market-related value of assets is equal to the fairvalue of assets at implementation with subsequent asset gains and lossesrecognized in the market-value systematically over a three-year period.*

 

The following estimated benefit payments, whichreflect future service, are expected to be paid as follows:

 

**Estimated Future Benefit Payments:**

 
| **$  in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|
| 2008                              |       | $           | 9.9        |               | $          | 1.3 |   |
| 2009                              |       | $           | 20.0       |               | $          | 2.6 |   |
| 2010                              |       | $           | 20.3       |               | $          | 2.6 |   |
| 2011                              |       | $           | 20.5       |               | $          | 2.5 |   |
| 2012                              |       | $           | 21.0       |               | $          | 2.4 |   |
| 2013 – 2017                  |       | $           | 110.6      |               | $          | 9.8 |   |

 

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**7.     Share-Based Compensation**

 

The following table summarizes share-based compensation expense:

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$  in millions**                                        | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock options                                                            | ** ** | **$**                            | **—** |                           | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Restricted stock units                                                   | ** ** | **—**                       |       | —                         | ** ** | **(0.1** | **)** | 0.1 |   |
| Performance shares                                                       | ** ** | **0.4**                          |       | 0.4                            | ** ** | **0.6** | ** ** | 0.8 |   |
| Restricted shares                                                        | ** ** | **0.1**                          |       | 0.1                            | ** ** | **0.2** | ** ** | 0.1 |   |
| Non-employee directors’ RSUs                                        | ** ** | **0.1**                          |       | 0.1                            | ** ** | **0.2** | ** ** | 0.1 |   |
| Management performance shares                                            | ** ** | **0.1**                          |       | —                         | ** ** | **0.1** | ** ** | — |   |
| Share-based compensation included in operations  and maintenance expense |       | **$**                            | **0.7**    |                           | $          | 0.6 |   | **$** | 1.0 | ** ** | $ | 1.1 |   |
| Income tax benefit                                                       | ** ** | **(0.2**                         | **)**      | (0.2                           | )          | **(0.3** | **)** | (0.4 | ) |
| Total share-based compensation, net of tax                               | ** ** | **$**                            | **0.5**    |                           | $          | 0.4 | ** ** | **$** | **0.7** |   | $ | 0.7 |   |

 

Share-based awards issued in **DPL’s**commonstock will be distributed from treasury stock. **DPL** believes it has sufficient treasurystock to satisfy all outstanding share-based awards.

 

Summarized share-based compensation activity for the six months ended June 30,2008 and 2007 was as follows:

 
| ** **                        | ** ** | **Options** |   | **RSUs**   |   | **Performance Shares** | ** ** |
|-----------------------------------|------------|-------------|--------|------------|--------|-----------------------------|------------|
| ** **                        | ** ** | **2008**    |   | **2007**   |   | **2008**                    | ** ** | **2007** |   | **2008** | ** ** | **2007** | ** ** |
| Outstanding at  beginning of year | ** ** | **946,500** |   | 5,091,500  |   | **22,976**                  | ** ** | 1,345,995 |   | **142,108** | ** ** | 154,768 |   |
| Granted                           | ** ** | **—**  |   | —     |   | **—**                  | ** ** | — |   | **93,298** | ** ** | 74,714 |   |
| Dividends                         | ** ** | **—**  |   | —     |   | **—**                  | ** ** | — |   | **—** | ** ** | — |   |
| Exercised                         | ** ** | **(50,000** | **)**  | (520,000   | )      | **(1,605**                  | **)**      | — |   | **—** | ** ** | (22,462 | ) |
| Expired                           | ** ** | **—**  |   | —     |   | **—**                  | ** ** | — |   | **(37,426** | **)** | (21,583 | ) |
| Forfeited                         | ** ** | **—**  |   | (3,620,000 | )      | **(1,603**                  | **)**      | (1,295,997 | ) | **(7,253** | **)** | (14,172 | ) |
| Outstanding at  period end        | ** ** | **896,500** |   | 951,500    |   | **19,768**                  | ** ** | 49,998 |   | **190,727** | ** ** | 171,265 |   |
| Exercisable at  period end        | ** ** | **896,500** |   | 941,500    |   | **—**                  | ** ** | — |   | **—** | ** ** | — |   |

 
| ** **                       | ** ** | **Restricted Shares** | ** ** | **Director RSUs** | ** ** | **Mgt. Performance Shares** | ** ** |
|----------------------------------|------------|----------------------------|------------|------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2008**                   | ** ** | **2007**               | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Outstanding at beginning of year | ** ** | **42,200**                 |       | 19,000                 | ** ** | **13,573**                            |       | — |   | — |   | — |   |
| Granted                          | ** ** | **20,000**                 |       | 16,400                 | ** ** | **15,752**                            |       | 13,552 |   | 39,144 |   | — |   |
| Dividends                        | ** ** | **—**                 |       | —                 | ** ** | **382**                               |       | 99 |   | — |   | — |   |
| Exercised                        | ** ** | **(1,000**                 | **)**      | —                 | ** ** | **(13,721**                           | **)**      | (142 | ) | — |   | — |   |
| Expired                          | ** ** | **—**                 | ** ** | —                 | ** ** | **—**                            | ** ** | — |   | — |   | — |   |
| Forfeited                        | ** ** | **—**                 | ** ** | —                 | ** ** | **—**                            |       | (1,553 | ) | — |   | — |   |
| Outstanding at period end        | ** ** | **61,200**                 |       | 35,400                 | ** ** | **15,986**                            |       | 11,956 |   | 39,144 |   | — |   |
| Exercisable at period end        | ** ** | **—**                 |       | —                 | ** ** | **—**                            |       | — |   | — |   | — |   |

 

On May 28, 2008, the Board of Directors granted a compensationaward for select management employees.  Atotal of 39,144 shares were granted.  Thegrants have a three year requisite service period from January 1, 2008 to December 31,2010 and certain performance conditions during the performance period.  The Management Performance Shares can only beawarded in **DPL**common shares.

 

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**8.     FairValue Measurements**

 

Effective January 1, 2008, we adopted Statement of FinancialAccounting Standards No.157, “Fair Value Measurements” (SFAS 157), whichprovides a framework for measuring fair value under GAAP.  SFAS 157 requires that the impact of thischange in accounting for fair valued assets and liabilities be recorded as anadjustment to beginning retained earnings in the period of adoption.  We did not have any adjustments to beginningretained earnings at adoption.

 

FSP SFAS 157-2 allows for a deferral from the SFAS 157 disclosures fornon-financial assets or liabilities until fiscal years beginning after November 15,2008.  We did not elect this deferral andhave disclosed an additional layer to an asset retirement obligation.

 

SFAS 157 defines fair value as the exchange price that would bereceived for an asset or paid to transfer a liability (an exit price) in theprincipal or most advantageous market for the asset or liability in an orderlytransaction between market participants on the measurement date.  SFAS 157 also establishes a fair valuehierarchy that requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputsthat may be used to measure fair value:

 

**Level 1**

 

Level 1 inputs are defined as quoted pricesin active markets for identical assets or liabilities.  Our Level 1 assets and liabilities includeequity securities held in various deferred compensation trusts and futurescontracts that are traded in an active exchange market.

 

**Level 2**

 

Level 2 inputs are observable inputs otherthan Level 1 prices such as quoted prices for similar assets or liabilities,quoted prices in markets that are not active, or other inputs that areobservable or can be corroborated by observable market data for substantiallythe full term of the assets or liabilities. Our Level 2 assets and liabilities include open-ended investment fundsand forward contracts with quoted prices from over-the-counter (OTC) markets ordirect broker quotes that are traded less frequently than exchange-tradedinstruments.

 

**Level 3**

 

Level 3 inputs are unobservable inputs thatare supported by little or no market activity and that are significant to thefair value of the assets or liabilities. Our Level 3 assets and liabilities include asset retirement obligationsthat are initially recognized at fair value.

 

Valuations of assets and liabilities reflect the value of theinstrument including the values associated with counterparty risk andperformance risk.  With the issuance ofSFAS 157, the accounting industry clarified that these values must also takeinto account our own credit standing.  Weincorporate credit risk into valuations by requiring or posting margin asrequested by/of counterparties.

 

The fair value of assets and liabilitiesmeasured on a recurring basis was determined as follows:

 
| ** **                        | ** ** | **Assets and Liabilities Measured at Fair Value on a Recurring Basis** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                                                                               | ** ** | ** ** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **                        | ** ** | ** **                                                                                                               | ** ** | ** ** | ** ** | **Based on Quoted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Fair Value at**                                                                                              | ** ** | **Prices in Active** | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **                        | ** ** | **June 30, 2008**                                                                                              | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$  in millions** | ** ** | **DPL**                                                                                                                  | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| **Assets**                        | ** ** | ** **                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Master Trust Assets               |       | $                                                                                                                        | 12.9       |   | $ | 44.2 |   | $ | — |   | $ | 31.3 |   | $ | 12.9 |   | $ | 12.9 |   | $ | — |   | $ | — |   |
| Derivative Assets                 |       | 2.5                                                                                                                      |       | 2.5 |   | 2.4 |   | 2.4 |   | 0.1 |   | 0.1 |   | — |   | — |   |
| Total                             |       | $                                                                                                                        | 15.4       |   | $ | 46.7 |   | $ | 2.4 |   | $ | 33.7 |   | $ | 13.0 |   | $ | 13.0 |   | $ | — |   | $ | — |   |
|                              |       |                                                                                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**                   | ** ** | ** **                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative Liabilities            |       | $                                                                                                                        | 5.1        |   | $ | 5.1 |   | $ | — |   | $ | — |   | $ | 5.1 |   | $ | 5.1 |   | $ | — |   | $ | — |   |
| Total                             |       | $                                                                                                                        | 5.1        |   | $ | 5.1 |   | $ | — |   | $ | — |   | $ | 5.1 |   | $ | 5.1 |   | $ | — |   | $ | — |   |

 

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*(a)**      ****DP&L****holds **DPL**stock in the Master Trust that is eliminated in consolidation.*

 

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Generally, for financial assets held by the Master Trust and forheating oil futures, fair value is determined by reference to quoted marketprices and other relevant information generated by market transactions.  Level 2 inputs are used to value derivativessuch as financial transmission rights where the quoted prices are from arelatively inactive market; forward power contracts which are valued usingprices on the New York Mercantile Exchange (NYMEX) for similar contracts on theOTC market; and open-ended funds that are valued using the end of day Net AssetValue (NAV).

 

The fair value of assets and liabilities measured on a non-recurringbasis was determined as follows:

 
| ** **                                           | ** ** | **Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                                                                   | ** ** | ** ** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **                                           | ** ** | ** **                                                                                                                   | ** ** | ** ** | ** ** | **Based on Quoted** | ** ** | **Based on** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Fair Value at**                                                                                                  | ** ** | **Prices in Active** | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                           | ** ** | **June 30, 2008**                                                                                                  | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$  in millions**                    | ** ** | **DPL**                                                                                                                      | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| Asset retirement obligations recorded during  period |       | $                                                                                                                            | 0.2        |   | $ | 0.2 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.2 |   | $ | 0.2 |   |
|                                                      |            |                                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The fair value of an asset retirement obligation (ARO) is estimated bydiscounting expected cash outflows to their present value.  Cash outflows are based on approximate futuredisposal cost as determined by market information, historical information, ormanagement judgment.  **DP&L** added an additional layer to the asbestos removalARO in the amount of $0.2 million during the three months ended June 30,2008 due to a change in estimate.

 

AtJune, 30, 2008, **DPL** had $40.1 million ofinvestments in money market mutual funds classified as cash and cashequivalents in its Condensed Consolidated Balance Sheet.  The money market funds have quoted pricesthat are generally equivalent to par.

 

**9.     Earnings per Share**

 

Basic earnings per share (EPS) is based on the weighted-average numberof **DPL** common shares outstandingduring the year.  Diluted EPS is based onthe weighted-average number of **DPL**common and common-equivalent shares outstanding during the year, except inperiods where the inclusion of such common-equivalent shares isanti-dilutive.  Excluded from outstandingshares for these weighted-average computations are shares held by **DP&L’s** Master Trust Plan for deferredcompensation and unreleased shares held by **DP&L’s**Employee Stock Ownership Plan (ESOP).

 

The following table represents common-equivalent shares excluded fromthe calculation of diluted EPS because they were anti-dilutive.  These shares may be dilutive in the future.

 
| ** **               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **In millions**     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                                                |       |                                              |       |   |   |   |   |
| Common equivalent shares | ** ** | **0.3**                                             |       | —                                            | ** ** | **0.3** |   | — |   |

 

The following illustrates the reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations forincome after discontinued operations:

 

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| ** **                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                             | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                          | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                                     | ** ** | **$**                                               | **47.6**   | ** ** | **109.4** | ** ** | **$** | **0.43** |   | $ | 58.7 |   | 107.9 |   | $ | 0.54 |   |
|                                              |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities:**                |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock units                            | ** ** | ** **                                          |       | **—** |   |   |   |   |   | 0.7 |   |   |   |
| Warrants                                          | ** ** | ** **                                          |       | **7.7** |   |   |   |   |   | 9.9 |   |   |   |
| Stock options, performance and restricted  shares | ** ** | ** **                                          |       | **0.2** |   |   |   |   |   | 1.0 |   |   |   |
|                                              |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                               | **47.6**   | ** ** | **117.3** | ** ** | **$** | **0.41** |   | $ | 58.7 |   | 119.5 |   | $ | 0.49 |   |

 
| ** **                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                           | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic EPS**                                     | ** ** | **$**                                             | **124.9**  | ** ** | **109.4** | ** ** | **$** | **1.14** |   | $ | 114.8 |   | 107.7 |   | $ | 1.07 |   |
|                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities:**                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock units                            | ** ** | ** **                                        |       | **—** |   |   |   |   |   | 1.0 |   |   |   |
| Warrants                                          | ** ** | ** **                                        |       | **7.2** |   |   |   |   |   | 9.5 |   |   |   |
| Stock options, performance and restricted  shares | ** ** | ** **                                        |       | **0.2** |   |   |   |   |   | 1.2 |   |   |   |
|                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                   | ** ** | **$**                                             | **124.9**  | ** ** | **116.8** | ** ** | **$** | **1.07** |   | $ | 114.8 |   | 119.4 |   | $ | 0.96 |   |

 

**10.  Commitments and Contingencies**

 

**ContractualObligations**

 

There have been no material changes, outsidethe ordinary course of business, to the information disclosed in thecontractual obligations table in our Annual Report of Form 10-K for thefiscal year ended December 31, 2007 except those relating to the followingtransactions:

 

·                  On April 4, 2008, **DP&L**repurchased all of the issued andoutstanding $90 million variable rate OAQDA Revenue bonds from the bondholdersand placed them in a custody account. This transaction is further discussed in Note 4 of Notes to CondensedConsolidated Financial Statements.

·                  On June 27, 2008, **DPL**entered into a $42 million settlementagreement with the ODT resolving all outstanding audit issues and appeals,including uncertain tax positions for tax years 1998 through 2006.  The $42 million payment will be made to theODT by July 31, 2008.  Thistransaction is further discussed in Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

·                  At December 31, 2007, **DP&L** had contractual obligationsrelating to the installation of FGD equipment in the amount of $144million.  During the three months ended June 30,2008, the installation of FGD equipment on Stuart station units 1 and 2 wassubstantially completed and the equipment put into test operation.  The open contractual obligations relating tothe installation of FGD equipment was therefore reduced to $32.1 million at June 30,2008.  It is expected that these opencontractual obligations will be satisfied within the next twelve months.

 

**CommercialCommitments**

 

With the exception of the transactionsdiscussed in the preceding paragraph, there have been no other materialchanges, outside the ordinary course of business, to our commercial commitmentsas disclosed in our Annual Report of Form 10-K for the fiscal year ended December 31,2007.

 

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**Contingencies**

 

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations.  We believe the amountsprovided in our Condensed Consolidated Financial Statements, as prescribed byGAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that theactual amounts required to satisfy alleged liabilities from various legalproceedings, claims, tax examinations, and other matters discussed below, andto comply with applicable laws and regulations, will not exceed the amountsreflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of June 30, 2008, cannot bereasonably determined.

 

**Coal Supply Agreement**

 

In February 2007 we filed a lawsuit against a coal supplier seekingdamages incurred due to the supplier’s failure to supply approximately 1.5million tons of coal to two jointly owned plants under a coal supply agreement,of which approximately 570 thousand tons is our share.  The supplier has denied liability and whiletrial is scheduled for November 2008, we are also attempting to resolve thisdispute through mediation.  We are unableto determine the ultimate resolution of this matter at this time.  In accordance with accounting for gaincontingencies, we will not record an amount for this matter until it isresolved.

 

**Environmental Matters**

 

**DPL**,**DP&L** and our subsidiaries’facilities and operations are subject to a wide range of environmentalregulations and laws.  In the normalcourse of business, we haveinvestigatory and remedial activities underway at these facilities to comply,or to determine compliance, with such regulations.  Wehave been identified, either by a government agency or by a privateparty seeking contribution to site clean-up costs, as a potentially responsibleparty (PRP) at two sites pursuant to state and federal laws.  Werecord liabilities for probable estimated loss in accordance with SFAS 5as discussed in Note 1 of Notes to Condensed Consolidated FinancialStatements.  We evaluate the potential liability related to probable lossesquarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could havea material effect on our results of operations and financial position.

 

**Sierra Club**

 

In September 2004, the Sierra Club filed a lawsuit against **DP&L**and the other owners of the Stuart generatingstation in the United States District Court for the Southern District of Ohiofor alleged violations of the Clean Air Act (CAA) and the station’s operatingpermit.  **DP&L**,on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has takenplace, including depositions, and most expert reports have been submitted.  Settlement negotiations are ongoing.

 

**Notices of Violation InvolvingWholly-Owned Plants**

 

In 2007, the Ohio EPA andthe USEPA issued NOVs to **DP&L** foralleged violations of the CAA at the O.H. Hutchings station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA and Ohio EPA, and **DP&L** has provided data to those agencies regarding itsmaintenance expenses and operating results and recommendations that hadpreviously been made by consultants to **DP&L**.  Additional information was provided to theU.S. Department of Justice (US DOJ) in response to a request made on January 28,2008.  **DP&L**metwith the US DOJ and USEPA on July 15, 2008 to discuss a possibleresolution of this matter.  A settlementof this matter could include a combination of capital projects, futurecommitments for compliance, and civil penalties of an unspecified amount.  At this time, **DP&L**is unable to determine the timing, costs, or method by which the issues may beresolved.

 

**Notices of Violation InvolvingCo-Owned Plants**

 

On March 13, 2008,Duke Energy Ohio Inc., the operator of the Zimmer generating station, receiveda NOV and a Finding of Violation from the USEPA alleging violations of the CAA,the Ohio State Implementation Program (SIP) and permits for the Station in areasincluding SO2,opacity, and increased heat input.  **DP&L** is a co-owner of the Zimmer generating station andcould be affected by the eventual resolution of this matter.  Duke Energy Ohio Inc. is expected to act onbehalf of itself and the co-owners with respect to this matter.  At this time, **DP&L**is unable to determine whether any additional actions will take place withrespect to this matter.

 

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**Environmental Regulation andLitigation Related to Air Quality**

 

On February 8, 2008,a three-judge panel of the Court of Appeals, D.C. Circuit, struck down theUSEPA regulations that were designed to establish a trading program for mercuryemissions, finding that the USEPA had not complied with statutory requirementsapplicable to “de-listing” mercury as a hazardous air pollutant and that acap-and-trade approach was not authorized by law for “listed” hazardous airpollutants.  The USEPA and a grouprepresenting utilities filed a request for rehearing en banc (i.e., a rehearingbefore all the D.C. Circuit judges). That request was denied on May 20, 2008.  The parties have a 90-day window to file apetition for certiorari with the U.S. Supreme Court (until August 20,2008).  If the petition is not filed bythe parties or if it is not accepted by the Supreme Court, or if the SupremeCourt grants certiorari and upholds the D.C. Circuit’s decision, EPA will haveto move forward to set Maximum Available Control Technology (MACT) standardsfor coal- and oil-fired electric generating units.  It is likely the EPA would take at leastthree years to gather new data to promulgate updated MACT standards and anotherthree years for the regulations to become effective.  At this time, **DP&L**is unable to determine the impact of promulgation of new MACT standards on its****financial position or results of operations.

 

On July 11, 2008, theUnited States Court of Appeals for the District of Columbia Circuit issued adecision that vacated the USEPA’s Clean Air Interstate Rule (CAIR) and itsassociated Federal Implementation Plan. This decision remands these issues backto the USEPA.  The USEPA issued CAIR on March 10,2005 to regulate certain upwind states with respect to fine particulate matterand ozone.  CAIR created interstatetrading programs for annual nitrogen oxide (NOx) emission allowances and mademodifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in2010.  The court’s decision, in part,invalidated the new NOx annual emission allowance trading program and themodifications to the SO2 emission trading program.  In the fourth quarter of 2007, **DP&L** began a program for selling excess emission allowances,including annual NOx emission allowances and SO2 emission allowances that were thesubject of CAIR trading programs.  Insubsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.   The overall impact of thecourt’s decision, and the actions the EPA will take in response to thisdecision, on **DPL** and **DP&L**isnot known at this time, however, the court’s decision may impact future salesof excess allowances. We do not expect this decision to have a material effecton our financial position.

 

**Environmental Regulation and LitigationRelated to Water Quality**

 

On July 9, 2004, theUSEPA issued final rules pursuant to the CAA governing existing facilitiesthat have cooling water intake structures. The rules require an assessment of impingement and/or entrainmentof organisms as a result of cooling water withdrawal.  A number of parties appealed the rules tothe Federal Court of Appeals for the Second Circuit in New York and the courtissued an opinion, on January 25, 2007, remanding several aspects of the rule toUSEPA for reconsideration.  Severalparties petitioned the U.S. Supreme Court for review of the lower courtdecision.  On April 14, 2008, theSupreme Court elected to review the lower court decision on the issue ofwhether USEPA can compare costs with benefits in determining the besttechnology available for minimizing adverse environmental impact at coolingwater intake structures.  Briefs will besubmitted to the Court this summer and oral arguments will likely be held in November orDecember 2008 with a potential decision rendered in 2009.

 

On February 5, 2008,we received a letter from Ohio EPA indicating that they intend to impose acompliance schedule, as part of the final National Pollutant Discharge EliminationSystem (NPDES) Permit, that requires us to implement one of two diffuseroptions for the discharge of water from the Stuart station into the Ohio Riveras identified in the thermal discharge study conducted pursuant to requirementscontained in a previous permit. The two diffuser options identified by Ohio EPAcould cost approximately $33 million based on preliminary cost estimates, ofwhich our pro-rata ownership share would be approximately $11.5 million.  On March 6, 2008, representatives from **DP&L** met with Ohio EPA to discuss the issue andreiterate the Company’s position that diffusers were not cost-effective.  We agreed to explore other potentialsolutions and share findings with Ohio EPA.

 

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**11.  Executive Litigation**

 

On May 21, 2007, wesettled litigation with three of our former executives.  As part of this settlement, these formerexecutives relinquished and dismissed all their claims, including those relatedto certain deferred compensation, RSUs, MVE incentives, stock options and legalfees.  The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, **DPL**had accrued obligations of approximately $64.2 million,of which **DP&L**had accrued obligations ofapproximately $60.3 million.  Included inthese amounts was approximately $3.1 million associated with the forfeiture ofstock options.  In exchange for ourpayment of $25 million, all of these claims were settled.  The $25 million settlement was funded fromthe sale of financial assets held in **DP&L’s**MasterTrust Plan for deferred compensation.

 

As a result of thissettlement, **DPL** realized a net pre-tax gain incontinuing and discontinued operations of approximately $31.0 million and $8.1million, respectively.  The net gain wascomprised of the reversal of the $64.2 million of accrued obligations less the$25 million settlement.  The obligationsrelated to the discontinued operations were associated with the management of **DPL’s** financial asset portfolio, which was conducted inMVE.  The MVE operations werediscontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense wasallocated between continuing and discontinued operations based on theproportionate share of continuing and discontinued obligations.

 

Similarly, **DP&L** realized a net pre-tax gain in continuingoperations of approximately $35.3 million. Accrued obligations associated with the former executives’ litigationwere recorded by **DP&L**since the obligationswere associated with our non-qualified benefit plans.  **DP&L**had noownership of **DPL’s** discontinued financial assetportfolio business; therefore, these liabilities were reversed and **DP&L’s**net pre-tax gain was recorded within continuingoperations.

 

As part of thistransaction, **DPL** and **DP&L**recordeda $3.2 million realized gain which was reflected in investment income duringthe three months ended June 30, 2007.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

This report includes the combined filing of DPL Inc.**(DPL)** and The Dayton Power and Light Company **(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 99% of **DPL’s**totalconsolidated revenue and approximately 94% of **DPL’s**totalconsolidated asset base.  Throughout thisreport the terms “we,” “us,” “our,” and “ours” are used to refer to both **DPL** and **DP&L**,respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report thatapply only to **DPL** or **DP&L**will clearly be noted in this section.

 

Certain statements contained in this discussionare “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Mattersdiscussed in this report that relate to events or developments that areexpected to occur in the future, including management’s expectations, strategicobjectives, business prospects, anticipated economic performance and financialcondition and other similar matters constitute forward-looking statements.  Forward-looking statements are based onmanagement’s beliefs, assumptions and expectations of future economicperformance, taking into account the information currently available tomanagement.  These statements are notstatements of historical fact and are typically identified by terms and phrasessuch as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,”“could,” “may,” “plan,” “project,” “predict,” “will,” and similarexpressions.  Such forward-lookingstatements are subject to risks and uncertainties, and investors are cautionedthat outcomes and results may vary materially from those projected due tovarious factors beyond our control, including but not limited to: abnormal orsevere weather and catastrophic weather-related damage; unusual maintenance orrepair requirements; changes in fuel costs and purchased power, coal,environmental emissions, natural gas, oil, and other commodity prices;volatility and changes in markets for electricity and other energy-relatedcommodities; performance of our suppliers and other counterparties; increasedcompetition and deregulation in the electric utility industry; increasedcompetition in the retail generation market; changes in interest rates; state,federal and foreign legislative and regulatory initiatives that affect cost andinvestment recovery, emission levels and regulations, rate structures or tax laws;changes in federal and/or state environmental laws and regulations to which **DPL** and its subsidiaries are subject; the development ofRegional Transmission Organizations (RTOs), including PJM Interconnection,L.L.C. (PJM) to which **DPL’s** operatingsubsidiary (**DP&L**) has given control of itstransmission functions; changes in our purchasing processes, pricing, delays,employee, contractor, and supplier performance and availability; significantdelays associated with large construction projects; 

 

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growth in our service territory and changes indemand and demographic patterns; changes in accounting rules and the effectof accounting pronouncements issued periodically by accounting standard-settingbodies; financial market conditions; the outcomes of litigation and regulatoryinvestigations, proceedings or inquiries; general economic conditions; and therisks and other factors discussed in **DPL’s** and **DP&L’s**filings with the Securities and ExchangeCommission.

 

Forward-looking statements speak only as of the date of the document inwhich they are made.  We disclaim anyobligation or undertaking to provide any updates or revisions to anyforward-looking statement to reflect any change in our expectations or anychange in events, conditions or circumstances on which the forward-lookingstatement is based.

 

The following discussion should be read in conjunction with the accompanyingunaudited financial statements and related footnotes included in Part 1 –Financial Information.

 

**BUSINESS OVERVIEW**

 

**DPL**isa diversified regional energy company organized in 1985 under the laws ofOhio.  Our executive offices are locatedat 1065 Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.

 

**DPL’s**principal subsidiary is **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 customersin a 6,000 square mile area of West Central Ohio.  **DP&L** alsosells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy theelectric requirements of their retail customers.  Electricity for **DP&L’s** 24 county service area is primarily generated ateight coal-fired power plants and is distributed to more than 514,000 retailcustomers.  **DP&L** also purchases retail peak load requirements from DPLEnergy LLC (DPLE), one of **DPL’s** whollyowned subsidiaries.  Principal industriesserved include automotive, food processing, paper, plastic manufacturing, anddefense.

 

**DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area.  **DP&L** sells any excess energy and capacity into thewholesale market.

 

**DPL’s** significantsubsidiaries (all of which are wholly owned) include DPLE, which engages in theoperation of peaking generating facilities; DPLER, which sells retail electricenergy under contract to major industrial and commercial customers in WestCentral Ohio; and Miami Valley Insurance Company (MVIC), our captive insurancecompany that provides insurance sources to us and our subsidiaries.  ** DP&L**has one significantsubsidiary, DPL Finance Company, Inc., which is wholly owned and providesfinancing to **DPL**, **DP&L** and other affiliated companies.

 

**DPL** and **DP&L** conduct their principal businessin one business segment - Electric.

 

As we look forward, there are a number of issues that we believe mayhave a significant impact on our business and operations described above.  The following issues mentioned below are notmeant to be exhaustive but to provide insight to matters that have or arelikely to have an effect on our industry and business:

 

·                  **Clean Air Interstate Rule (CAIR) decision by the U.S. Court ofAppeals for the District of Columbia Circuit**

 

On July 11, 2008, the United States Court of Appeals for theDistrict of Columbia Circuit issued a decision that vacated the United StatesEnvironmental Protection Agency’s (USEPA) CAIR and its associated FederalImplementation Plan. This decision remands these issues back to the USEPA.  The USEPA issued CAIR on March 10, 2005to regulate certain upwind states with respect to fine particulate matter andozone.  CAIR created interstate tradingprograms for annual nitrogen oxide (NOx) emission allowances and mademodifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in2010.  The court’s decision, in part,invalidated the new NOx annual emission allowance trading program and themodifications to the SO2 emission trading program.  The court’s decision may impact future salesof excess allowances, however, we do not expect this decision to have amaterial effect on our financial position.

 

·                  **Ohio Senate Bill 221**

 

On May 1, 2008, substitute Senate Bill 221,an Ohio electric energy bill, was signed by the Governor and will becomeeffective July 31, 2008.  This billis further discussed in the Updates/Other Matters section below.  We are currently in the process of reviewingthe bill and evaluating its ramifications. While the overall financial impact of this new legislation on **DPL** and **DP&L** willnot be known for some time, implementation of the new legislation by **DPL** and **DP&L** maymaterially impact our financial condition.

 

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·                  **Greenhouse Gases**

 

The rules issued by the USEPA and Ohio Environmental ProtectionAgency (Ohio EPA) that require substantial reductions in sulfur dioxide (SO2), nitrogen oxides (NOX),and mercury emissions may impact our business and operations.  We are installing(and have installed) emission control technology and are taking other measuresto comply with required reductions.

 

In addition to the requirements related to emissions of SO2, NOX and mercury noted above, there is a growingconcern nationally and internationally about global climate change and thecontribution of emissions of greenhouse gases, including most significantly,carbon dioxide (CO2).  Thisconcern has led to increased interest in legislation at the federal level andactions at the state level as well as litigation relating to greenhouse gasemissions, including a recent U.S. Supreme Court decision holding that theUSEPA has the authority to regulate CO2 emissions from motor vehicles under the CleanAir Act (CAA).  Increased pressure for carbon dioxide emissionsreduction is also coming from investor organizations and the internationalcommunity.  If legislation or regulations are passed at the federal orstate levels imposing mandatory reductions of CO2 and other greenhouse gases on generationfacilities, the cost of such reductions could be material.

 

·                  **Fuel Prices**

 

Recently, the coal market has experienced significant priceincreases.  We are now in a global marketfor coal in which our domestic price is increasingly affected by internationalsupply disruptions and demand balance. Exports from the U.S. have increased significantly in recent years.  In addition, domestic issues likegovernment-imposed direct costs and permitting issues are affecting miningcosts and supply availability.  Ourapproach is to hedge the fuel for our anticipated electric sales.  We have entered into contracts to hedge ourexposure to fuel requirements and other energy-related commodities.  We may not be able to hedge the entireexposure of our operations from commodity price volatility.  To the extent our suppliers do not meet theircontractual commitments or we are not hedged against price volatility, ourresults of operations, financial position, or cash flows could be materiallyaffected.

 

·                  **Credit Market**

 

The current globalcredit crisis may adversely affect our business and financial results.  During 2007, higher interest rates, fallingproperty prices, and a significant increase in the number of sub-primemortgages originated in 2005 and 2006 contributed to dramatic increases inmortgage delinquencies and defaults in 2007 and the six months ended June 30,2008.  The anticipated futuredelinquencies among high-risk, or sub-prime, borrowers in the United States isexpected to continue in the foreseeable future. The widespread dispersion of credit risk related to mortgagedelinquencies and defaults through the securitization of mortgage-backedsecurities (MBS), sales of collateralized debt obligations (CDOs) and the creationof structured investment vehicles (SIVs), as well as the unclear impact onlarge banks of MBS, CDOs, and SIVs, caused banks to reduce their loans to eachother or make them at higher interest rates. Similarly, the ability of corporations to obtain funds through theissuance of debt was negatively impacted. We issue debt to cover the costs of certain of our operations andexpenditures and the inability to issue such debt on reasonable terms, or atall, could negatively affect our business and financial results.  See Note 4 of Notes to Condensed ConsolidatedFinancial Statements which discusses recent actions taken by **DP&L**associated with its auction rate securities.

 

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** **

**UPDATES /OTHER MATTERS**

 

**Competition andRegulation Updates**

 

**Ohio Matters Updates**

 

***Ohio Retail Rates***

 

On May 1, 2008, substitute Senate Bill 221, an Ohio electricenergy bill, was signed by the Governor and will become effective July 31,2008.  This new law states that all Ohiodistribution utilities must file either an electric security plan or a marketrate option to be in effect January 1, 2009.  Under the market rate option, the retailgeneration price will be set by a periodic competitive bid process after theutility demonstrates that it can meet certain market criteria and bidrequirements set out in the bill.  Also, under this option, utilities thatstill own generation in the state are required to phase in the market rate optionover a period of not less than five years. An electric security plan which may allow for adjustments to thestandard offer for costs associated with environmental compliance; fuel andpurchased power; construction of new or investment in specified generatingfacilities; the provision of standby and default service, operating,maintenance, or other costs including taxes.  As part of its electricsecurity plan, the utility is permitted to file an infrastructure improvementplan that will specify the initiatives the utility will take to rebuild,upgrade, or replace its electric distribution system, including cost recoverymechanisms.  On July 2, 2008, the Public Utilities Commission of Ohio(PUCO) issued the first set in a series of rules related to implementationof the new law, including what information must be included in an electricsecurity plan as well as a market rate option. **DP&L** is preparing to file itscomments on the rules.

 

This new law contains annual targets relating to advanced energyportfolio standards, renewable energy, and energy efficiency standards.  The standards require that by the year 2025,25% of the total number of kilowatt hours of electricity sold by the utility toretail electric consumers must come from alternative energy resources, whichinclude “advanced energy resources” such as distributed generation, clean coal,advanced nuclear, energy efficiency, and fuel cell technology; and “renewableenergy resources” such as solar, hydro, wind, geothermal, and biomass. At leasthalf of the 25% must be generated from renewable energy resources, including0.5% from solar energy.   In addition,the proposed bill requires annual energy efficiency reductions that reach 22.3%by 2025 and peak demand reduction requirements that reach 7.75% by 2018.  The advanced energy portfolio and energyefficiency standards begin to phase in during 2009, with increases inrequirement percentages each year.  Ifany targets are not met, compliance penalties will apply.  Rules relating to implementation ofthese targets are expected to be issued later this summer.  While the overall financial impact of thisbill will not be known for some time, implementation of the bill could have amaterial impact on our financial condition.

 

**Federal Matters Updates**

 

As a member of PJM, **DP&L** issubject to charges and costs associated with PJM operations as approved by theFederal Energy Regulatory Commission (FERC). FERC Orders issued in 2007, regarding the allocation of costs of largetransmission facilities within PJM, could result in additional costs beingallocated to **DP&L**of approximately $12million or more annually by 2012.  **DP&L** filed a notice of appeal to the U.S. Court ofAppeals, D.C. Circuit on March 18, 2008. The appeal has been consolidated with other appeals taken by otherinterested parties of the same FERC Orders and the consolidated cases have beenassigned to the 7th Circuit. The Company cannot predict the outcome or timing of a decision in theappeals.

 

As a member of PJM, the value of **DP&L****’****s** generation capacityis affected by changes in and the clearing results of the PJM capacityconstruct.  The construct utilizes a Reliability Pricing Model (RPM) thatchanges the way generation capacity is priced and planned for by PJM.  PJMheld a series of auctions with the most recent taking place in May 2008 for the2011/2012 planning year.  The results ofthese auctions have not had a material impact on our results of operations,financial position or cash flows.  TheFERC decisions establishing RPM have been appealed by various entities to a Federal appealscourt.  RPM remains in effect pending theoutcome of the appeal.  **DP&L** has intervened and supports the FERCdecisions.  On March 19, 2008, a large coalition of consumers filed amotion to request a FERC Technical Conference to evaluate whether the RPM construct isperforming as expected, and proposed that the RPM market should be modified orreplaced.  In a related, but separateaction, many of the same group of consumers filed a complaint, on May 30, 2008, alleging that bidding approaches and others actions takenby unspecified market participants have resulted in unjust and unreasonablerates of $26 billion across PJM.  Thecomplaint seeks reduced RPM capacity prices beginning June 1, 2008.  OnJuly 3, 2008, **DP&L** filed in opposition to the complaint individually and as part of acoalition of companies.  **DP&L** is unable to predict the eventual outcome of theproceeding.

 

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On September 28, 2007, the Internal RevenueService (IRS) published proposed regulations which would change the treatmentof transactions involving the provision of insurance between members of aconsolidated tax group.  If adopted,these regulations would affect the tax position previously held by Miami ValleyInsurance Company (MVIC), our captive insurance company, that providesinsurance to us and our subsidiaries. The IRS requested comments by December 27, 2007.  MVIC filed comments as part of a coalitionformed for this purpose which included captive insurance companies and parentcompanies, captive insurance industry associations and insurance departments ofnumerous states which have captive insurance regulations.  These entities all opposed the IRS’ proposedregulations.  After review of allcomments received, on February 20, 2008, the IRS withdrew the part of itsproposed regulation that would have eliminated the current taxation structureof single-parent captive insurance companies filing a consolidated tax returnwith their parent.  Therefore, there hasbeen no adverse impact on **DPL**, **DP&L**, or MVIC.

 

In April 2008, **DPL**was notified that the IRS would audit its 2005 federal income tax return.  That IRS audit has commenced and **DPL** cannot determine the outcome of the audit.

 

**Environmental Updates**

 

**DPL**,**DP&L** and our subsidiaries’ facilitiesand operations are subject to a wide range of environmental regulations andlaws by federal, state and local authorities.

 

As well as imposing continuing compliance obligations, these laws andregulations authorize the imposition of substantial penalties fornoncompliance, including fines, injunctive relief and other sanctions. In thenormal course of business, we have investigatory and remedial activitiesunderway at these facilities to comply, or to determine compliance, with suchregulations.  We record liabilities forprobable estimated loss in accordance with Statement of Financial AccountingStandards No. 5 “Accounting for Contingencies” (SFAS 5), as discussed in Note 1 of Notes to Condensed Consolidated FinancialStatements. **  DPL,** through its wholly ownedcaptive insurance subsidiary MVIC, has an actuarially calculated reserve forenvironmental matters.  We evaluate thepotential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results ofoperations, financial position or cash flows.

 

***Sierra Club Litigation Update***

 

In September 2004, the Sierra Club filed a lawsuit against **DP&L**and the other owners of the Stuart generatingstation in the United States District Court for the Southern District of Ohiofor alleged violations of the Clean Air Act (CAA) and the station’s operatingpermit.  **DP&L**,on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has takenplace, including depositions, and most expert reports have been submitted.  Settlement negotiations are ongoing.

 

***Noticesof Violation Involving Wholly Owned Plants***

 

In 2007, the Ohio EPA andthe USEPA issued NOVs to **DP&L** foralleged violations of the CAA at the O.H. Hutchings station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA and Ohio EPA, and **DP&L** has provided data to those agencies regarding itsmaintenance expenses and operating results and recommendations that hadpreviously been made by consultants to **DP&L**.  Additional information was provided to theU.S. Department of Justice in response to a request made on January 28,2008.  **DP&L**metwith the US DOJ and USEPA on July 15, 2008 to discuss a possibleresolution of this matter.  A settlementof this matter could include a combination of capital projects, futurecommitments for compliance and civil penalties of an unspecified amount.  At this time, **DP&L**isunable to determine the timing, costs, or method by which the issues may beresolved.

 

***Noticesof Violation Involving Co-Owned Plants***

 

On March 13, 2008,Duke Energy Ohio Inc., the operator of the Zimmer generating station, receiveda NOV and a Finding of Violation from the USEPA alleging violations of the CAA,the Ohio State Implementation Program (SIP) and permits for the Station inareas including SO2,opacity, and increased heat input.  **DP&L** is a co-owner of the Zimmer generating station andcould be affected by the eventual resolution of this matter.  Duke Energy Ohio Inc. is expected to act onbehalf of itself and the co-owners with respect to this matter.  At this time, **DP&L**is unable to determine whether any additional actions will take place withrespect to this matter.

 

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***EnvironmentalRegulation and Litigation Related to Air Quality***

 

On February 8, 2008,a three-judge panel of the Court of Appeals, D.C. Circuit, struck down theUSEPA regulations that were designed to establish a trading program for mercuryemissions, finding that the USEPA had not complied with statutory requirementsapplicable to “de-listing” mercury as a hazardous air pollutant and that acap-and-trade approach was not authorized by law for “listed” hazardous airpollutants.  The USEPA and a grouprepresenting utilities filed a request for rehearing en banc (i.e., a rehearingbefore all the D.C. Circuit judges). That request was denied on May 20, 2008.  The parties have a 90-day window to file apetition for certiorari with the U.S. Supreme Court (until August 20,2008).  If the petition is not filed bythe parties or if it is not accepted by the Supreme Court, or if the SupremeCourt grants certiorari and upholds the D.C. Circuit’s decision, EPA will have tomove forward to set Maximum Available Control Technology (MACT) standards forcoal- and oil-fired electric generating units. It is likely the EPA would take at least three years to gather new datato promulgate updated MACT standards and another three years for theregulations to become effective.  At thistime, **DP&L** is unable to determine theimpact of promulgation of new MACT standards on its****financialposition or results of operations.

 

On July 11, 2008, the United States Courtof Appeals for the District of Columbia Circuit issued a decision that vacatedthe USEPA’s CAIR and its associated Federal Implementation Plan. This decisionremands these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwindstates with respect to fine particulate matter and ozone.  CAIR created interstate trading programs forannual NOx emission allowances and made modifications to an existing tradingprogram for SO2 that were to take effect in 2010.  The court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program and the modifications tothe SO2 emission trading program.  In the fourth quarter of 2007, **DP&L** began a program for selling excess emissionallowances, including annual NOx emission allowances and SO2 emission allowances that were the subjectof CAIR trading programs.  In subsequentquarters, **DP&L** recognized gains from the saleof excess emission allowances to third parties.   The overall impact of the court’s decision,and the actions the EPA will take in response to this decision, on **DPL** and **DP&L**is notknown at this time, however, the court’s decision may impact future sales ofexcess allowances. We do not expect this decision to have a material effect onour financial position.

 

***Environmental Regulation and LitigationRelated to Water Quality***

 

OnJuly 9, 2004, the USEPA issued final rules pursuant to the CleanWater Act governing existing facilities that have cooling water intakestructures.  The rules require an assessment of impingement and/orentrainment of organisms as a result of cooling water withdrawal.  A number of parties appealed the rules tothe Federal Court of Appeals for the Second Circuit in New York and the Courtissued an opinion on January 25, 2007 remanding several aspects of the rule toUSEPA for reconsideration.  Several parties petitioned the U.S. SupremeCourt for review of the lower court decision. On April 14, 2008, the Supreme Court elected to review the lowercourt decision on the issue of whether USEPA can compare costs with benefits indetermining the best technology available for minimizing adverse environmentalimpact at cooling water intake structures. Briefs will be submitted to the Court this summer and oral argument willlikely be held in November or December 2008.  A decision may be rendered in 2009.

 

OnFebruary 5, 2008, we received a letter from Ohio EPA indicating that theyintend to impose a compliance schedule, as part of the final National PollutantDischarge Elimination System (NPDES) Permit, that requires us to implement oneof two diffuser options for the discharge of water from the Stuart station intothe Ohio River as identified in the thermal discharge study conducted pursuantto requirements contained in a previous permit. The two diffuser options identified by Ohio EPA could cost approximately$33 million based on preliminary cost estimates, of which our pro-rata sharewould be approximately $11.5 million.  OnMarch 6, 2008, representatives from **DP&L** metwith Ohio EPA to discuss the issue and reiterate our position that diffuserswere not cost-effective.  We agreed toexplore other potential solutions and share findings with Ohio EPA.

 

***FGDProject Implementation***

 

Installation of the fluegas desulfurization (FGD) equipment on Stuart station units 1 and 2 wascompleted during the three months ended June 30, 2008.  The equipment is currently in physical testoperation which is expected to be finalized during the third quarter of 2008.

 

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**FINANCIALOVERVIEW**

 

As more fully discussed in later sections of this Form 10-Q, thefollowing were significant themes and events for the three months and sixmonths ended June 30, 2008:

 

·                  During the threemonths and six months ended June 30, 2008, **DP&L**sold excess emission allowances to various counterparties realizing total netgains of $4.0 million and $30.5 million, respectively.

 

·                  **DPL’s** revenues for both the three months and six monthsended June 30, 2008 increased 10% over the same periods in 2007 mainly dueto the effect of the environmental investment rider combined with wholesale andcapacity revenue increases.  For the three months and six months ended June 30,2008, **DPL’s** fuel costs, excluding the gainsfrom the sale of emission allowances discussed above, increased by 12% and 4%,respectively, over the same periods in 2007, mainly due to an increase ingeneration output.  For the three monthsand six months ended June 30, 2008, purchased power costs increased by 3%and 25%, respectively, mainly due to increased capacity charges. Operation and maintenance expense increased 13% for the three monthsended June 30, 2008, primarily due to a 2007 $14.5 million insurancerecovery, as well as a 2007 net gain of $6.0 million realized from the sale of **DPL’s** corporate aircraft. Operation and maintenance expense remained relatively flat over the sixmonth periods.

 

·                  **DP&L’s** revenues for both the three months and six monthsended June 30, 2008 increased 10% over the same periods in 2007 mainly dueto the effect of the environmental investment rider combined with wholesale andcapacity revenue increases.  For the three months and six months ended June 30,2008, **DP&L’s** fuel costs, excluding thegains from the sale of emission allowances discussed above, increased by 10%and 3%, respectively, over the same periods in 2007, mainly due to an increasein generation output.  For the threemonths and six months ended June 30, 2008, purchased power costs increasedby 5% and 26%, respectively, mainly due to increased capacity charges.  Operation and maintenance expense decreased9% and 5% for the three months and six months ended June 30, 2008,respectively.

 

·                  On June 27, 2008, we entered into a$42.0 million settlement agreement with the Ohio Department of Taxation (ODT)resolving all outstanding audit issues and appeals, including uncertain taxpositions for tax years 1998 through 2006. The $42 million payment will be made to the ODT by July 31,2008.  Due to this settlement agreement,the balance of our unrecognized state tax liabilities recorded at March 31,2008, in the amount of $56.3 million, was reversed resulting in a recordedincome tax benefit of $8.5 million, net of federal tax impact, during the threemonths ended June 30, 2008.

 

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**RESULTSOF OPERATIONS – DPL Inc.**

 

**DPL’s**results ofoperations include the results of its subsidiaries, including the consolidatedresults of **DP&L** and all of **DP&L’s** consolidated subsidiaries.  **DP&L**providesapproximately 99% of the total revenues of **DPL. **All material intercompany accountsand transactions have been eliminated in consolidation.  A separate specific discussion of the resultsof operations for **DP&L** ispresented elsewhere in this report.

 

**Income Statement Highlights – DPL**

** **
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Revenues:**                              |       |                             |       |                           |       |   |   |   |   |
| Retail                                     | ** ** | **$**                            | **287.0**  |                           | $          | 284.2 | ** ** | **$** | **605.1** |   | $ | 588.7 |   |
| Wholesale                                  | ** ** | **39.8**                         |       | 30.4                           | ** ** | **96.9** |   | 87.1 |   |
| RTO revenues                               | ** ** | **28.2**                         |       | 21.5                           | ** ** | **53.1** |   | 37.2 |   |
| Capacity revenues                          | ** ** | **20.7**                         |       | 4.3                            | ** ** | **33.9** |   | 4.3 |   |
| Other revenues                             | ** ** | **3.1**                          |       | 2.7                            | ** ** | **5.9** |   | 5.5 |   |
| Total revenues                             | ** ** | **$**                            | **378.8**  |                           | $          | 343.1 | ** ** | **$** | **794.9** |   | $ | 722.8 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Cost of revenues:**                      |       |                             |       |                           |       |   |   |   |   |
| Fuel                                       | ** ** | **$**                            | **72.4**   |                           | $          | 64.8 | ** ** | **$** | **160.8** |   | $ | 155.0 |   |
| Gains from sale of emission allowances (a) | ** ** | **(4.0**                         | **)**      | (1.3                           | )          | **(30.5** | **)** | (1.2 | ) |
| Purchased power                            | ** ** | **54.4**                         |       | 66.2                           | ** ** | **113.4** |   | 106.0 |   |
| RTO charges (b)                            | ** ** | **12.6**                         |       | 13.0                           | ** ** | **24.5** |   | 25.4 |   |
| Capacity charges (b)                       | ** ** | **19.1**                         |       | 4.0                            | ** ** | **31.2** |   | 4.0 |   |
| **Gross margins (c)**                      | ** ** | **$**                            | **224.3**  |                           | $          | 196.4 | ** ** | **$** | **495.5** |   | $ | 433.6 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| Gross margin as a percentage of revenues   |       | **59**                           | **%**      | 57                             | %          | **62** | **%** | 60 | % |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Operating income**                       | ** ** | **$**                            | **85.6**   |                           | $          | 69.4 | ** ** | **$** | **228.3** |   | $ | 172.9 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Basic earnings per share:**              |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                      | ** ** | **$**                            | **0.43**   |                           | $          | 0.50 | ** ** | **$** | **1.14** |   | $ | 0.98 |   |
| Discontinued operations                    | ** ** | **$**                            | **—** |                           | $          | 0.04 | ** ** | **$** | **—** |   | $ | 0.09 |   |
| Total basic                                | ** ** | **$**                            | **0.43**   |                           | $          | 0.54 | ** ** | **$** | **1.14** |   | $ | 1.07 |   |

 

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*(a)**             **Gains from the sale ofemission allowances are included in fuel costs in the Condensed ConsolidatedStatements of Results of Operations.*

*(b)**             **RTO and capacity charges areincluded in total purchased power in the Condensed Consolidated Statements ofResults of Operations.*

*(c)**              **For purposes of discussingoperating results, we present and discuss gross margins. This format is usefulto investors because it allows analysis and comparability of operating trendsand includes the same information that is used by management to make decisionsregarding our financial performance.*

 

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**DPLInc. – Revenues**

 

Retailcustomers, especially residential and commercial customers, consume moreelectricity on warmer and colder days. Therefore,**DPL’s** retail sales volume is impacted by the number ofheating and cooling degree days occurring during a year.  Since**DPL** plans to utilize its internalgenerating capacity to supply its retail customers’ needs first, increases inretail demand will decrease the volume of internal generation available to besold in the wholesale market and vice versa.

 

The wholesale market covers a multi-state area and settles on an hourlybasis throughout the year. Factors impacting**DPL’s** wholesale sales volume each hour of the year include wholesalemarket prices;**DPL’s** retaildemand; retail demand elsewhere throughout the entire wholesale market area;**DPL** and non-**DPL** plants’ availability to sell into the wholesale market andweather conditions across the multi-state region.**DPL’s** plan is to make wholesale sales when market pricesallow for the economic operation of its generation facilities not beingutilized to meet its retail demand.

 

The following table provides a summary of changes in revenues from theprior period:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**    | ** ** |
|                        |       |                             |       |                           |       |
| **Retail**                  |       |                             |       |                           |       |
| Rate                        |       | $                                | 16.9       |                           | $          | 25.4 |   |
| Volume                      |       | (14.8                            | )          | (9.5                           | )          |
| Other                       |       | 0.7                              |       | 0.5                            |       |
| **Total retail change**     | ** ** | **$**                            | **2.8**    | ** **                     | **$**      | **16.4** | ** ** |
|                        |       |                             |       |                           |       |
| **Wholesale**               |       |                             |       |                           |       |
| Rate                        |       | $                                | 11.5       |                           | $          | 23.2 |   |
| Volume                      |       | (2.1                             | )          | (13.4                          | )          |
| **Total wholesale change**  | ** ** | **$**                            | **9.4**    | ** **                     | **$**      | **9.8** | ** ** |
|                        |       |                             |       |                           |       |
| **RTO and other**           |       |                             |       |                           |       |
| RTO and other revenues      | ** ** | **$**                            | **23.5**   | ** **                     | **$**      | **45.9** | ** ** |
|                        |       |                             |       |                           |       |
| **Total revenues**          | ** ** | **$**                            | **35.7**   | ** **                     | **$**      | **72.1** | ** ** |

 

For the three months ended June 30, 2008, revenues increased $35.7million, or 10%, to $378.8 million from $343.1 million for the same period inthe prior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales and an increase in RTO revenue, partiallyoffset by lower retail and wholesale sales volume.  Retail revenuesincreased $2.8 million resulting primarily from a 6% increase in average retailrates due largely to the second phase of the environmental investment rider(EIR), partially offset by a 5% decrease in sales volume.  This resultedin a favorable $16.9 million price variance and an unfavorable $14.8 millionsales volume variance for retail revenues.  Wholesale revenues increased$9.4 million for the three months ended June 30, 2008 primarily as a resultof a 41% increase in wholesale average rates, partially offset by a 7% decreasein sales volume.  This resulted in afavorable $11.5 million wholesale price variance and an unfavorable $2.1million volume variance.  For the threemonths ended June 30, 2008, RTO and other revenues, consisting primarilyof compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $23.5million compared to the same period in the prior year.  This increase primarily resulted fromadditional income of $16.4 million and $6.7 million realized from the PJMcapacity auction and PJM transmission and congestion revenues, respectively.

 

For the six months ended June 30, 2008, revenues increased $72.1million, or 10%, to $794.9 million from $722.8 million for the same period inthe prior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales and an increase in RTO revenue, partiallyoffset by lower retail and wholesale sales volume.  Retail revenuesincreased $16.4 million resulting primarily from a 4% increase in averageretail rates due largely to the second phase of the environmental investmentrider (EIR), partially offset by a 2% decrease in sales volume.  Thisresulted in a favorable $25.4 million price variance and an unfavorable 

 

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$9.5 million sales volume variance for retail revenues.  Wholesalerevenues increased $9.8 million for the six months ended June 30, 2008primarily as a result of a 32% increase in wholesale average rates, partiallyoffset by a 15% decrease in sales volume. This resulted in a favorable $23.2 million wholesale price variance andan unfavorable $13.4 million volume variance. For the six months ended June 30, 2008, RTO and other revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $45.9million compared to the same period in the prior year.  This increase primarily resulted fromadditional income of $29.6 million and $15.9 million realized from the PJMcapacity auction and PJM transmission and congestion revenues, respectively.

 

## **DPL Inc. – Cost of Revenues**

##  

Fuel costs, which include coal net of sales, gas, oil, and emissionallowance sales and costs, increased $4.9 million, or 8%, in the three monthsended June 30, 2008 compared to the same period in 2007, primarily due toa 15% increase in generation output, partially offset by an increase in netgains of $2.7 million realized from the sale of **DP&L’s**excess emission allowances.  Purchasedpower increased $2.9 million in the three months ended June 30, 2008compared to the same period in 2007.  Theincrease in purchased power primarily results from a $25.3 million increaserelating to higher average market rates and a $15.1 million increase in RTOcapacity charges, partially offset by a $37.1 million decrease relating tolower volumes of purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

Fuel costs, which include coal net of sales, gas, oil, and emissionallowance sales and costs, decreased $23.5 million, or 15%, in the six monthsended June 30, 2008 compared to the same period in 2007, primarily due to anincrease in net gains of $29.3 million realized from the sale of **DP&L’s** excess emission allowances, partially offset byan increase in the usage of fuel due mainly to a 5% increase in generationoutput.    Purchased power increased$33.7 million in the six months ended June 30, 2008 compared to the sameperiod in 2007.  The increase inpurchased power primarily results from a $47.4 million increase relating tohigher average market rates and a $27.2 million increase in RTO capacitycharges, partially offset by a $40.0 million decrease relating to lower volumesof purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

**DPL Inc. – Gross Margins**

 

For the three months ended June 30, 2008, gross margin of $224.3million increased $27.9 million, or 14%, from $196.4 million in the same periodof the prior year.  As a percentage oftotal revenues, gross margin increased to 59% in 2008 compared to 57% in 2007.

 

For the six months ended June 30, 2008, gross margin of $495.5million increased $61.9 million, or 14%, from $433.6 million in the same periodof the prior year.  As a percentage oftotal revenues, gross margin increased to 62% in 2008 compared to 60% in 2007.

 

These gross margin results reflect the impact of revenues and cost ofrevenues discussed above.

 

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**DPL Inc. – Operation and Maintenance**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$  in millions**                   | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**    | ** ** |
| Insurance settlement                                |       | $                                | 14.5       |                           | $          | 14.5 |   |
| Gain on sale of corporate aircraft                  |       | 6.0                              |       | 6.0                            |       |
| Generating facilities operating expenses            |       | 4.7                              |       | 4.5                            |       |
| Legal costs                                         |       | (10.1                            | )          | (15.9                          | )          |
| Boiler maintenance costs                            |       | (4.6                             | )          | (1.5                           | )          |
| Turbine maintenance costs                           |       | (1.1                             | )          | 0.1                            |       |
| Deferred compensation (mark-to-market  adjustments) |       | (0.5                             | )          | (6.4                           | )          |
| Other, net                                          |       | (0.6                             | )          | 0.1                            |       |
| **Total operation and maintenance expense**         |       | $                                | 8.3        |                           | $          | 1.4 |   |

 

For the three months ended June 30, 2008, operation andmaintenance expense increased $8.3 million, or 13%, compared to the same periodin 2007.  This variance was primarily theresult of a $14.5 million insurance settlement in 2007 reimbursing us for legalfees relating to the litigation with the three former executives, the gain onsale of the corporate aircraft of $6.0 million which was also realized in 2007,and an increase of $4.7 million in operating expenses for the generatingfacilities.  These increases werepartially offset by a $10.1 million decrease in legal costs due largely to thelitigation settlement with three of our former executives in May 2007, anddecreased costs for boiler and turbine maintenance of $4.6 million and $1.1million, respectively.

 

For the six months ended June 30, 2008, operation and maintenanceexpense increased $1.4 million, or 1%, compared to the same period in2007.  This variance was primarily theresult of a $14.5 million insurance settlement in 2007 reimbursing us for legalfees relating to the litigation with the three former executives, the gain onsale of the corporate aircraft of $6.0 million which was also realized in 2007,and an increase of $4.5 million in operating expenses for the generatingfacilities.  These increases werepartially offset by a $15.9 million decrease in legal costs due largely to thelitigation settlement with three of our former executives in May 2007, a$6.4 million decrease in deferred compensation costs (mark-to-marketadjustments) primarily associated with deferred compensation liabilities forthe former executives, and a $1.5 million decrease in boiler maintenance costs.

 

**DPL Inc. – General Taxes**

 

For the three months ended June 30, 2008, general taxes increased$5.0 million, to $32.5 million, compared to the same period in 2007.  This increase was primarily the result ofincreased property taxes due mainly to capital improvements which have led tohigher assessed property values, combined with increased tax rates.

 

For the six months ended June 30, 2008, general taxes increased$6.8 million, to $62.3 million, compared to the same period in 2007.  This increase was primarily the result ofincreased property taxes due mainly to capital improvements which have led tohigher assessed property values, combined with increased tax rates.

 

**DPL Inc. – Net Gain on Settlement of ExecutiveLitigation**

 

On May 21, 2007, we settled the litigation with the three formerexecutives.  In exchange for our paymentof $25 million, the three former executives relinquished and dismissed all oftheir claims including those related to deferred compensation, restricted stockunits (RSUs), MVE incentives, stock options, and legal fees.  As a result of this settlement, during thesecond quarter ended June 30, 2007, DPL realized a net pre-tax gain incontinuing operations of approximately $31.0 million.

 

## **DPL Inc. – Investment Income**

##  

For the three months ended June 30, 2008, investment incomedecreased $4.4 million, to $0.9 million, compared to the same period in2007.  This decrease was primarily theresult of $3.2 million gains realized in 2007 from the sale of financial assetsheld in DP&L’s Master Trust Plan for deferred compensation used for thesettlement payment to the three former executives, as well as lower cash andshort-term investment balances combined with overall lower market yields on investmentsin 2008 compared to 2007.

 

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For the six months ended June 30, 2008, investment incomedecreased $5.7 million, to $2.6 million, compared to the same periods in2007.  This decrease was primarily theresult of $3.2 million gains realized in 2007 from the sale of financial assetsheld in DP&L’s Master Trust Plan for deferred compensation used for thesettlement payment to the three former executives, as well as lower cash andshort-term investment balances combined with overall lower market yields oninvestments in 2008 compared to 2007.

 

**DPL Inc**. –**Interest Expense**

 

Interest expense for the threemonths ended June 30, 2008 increased$5.6 million, or 29%, compared to the same period in 2007 resulting primarilyfrom lower capitalized interest and the write-off of unamortized debt issuancecosts relating to **DP&L’s** $90million variable rate pollution control bonds following their repurchase fromthe bondholders on April 4, 2008. The increases were partially offset by the redemption of the $100million 6.25% Senior Notes in May 2008.

 

Interest expense for the sixmonths ended June 30, 2008 increased$3.5 million, or 8%, compared to the same period in 2007 resulting primarilyfrom lower capitalized interest, additional interest expense associated with **DP&L’s** $90 million variable rate pollution control bondsissued November 15, 2007, and the write-off of unamortized debt issuancecosts relating to the above-mentioned pollution control bonds following theirrepurchase from the bondholders on April 4, 2008.  These increases were partially offset by theredemption of the $225 million 8.25% Senior Notes in March 2007 and the $100million 6.25% Senior Notes in May 2008.

 

## **DPL Inc. – Other Income (Deductions)**

##  

Other Income (Deductions) for the three months ended June 30, 2008did not experience any significant fluctuations from the same period of theprior year.

 

For the six months ended June 30, 2008, other deductions of $0.5million changed from other income of $0.6 million recorded for the same periodof the prior year.  This change fromother income to other deductions primarily resulted from $0.7 million of gainsrealized from the sale of NOx allowances in the same period of 2007.

 

## **DPL Inc. – Income Tax Expense**

##  

For the three months ended June 30, 2008, income taxes fromcontinuing operations decreased $18.4 million, or 57%, compared to the sameperiod in 2007, primarily reflecting a decrease in pre-tax book income, adecrease in the effective tax rate resulting from the phase-out of the OhioFranchise Tax, and a decrease in tax expense due to the settlement of the OhioFranchise Tax issues.  See Note 5 ofNotes to Condensed Consolidated Financial Statements.

 

For the six months ended June 30, 2008, income taxes fromcontinuing operations decreased $6.0 million, or 9%, compared to the sameperiod in 2007, primarily reflecting a decrease in the effective tax rateresulting from the phase-out of the Ohio Franchise Tax and a decrease in taxexpense due to the settlement of the Ohio Franchise Tax issues, which waspartially offset by an increase in pre-tax book income.  See Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

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**RESULTS OF OPERATIONS – The Dayton Power andLight Company (DP&L)**

 

**Income Statement Highlights – DP&L**

** **
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Revenues:**                              |       |                             |       |                           |       |   |   |   |   |
| Retail                                     | ** ** | **$**                            | **248.7**  |                           | $          | 246.3 | ** ** | **$** | **531.5** |   | $ | 518.1 |   |
| Wholesale                                  | ** ** | **78.8**                         |       | 69.0                           | ** ** | **171.8** |   | 159.0 |   |
| RTO revenues                               | ** ** | **28.2**                         |       | 21.6                           | ** ** | **53.1** |   | 37.3 |   |
| Capacity revenues                          | ** ** | **20.7**                         |       | 4.3                            | ** ** | **33.9** |   | 4.3 |   |
| Total revenues                             | ** ** | **$**                            | **376.4**  |                           | $          | 341.2 | ** ** | **$** | **790.3** |   | $ | 718.7 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Cost of revenues:**                      |       |                             |       |                           |       |   |   |   |   |
| Fuel                                       | ** ** | **$**                            | **69.9**   |                           | $          | 63.6 | ** ** | **$** | **157.1** |   | $ | 153.0 |   |
| Gains from sale of emission allowances (a) | ** ** | **(4.0**                         | **)**      | (1.3                           | )     | **(30.5** | **)** | (1.2 | ) |
| Purchased power                            | ** ** | **56.1**                         |       | 66.8                           | ** ** | **116.0** |   | 107.2 |   |
| RTO charges (b)                            | ** ** | **12.6**                         |       | 13.0                           | ** ** | **24.5** |   | 25.3 |   |
| Capacity charges (b)                       | ** ** | **19.1**                         |       | 4.0                            | ** ** | **31.2** |   | 4.0 |   |
| **Gross margins (c)**                      | ** ** | **$**                            | **222.7**  |                           | $          | 195.1 | ** ** | **$** | **492.0** |   | $ | 430.4 |   |
|                                       |       |                             |       |                           |       |   |   |   |   |
| Gross margin as a percentage of revenues   |       | **59**                           | **%**      | 57                             | %          | **62** | **%** | 60 | % |
|                                       |       |                             |       |                           |       |   |   |   |   |
| **Operating Income**                       | ** ** | **$**                            | **90.5**   |                           | $          | 59.7 | ** ** | **$** | **236.9** |   | $ | 174.4 |   |

 

----

| *(a)* | * * | *Gains from the sale of emission allowances are included in  fuel costs in the Condensed Consolidated Statements of Results of Operations.*                                                                                                                                                                       |
|-------|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | * * | *RTO and capacity charges are included in total purchased power  in the Condensed Consolidated Statements of Results of Operations.*                                                                                                                                                                              |
| *(c)* | * * | *For purposes of discussing operating results, we present  and discuss gross margins. This format is useful to investors because it  allows analysis and comparability of operating trends and includes the same  information that is used by management to make decisions regarding our  financial performance.* |

 

**DP&L – Revenues**

 

Retail customers, especially residential and commercial customers,consume more electricity on warmer and colder days. Therefore,**DP&L’s** retail sales volume is impactedby the number of heating and cooling degree days occurring during a year. Since**DP&L** plans to utilizeits internal generating capacity to supply its retail customers’ needs first,increases in retail demand will decrease the volume of internal generationavailable to be sold in the wholesale market and vice versa.

 

The wholesale market covers a multi-state areaand settles on an hourly basis throughout the year. Factors impacting**DP&L’s** wholesale sales volume eachhour of the year include wholesale market prices;**DP&L’s** retail demand, retail demand elsewhere throughoutthe entire wholesale market area;**DP&L**and non-**DP&L** plants’availability to sell into the wholesale market and weather conditions acrossthe multi-state region.**  DP&L’s** plan is to makewholesale sales when market prices allow for the economic operation of itsgeneration facilities that are not being utilized to meet its retail demand.

 

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The following table provides a summary of changes in revenues from theprior period:

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**    | ** ** |
|                        |       |                             |       |                           |       |
| **Retail**                  |       |                             |       |                           |       |
| Rate                        |       | $                                | 14.5       |                           | $          | 21.3 |   |
| Volume                      |       | (12.8                            | )          | (8.3                           | )          |
| Other                       |       | 0.7                              |       | 0.4                            |       |
| **Total retail change**     | ** ** | **$**                            | **2.4**    | ** **                     | **$**      | **13.4** | ** ** |
|                        |       |                             |       |                           |       |
| **Wholesale**               |       |                             |       |                           |       |
| Rate                        |       | $                                | 14.4       |                           | $          | 37.3 |   |
| Volume                      |       | (4.6                             | )          | (24.5                          | )          |
| **Total wholesale change**  | ** ** | **$**                            | **9.8**    | ** **                     | **$**      | **12.8** | ** ** |
|                        |       |                             |       |                           |       |
| **RTO and capacity**        |       |                             |       |                           |       |
| RTO and capacity revenues   | ** ** | **$**                            | **23.0**   | ** **                     | **$**      | **45.4** | ** ** |
| ** **                  | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| **Total revenues**          | ** ** | **$**                            | **35.2**   | ** **                     | **$**      | **71.6** | ** ** |

 

For the three months ended June 30, 2008, revenues increased $35.2million, or 10%, to $376.4 million from $341.2 million in the same period ofthe prior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales, and an increase in RTO revenue, partiallyoffset by lower retail and wholesale sales volume.  Retail revenuesincreased $2.4 million resulting primarily from a 6% increase in average retailrates due largely to the second phase of the EIR, partially offset by a 5%decrease in sales volume.  This resultedin a favorable $14.5 million price variance and an unfavorable $12.8 millionsales volume variance for retail revenues. Wholesale revenues increased $9.8 million, for the three months ended June 30,2008, primarily as a result of a 22% increase in wholesale average rates,partially offset by a 7% decrease in sales volume.  This resulted in a favorable $14.4 millionwholesale price variance and an unfavorable $4.6 million volume variance.  For the three months ended June 30,2008, RTO and other revenues, consisting primarily of compensation for use of **DP&L’s** transmission assets, regulation services,reactive supply and operating reserves, and capacity payments under the RPMconstruct, increased $23.0 million compared to the same period in the prioryear.  This increase primarily resultedfrom additional income of $16.4 million and $6.6 million realized from the PJMcapacity auction and PJM transmission and congestion revenues, respectively.

 

For the six months ended June 30, 2008, revenues increased $71.6million, or 10%, to $790.3 million from $718.7 million in the same period ofthe prior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales, and an increase in RTO revenue, partiallyoffset by lower retail and wholesale sales volume.  Retail revenues increased$13.4 million resulting primarily from a 4% increase in average retail ratesdue largely to the second phase of the EIR, partially offset by a 2% decreasein sales volume.  This resulted in afavorable $21.3 million price variance and an unfavorable $8.3 million salesvolume variance for retail revenues. Wholesale revenues increased $12.8 million for the six months ended June 30,2008, primarily as a result of a 28% increase in wholesale average rates,partially offset by a 15% decrease in sales volume.  This resulted in a favorable $37.3 millionwholesale price variance and an unfavorable $24.5 million volume variance.  For the six months ended June 30, 2008,RTO and other revenues, consisting primarily of compensation for use of **DP&L’s** transmission assets, regulation services,reactive supply and operating reserves, and capacity payments under the RPMconstruct, increased $45.4 million compared to the same period in the prioryear.  This increase primarily resultedfrom additional income of $29.6 million and $15.8 million realized from the PJMcapacity auction and PJM transmission and congestion revenues, respectively.

 

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## **DP&L – Cost of Revenues**

##  

Fuel costs, which include coal net of sales, gas, oil, and emissionallowance sales and costs, increased $3.6 million, or 6%, in the three monthsended June 30, 2008, compared to the same period in 2007, primarily due toa 15% increase in generation output, partially offset by an increase in netgains of $2.7 million realized from the sale of **DP&L’s**excess emission allowances.  Purchasedpower increased $4.0 million in the three months ended June 30, 2008compared to the same period in 2007.  Theincrease in purchased power primarily results from a $27.6 million increaserelating to higher average market rates and a $15.1 million increase in RTOcapacity charges, partially offset by a $38.3 million decrease relating tolower volumes of purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunanticipated outages or when market prices are below the marginal costsassociated with our generating facilities.

 

Fuel costs, which include coal net of sales, gas, oil, and emissionallowance sales and costs, decreased $25.2 million, or 17%, in the six monthsended June 30, 2008, compared to the same period in 2007, primarily due toan increase in net gains of $29.3 million realized from the sale of **DP&L’s** excess emission allowances, partially offset byan increase in the usage of fuel due mainly to a 5% increase in generationoutput.  Purchased power increased $35.2million in the six months ended June 30, 2008 compared to the same periodin 2007.  The increase in purchased powerprimarily results from a $50.7 million increase relating to higher averagemarket rates and a $27.1 million increase in RTO capacity charges, partiallyoffset by a $41.9 million decrease relating to lower volumes of purchased power.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unanticipated outages or when market pricesare below the marginal costs associated with our generating facilities.

 

**DP&L – Gross Margins**

 

For the three months ended June 30, 2008, gross margin of $222.7million increased $27.6 million, or 14%, from $195.1 million in the same periodof the prior year.  As a percentage oftotal revenues, gross margin increased to 59% in 2008 compared to 57% in 2007.

 

For the six months ended June 30, 2008, gross margin of $492.0million increased $61.6 million, or 14%, from $430.4 million in the same periodof the prior year.  As a percentage oftotal revenues, gross margin increased to 62% in 2008 compared to 60% in 2007.

 

These gross margin results reflect the impact of revenues and cost ofrevenues discussed above.

 

**DP&L**–**Operation and Maintenance**

** **
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **$ in millions**                         | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**    | ** ** |
| Boiler maintenance costs                            |       | $                                | (4.6       | )                              | $          | (1.5 | ) |
| Deferred compensation (mark-to-market  adjustments) |       | (2.7                             | )          | (5.4                           | )          |
| Legal costs                                         |       | (2.4                             | )          | (2.4                           | )          |
| Turbine maintenance costs                           |       | (1.1                             | )          | 0.1                            |       |
| Generating facilities operating expenses            |       | 3.8                              |       | 7.2                            |       |
| Other, net                                          |       | 0.6                              |       | (4.2                           | )          |
| **Total operation and maintenance expense**         |       | $                                | (6.4       | )                              | $          | (6.2 | ) |

 

For the threemonths ended June 30, 2008, operation and maintenance expense decreased$6.4 million compared to the same period in 2007.  This variance was primarily the result of a$4.6 million decrease related to boiler maintenance costs, a $2.7 milliondecrease in deferred compensation costs (mark-to-market adjustments) primarilyassociated with deferred liabilities for three of our former executives, and a $2.4million decrease in legal.  Thesedecreases were partially offset by a $3.8 million increase related to operatingexpenses for the generating facilities.

 

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For the sixmonths ended June 30, 2008, operation and maintenance expense decreased$6.2 million compared to the same period in 2007.  This variance was primarily the result of a$5.4 million decrease in deferred compensation costs (mark-to-marketadjustments) primarily associated with deferred liabilities for three of ourformer executives, a $2.4 million decrease in legal costs, and a decrease of$1.5 million relating to boiler maintenance costs.  These decreases were partially offset by a$7.2 million increase related to operating expenses for the generatingfacilities.

 

**DP&L – General Taxes**

 

For the three months ended June 30, 2008, general taxes increased$4.9 million, to $32.3 million, compared to the same period in 2007.  This increase was primarily the result ofincreased property taxes due mainly to capital improvements which have led tohigher assessed property values, combined with increased tax rates.

 

For the six months ended June 30, 2008, general taxes increased$6.8 million, to $61.8 million, compared to the same period in 2007.  This increase was primarily the result ofincreased property taxes due mainly to capital improvements which have led tohigher assessed property values, combined with increased tax rates.

 

**DP&L – Net Gain on Settlement of ExecutiveLitigation**

 

On May 21,2007, we settled litigation with three of our former executives.  In exchange for our payment of $25 million,the three former executives relinquished and dismissed all of their claimsincluding those related to deferred compensation, RSUs, MVE incentives, stockoptions, and legal fees.  As a result ofthis settlement, during the second quarter ended June 30, 2007, **DP&L** realized a net pre-tax gain in continuingoperations of approximately $35.3 million.

 

**DP&L**–**Interest Expense**

 

Interest expense for the three months ended June 30, 2008increased $6.4 million compared to the same period of the prior year primarilyas a result of lower capitalized interest and the write-off of unamortized debtissue costs relating to **DP&L’s** $90million variable rate pollution control bonds following their repurchase fromthe bondholders on April 4, 2008.

 

Interest expense for the six months ended June 30, 2008 increased$7.6 million compared to the same period of the prior year primarily as aresult of lower capitalized interest, additional interest expense associatedwith **DP&L’s**$90 million variable ratepollution control bonds issued November 15, 2007, and the write-off ofunamortized debt issue costs relating to the above-mentioned pollution controlbonds following their repurchase from the bondholders on April 4, 2008.

 

## **DP&L – Other Income (Deductions)**

##  

Other Income (Deductions) for the three months ended June 30, 2008did not experience any significant fluctuations from the same period of theprior year.

 

For the six months ended June 30, 2008, other deductions of $0.6million changed from other income of $0.6 million for the same period in theprior year.  This change from otherincome to other deductions primarily resulted from $0.7 million of gainsrealized from the sale of NOx allowances in the same period of 2007.

##  

## **DP&L – Income Tax Expense**

##  

For the three months ended June 30, 2008, income taxes decreased$15.3 million, or 43%, compared to the same period in the prior year, primarilyreflecting a decrease in pre-tax book income, a decrease in the effective taxrate resulting from the phase-out of the Ohio Franchise Tax, and a decrease intax expense due to the settlement of the Ohio Franchise Tax issues.  See Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

For the six months ended June 30, 2008, income taxes decreased$5.5 million, or 7%, compared to the same period in the prior year, primarilyreflecting a decrease in the effective tax rate resulting from the phase-out ofthe Ohio Franchise Tax and a decrease in tax expense due to the settlement ofthe Ohio Franchise issues, which was partially offset by an increase in pre-taxbook income.  See Note 5 of Notes toCondensed Consolidated Financial Statements.

 

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**FINANCIALCONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS**

 

**DPL’s**financial condition,liquidity, and capital requirements include the consolidated results of **DP&L** and all of **DP&L’s** consolidated subsidiaries.  All material intercompany accounts andtransactions have been eliminated in consolidation.

 

During the fourth quarter ended December 31, 2007, we identifiedimmaterial changes in certain accounts payable balances that had not beencorrectly presented in our prior period cash flow statements.  Changes inaccounts payable balances representing capital expenditures had previously beenclassified with cash flows from operating activities and should have beenclassified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statements of Cash Flows for allperiods presented have been reclassified to conform to the currentpresentation.  See Note 1 of Notes toCondensed Consolidated Financial Statements.

 

**DPL’s Cash Position**

 

**DPL’s** cash and cashequivalents totaled $78.7 million at June 30, 2008, compared to $134.9million at December 31, 2007, a decrease of $56.2 million.  The decrease in cash and cash equivalents isprimarily attributed to cash used to retire $100.0 million in long-term debt,$118.4 million in capital expenditures, and $59.9 million in dividends paid oncommon stock, partially offset by cash provided by operating activities of$200.4 million and $20.5 million restricted funds drawn to fund pollutioncontrol capital expenditures.  At June 30,2008, **DPL** had $16.5 million in restrictedfunds held in trust relating to the 2007 issuance of $90.0 million in pollutioncontrol bonds.  On April 4, 2008, **DP&L** repurchased the bonds from bondholders, and willhold them in trust while it continues to evaluate market conditions and exploresuitable long-term financing alternatives. See Note 4 of Notes to Condensed Consolidated Financial Statements.

 

**DP&L’s Cash Position**

 

**DP&L’s** cash andcash equivalents totaled $28.5 million at June 30, 2008, compared to $13.2million at December 31, 2007, an increase of $15.3 million.  The increase in cash and cash equivalents wasprimarily attributed to $212.9 million in cash generated from operatingactivities, and $20.5 million restricted funds drawn to fund pollution controlcapital expenditures, partially offset by $117.7 million in capital expenditures,$80.0 million in dividends paid on common stock to our parent **DPL,** and a $20.0 million short-term loan repayment to **DPL**.  At June 30,2008, **DP&L** had $16.5 million inrestricted funds held in trust relating to the 2007 issuance of $90.0 millionin pollution control bonds.  On April 4,2008, **DP&L** repurchased the bonds frombondholders, and will hold them in trust while it continues to evaluate marketconditions and explore suitable long-term financing alternatives.  See Note 4 of Notes to Condensed ConsolidatedFinancial Statements.

 

On or before July 31, 2008, **DPL** and **DP&L** will make a $42 million payment to the OhioDepartment of Taxation (ODT) in accordance with the settlement agreementreached on June 27, 2008.  See Note5 of Notes to Condensed Consolidated Financial Statements.

 

**OperatingActivities**

 

For the six months ended June 30, 2008 and 2007, cash flows fromoperations were as follows:

 

**Net Cash provided by OperatingActivities**

 
| ** **                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                        |       |                           |       |   |   |
| **DPL**                     | ** ** | **$**                          | **200.4**  |   | $ | 120.1 |   |
|                        |       |                           |       |   |   |
| **DP&L**                | ** ** | **$**                          | **212.9**  |   | $ | 145.6 |   |

 

The tariff-based revenue from our energy business continues to be theprincipal source of cash from operating activities.  Management believes that the diversifiedretail customer mix of residential, commercial, and industrial classes coupledwith the rate relief approved by the PUCO will provide us with a reasonablypredictable gross cash flow from operations.

 

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**DPL’s Cash provided by Operating Activities**

 

**DPL** generated netcash from operating activities of $200.4 million and $120.1 million in the sixmonth periods ended June 30, 2008 and 2007, respectively.  The net cash provided by operating activitiesfor 2008 and 2007 was primarily the result of cash received from utilitycustomers, partially offset by cash used for fuel, purchased power, operatingexpenditures, interest, and taxes.  Thefluctuations in working capital result from the timing of payments made andcash receipts from our utility customers.

 

**DP&L’s Cash provided by OperatingActivities**

 

**DP&L** generatednet cash from operating activities of $212.9 million and $145.6 million in thesix month periods ended June 30, 2008 and 2007, respectively.  The net cash provided by operating activitiesfor 2008 and 2007 was primarily the result of cash received from utilitycustomers, partially offset by cash used for fuel, purchased power, operatingexpenditures, interest and taxes.  Thefluctuations in working capital result from the timing of payments made andcash receipts from our utility customers.

 

**InvestingActivities**

 

For the six months ended June 30, 2008 and 2007, cash flows frominvesting activities were as follows:

 

**Net Cashused for Investing Activities**

 
| ** **                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                        |       |                           |       |   |   |
| **DPL**                     | ** ** | **$**                          | **(118.4** | **)** | $ | (22.7 | ) |
|                        |       |                           |       |   |   |
| **DP&L**                | ** ** | **$**                          | **(117.7** | **)** | $ | (177.0 | ) |

 

**DPL’s Cash used for Investing Activities**

 

**DPL’s**net cash used for investing activities was$118.4 million and $22.7 million in the six month periods ended June 30,2008 and 2007, respectively.  For2008, net cash flows used for investing activities were related to capitalexpenditures.  Net cash flows used forinvesting activities for the six months ended June 30, 2007 were relatedto capital expenditures that were largely offset by proceeds from the sale oftwo peaking units and an aircraft.

 

**DP&L’s Cash used for Investing Activities**

 

**DP&L’s** net cashused for investing activities were $117.7 million and $177.0 million in the sixmonth periods ended June 30, 2008 and 2007, respectively.  Net cash flows used for investing activitiesduring both these periods were related to capital expenditures.

 

**FinancingActivities**

 

For the six months ended June 30, 2008 and 2007, cash flows fromfinancing activities were as follows:

 

**Net Cashused for Financing Activities**

 
| ** **                  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **June 30,**              | ** ** |
| **$ in millions** | ** ** | **2008**                       | ** ** | **2007** | ** ** |
|                        |       |                           |       |   |   |
| **DPL**                     | ** ** | **$**                          | **(138.2** | **)** | $ | (255.7 | ) |
|                        |       |                           |       |   |   |
| **DP&L**                | ** ** | **$**                          | **(79.9**  | **)** | $ | (10.3 | ) |

 

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** **

**DPL’s Cash used for Financing Activities**

 

**DPL’s**net cash used for financing activities in thesix months ended June 30,2008 was $138.2 million compared to $255.7 million during the same period of the prior year.  Net cash flows used for financing activitiesin the six months ended June 30, 2008 were primarily the result of cashused to redeem the $100 million 6.25% Senior Notes on May 15, 2008 and topay dividends of $59.9 million to stockholders, partially offset by withdrawalsof $20.5 million from the restricted funds held in trust.  Net cash flows used for financing activitiesin the six months ended June 30, 2007 were the result of cash used toredeem the $225 million 8.25% Senior Notes on March 1, 2007 and to paydividends to stockholders of $55.8, partially offset by cash received from theexercise of stock options, including tax effect, of $15.0 million and the $10.1million of restricted funds held in trust.

 

**DP&L’s Cash used for Financing Activities**

 

**DP&L’s** net cashused for financing activities in the six months ended June 30, 2008 were$79.9 million compared to $10.3 million during the same period of the prioryear.  Net cash flows used for financingactivities in the six months ended June 30, 2008 were primarily the resultof cash used to pay common stock dividends of $80.0 million to our parent **DPL** and a short-term loan repayment to **DPL**of $20.0 million, partially offset by withdrawals of $20.5 million fromrestricted funds held in trust.  Net cashflows used for financing activities for 2007 were the result of cash used topay common stock dividends to our parent **DPL** of $125.0million and preferred dividends to third parties of $0.4 million, partiallyoffset by $105.0 million from short-term borrowings from our parent **DPL** and $10.1 million of withdrawals from the trust set upas a result of issuing the $100 million 4.8% Series pollution controlbonds in September 2006.

 

**DPL** and **DP&L** haveobligations to make future payments for capital expenditures, debt agreements,lease agreements and other long-term purchase obligations, and have certaincontingent commitments such as guarantees. We believe our cash flows from operations, the credit facilities(existing or future arrangements), the senior notes and other short- andlong-term debt financing, will be sufficient to satisfy our future workingcapital, capital expenditures, and other financing requirements for theforeseeable future.  Our ability togenerate positive cash flows is dependent on general economic conditions,competitive pressures and other business and risk factors described in Item 1aof our Annual Report of Form 10-K for the fiscal year ended December 31,2007 and supplemented by those described in Item 1a of this quarterlyreport.  If we are unable to generatesufficient cash flows, or otherwise comply with the terms of our creditfacilities, the senior notes and other long-term debt, we may be required torefinance all or a portion of our existing debt or seek additional financingalternatives.  A discussion of each ofour critical liquidity commitments is outlined below.

 

**Capital Requirements**

 

**DPL’s**construction additions were $106.5 million and $193.5 million during thesix month periods ended June 30, 2008 and 2007, respectively.  **DPL** is expectedto spend approximately $118.5 million for the remainder of 2008.

 

**DP&L’s**construction additions were $105.8 million and $192.0 million during thesix month periods ended June 30, 2008 and 2007, respectively.  **DP&L**is****expected to spend approximately $117.2 million for theremainder of 2008.  Planned constructionadditions for 2008 relate to **DP&L’s**environmental compliance program, power plant equipment, and its transmissionand distribution system.

 

Capital projects are subject to continuing review and are revised inlight of changes in financial and economic conditions, load forecasts,legislative and regulatory developments and changing environmental standards,among other factors.  **DPL,** through its subsidiary **DP&L,**is projecting to spend an estimated $510 millionin capital projects for the period 2008 through 2010.   In our Annual Report of Form 10-K forthe fiscal year ended December 31, 2007, we reported our estimated capitalspending to be approximately $490 million. This change is primarily due to expected cost increases relating to theongoing flue gas desulfurization project at Stuart station.  Our ability to complete capital projects andthe reliability of future service will be affected by our financial condition,the availability of internal funds, and the reasonable cost of externalfunds.  We expect to finance our constructionadditions in 2008 with a combination of cash on hand, short-term financing,long-term debt, and cash flows from operations.

 

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**Debt**

 

During the three months ended March 31,2006, the Ohio Department of Development (ODOD) awarded **DP&L**the ability to issue, over three years, up to $200 million of qualifiedtax-exempt financing from the ODOD’s 2005 volume cap carryforward.   On September 13,2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of4.80% fixed interest rate OAQDA Revenue bonds 2006 Series A due September 1,2036.  In turn, **DP&L**borrowed these funds from the OAQDA. These funds were placed in escrow with a trustee and, as of April 3,2007, **DP&L** had drawn out the entirety ofthe funds.

 

On November 15, 2007, the OAQDA issued $90million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  **DP&L** subsequently repurchased these bonds from thebondholders on April 4, 2008.  Thistransaction is further discussed in Note 4 of Notes to Condensed ConsolidatedFinancial Statements.

 

**Debt Covenants**

 

There have been no changes to our debt covenantsas disclosed in our Annual Report of Form 10-K for the fiscal year ended December 31,2007.  We are in compliance with all ourdebt covenants.

 

**Credit Ratings**

 

Our rating agencies upgraded our corporate credit and debtratings.  The following table outlinesthe rating of each company and date of the upgrade:

 
| ** **                            | ** ** | **DPL Inc.** | ** ** | **DP&L** | ** ** | **Outlook** | ** ** | **Effective**   | ** ** |
|---------------------------------------|------------|-------------------|------------|--------------|------------|-------------|------------|-----------------|------------|
|                                  |       |              |       |         |       |        |       |            |       |
| Fitch Ratings                         |       | BBB+              |       | A+           |       | Positive    |       | April 2008 |       |
| Moody’s Investors Service        |       | Baa2              |       | A2           |       | Positive    |       | July 2008  |       |
| Standard & Poor’s Corp. |       | BBB-              |       | A-           |       | Positive    |       | April 2008 |       |

 

**Off-Balance Sheet Arrangements**

 

**DPL Inc. - Guarantees**

 

In the normal course of business, **DPL**enters into variousagreements with our wholly owned generating subsidiary DPLE providing financialor performance assurance to third parties.  These agreements are entered intoprimarily to support or enhance the creditworthiness otherwise attributed toDPLE on a stand-alone basis, therebyfacilitating the extension of sufficient credit to accomplish DPLE’s intendedcommercial purposes.  Such agreements fall outside the scope of FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  There have been no material changes to ourguarantees as disclosed in our Annual Report of Form 10-K for the fiscalyear ended December 31, 2007.

 

**Contractual Obligations**

 

There have been no material changes, outsidethe ordinary course of business, to the information disclosed in thecontractual obligations table in our Annual Report of Form 10-K for thefiscal year ended December 31, 2007 except those relating to the followingtransactions:

 
| · |   | On April 4, 2008, **DP&L**repurchased all of the issued  and outstanding $90 million variable rate OAQDA Revenue bonds from the bondholders  and placed them in a custody account. This transaction is further discussed  in Note 4 of Notes to Condensed Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | On June 27, 2008, **DPL**entered into a $42 million settlement  agreement with the Ohio Department of Taxation (ODT) resolving all  outstanding audit issues and appeals, including uncertain tax positions for  tax years 1998 through 2006. The $42 million payment will be made to the ODT  by July 31, 2008. This transaction is further discussed in Note 5 of Notes  to Condensed Consolidated Financial Statements.                                                                                                                                                                    |
| · |   | At December 31, 2007, **DP&L** had contractual obligations  relating to the installation of FGD equipment in the amount of $144 million.  During the three months ended June 30, 2008, the installation of FGD  equipment on Stuart station units 1 and 2 was substantially completed and the  equipment put into test operation. The open contractual obligations relating  to the installation of FGD equipment was therefore reduced to $32.1 million  at June 30, 2008. It is expected that these open contractual obligations  will be satisfied within the next twelve months. |

 

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**Commercial Commitments**

 

With the exception of the transactions discussed in the precedingparagraph, there have been no material changes, outside the ordinary course ofbusiness, to our commercial commitments as disclosed in our Annual Report of Form 10-Kfor the fiscal year ended December 31, 2007.

 

**MARKETRISK**

 

In the normal course ofbusiness, we are subject to certain market risks including, but not limited to,changes in commodity prices for electricity, coal, environmental emissions andgas, and fluctuations in interest rates. Commodity pricing exposure includes the impacts of weather, marketdemand, increased competition, and other economic conditions.  For purposes of potential risk analysis, weuse sensitivity analysis to quantify potential impacts of market rate changeson the results of operations. The sensitivity analysis represents hypotheticalchanges in market values that may or may not occur in the future.

 

Our Risk ManagementCommittee (RMC) is responsible for establishing risk management policies andthe monitoring and reporting of risk exposures. The RMC meets on a regularbasis with the objective of identifying, assessing, and quantifying materialrisk issues and developing strategies to manage these risks.

 

**Commodity PricingRisk**

 

Recently, the coal market has experienced significant priceincreases.  We are now in a global marketfor coal in which our domestic price is increasingly affected by internationalsupply disruptions and demand balance. Exports from the U.S. have increased significantly in recent years.  In addition, domestic issues likegovernment-imposed direct costs and permitting issues are affecting miningcosts and supply availability.  We haveresponded to increases in the price of coal by entering into contracts to hedgeour exposure to fuel requirements and other energy-related commodities.  We may not be able to hedge the entireexposure of our operations from commodity price volatility.  To the extent we are not hedged against pricevolatility, our results of operations, financial position, or cash flows couldbe materially affected.

 

Approximately12% of **DPL’s** and 22% of **DP&L’s** electric revenues for the sixmonths ended June 30, 2008 were fromsales of excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs ofexisting retail customers are sold in the wholesale market when we can identifyopportunities with positive margins. As of June 30, 2008, ahypothetical increase or decrease of 10% in **DPL’s**annual wholesale revenues could result in approximately a $13.1 millionincrease or decrease to net income, assuming no increases in fuel and purchasedpower costs.  As of June 30, 2008, ahypothetical increase or decrease of 10% in **DP&L’s**annual wholesale revenues could result in approximately a $23.3 millionincrease or decrease to net income, assuming no increases in fuel and purchasedpower costs.

 

**DPL’s** fuel(including coal, gas, oil and emission allowances) and purchased power costs asa percent of total operating costs in the six months ended June 30, 2008and 2007 were 53% and 52%, respectively.  **DP&L’s** fuel (includingcoal, gas, oil and emission allowances) and purchased power costs as a percentof total operating costs were 54% and 53% for the six month periods ending June 30,2008 and 2007, respectively.  We havesubstantially all of the total expected coal volume needed to meet our retailand firm wholesale sales requirements for 2008 under contract.  The majority of our contracted coal ispurchased at fixed prices.  Somecontracts provide for periodic adjustment and some are priced based on marketindices.  Substantially all contractshave features that limit price escalations in any given year.  Our consumption of SO2 allowances should decline in 2008 due toplanned emission control upgrades.  We donot expect to purchase SO2 allowancesfor 2008.  The exact consumption of SO2 allowances will depend onmarket prices for power, availability of our generation units, the timing ofemission control equipment upgrade completion, and the actual sulfur content ofthe coal burned.  **DP&L**does not plan to purchase NOX allowances for 2008.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on higher volume and price(and excluding the effect of emission allowance sales), fuel costs are forecastto be 5% to 15% higher in 2008 compared to 2007.

 

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Purchased power costs depend, in part, uponthe timing and extent of planned and unplanned outages of our generatingcapacity.  We will purchase power on adiscretionary basis when wholesale market conditions provide opportunities toobtain power at a cost below our internal production costs. As of June 30,2008, a hypothetical increase or decrease of 10% in **DPL’s** annual fuel and purchased power costs could result inapproximately a $37.1 million increase or decrease to net income.  As of June 30, 2008, a hypotheticalincrease or decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $37.1million increase or decrease to net income.

 

**Interest Rate Risk**

 

As a result of our normal investing andborrowing activities, our financial results are exposed to fluctuations ininterest rates, which we manage through our regular financing activities.  We maintain both cash on deposit andinvestments in cash equivalents that may be affected by adverse interest ratefluctuations.  At June 30, 2008, wemaintained only fixed rate long-term debt. As discussed in Note 4 of Notes to Condensed Consolidated FinancialStatements, we repurchased $90 million of our OAQDA Revenue bonds on April 4,2008.  This repurchase reduces ourexposure to fluctuations in interest rates.

 

The carrying value of **DPL’s** debt was $1,542.1 million at June 30,2008, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, **DPL’s** unsecurednotes, **DP&L’s** revolving  credit facility, and **DP&L’s** capital leases.  The fair value of this debt was $1,508.1million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.

 

The carrying value of **DP&L’s**debt was $875.0 million at June 30, 2008, consisting of **DP&L’s** first mortgage bonds, tax-exempt pollutioncontrol bonds, revolving credit facility, and capital leases.  The fair value of this debt was $826.9million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.

 

**CRITICALACCOUNTING ESTIMATES**

 

**DPL’s**and **DP&L’s** condensedconsolidated financial statements are prepared in accordance with GAAP.  In connection with the preparation of thesefinancial statements, our management is required to make assumptions, estimatesand judgments that affect the reported amounts of assets, liabilities,revenues, expenses and the related disclosure of contingent liabilities.  These assumptions, estimates and judgmentsare based on our historical experience and assumptions that we believed to bereasonable at the time.  However, becausefuture events and their effects cannot be determined with certainty, thedetermination of estimates requires the exercise of judgment.  Our critical accounting estimates are thosewhich require assumptions to be made about matters that are highly uncertain.

 

Different estimates could have a materialeffect on our financial results. Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions or circumstances.  Historically, however, recorded estimateshave not differed materially from actual results.  Significant items subject to such judgmentsinclude: the carrying value of property, plant and equipment; unbilledrevenues; income taxes; valuation of regulatory assets and liabilities; thevaluation of insurance and claims costs; the valuation of assets andliabilities related to employee benefits; and the valuation of contingent and otherobligations.  Actual results may differfrom those estimates.  Refer to ourAnnual Report of Form 10-K  for thefiscal year ended December 31, 2007 for a complete listing of our criticalaccounting policies and estimates.  Therehave been no material changes to these critical accounting policies andestimates.

 

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**ELECTRIC SALES AND REVENUES**

 
| ** **                           | ** ** | **DPL Inc.**                | ** **  | **DP&L (a)**          | ** ** |
|--------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|                                 | ** ** | **2008**                         | ** **  | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Electric sales  (millions in kWh)    | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Residential                          | ** ** | **1,089**                        |        | 1,133                          | ** ** | **2,769** |   | 2,771 | ** ** | **1,089** |   | 1,133 | ** ** | **2,769** |   | 2,771 |   |
| Commercial                           | ** ** | **987**                          |        | 1,005                          | ** ** | **1,946** |   | 1,937 | ** ** | **987** |   | 1,005 | ** ** | **1,946** |   | 1,937 |   |
| Industrial                           | ** ** | **996**                          |        | 1,117                          | ** ** | **1,963** |   | 2,094 | ** ** | **996** |   | 1,117 | ** ** | **1,963** |   | 2,094 |   |
| Other retail                         | ** ** | **369**                          |        | 376                            | ** ** | **716** |   | 714 | ** ** | **369** |   | 376 | ** ** | **716** |   | 714 |   |
| Total retail                         | ** ** | **3,441**                        |        | 3,631                          | ** ** | **7,394** |   | 7,516 | ** ** | **3,441** |   | 3,631 | ** ** | **7,394** |   | 7,516 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Wholesale                            | ** ** | **520**                          |        | 558                            | ** ** | **1,419** |   | 1,678 | ** ** | **520** |   | 558 | ** ** | **1,419** |   | 1,678 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                | ** ** | **3,961**                        |        | 4,189                          | ** ** | **8,813** |   | 9,194 | ** ** | **3,961** |   | 4,189 | ** ** | **8,813** |   | 9,194 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Operating  revenues ($in thousands)  | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Residential                          | ** ** | **$**                            | **113,921** |                           | $          | 114,340 | ** ** | **$** | **269,590** |   | $ | 262,317 | ** ** | **$** | **113,921** |   | $ | 114,340 | ** ** | **$** | **269,590** |   | $ | 262,317 |   |
| Commercial                           | ** ** | **85,767**                       |        | 81,064                         | ** ** | **164,671** |   | 155,762 | ** ** | **79,137** |   | 75,888 | ** ** | **153,409** |   | 146,875 |   |
| Industrial                           | ** ** | **60,070**                       |        | 62,993                         | ** ** | **118,207** |   | 120,489 | ** ** | **33,301** |   | 34,905 | ** ** | **64,687** |   | 66,524 |   |
| Other retail                         | ** ** | **25,021**                       |        | 24,304                         | ** ** | **47,852** |   | 45,830 | ** ** | **20,183** |   | 19,659 | ** ** | **39,079** |   | 38,067 |   |
| Other  miscellaneous revenues        | ** ** | **2,173**                        |        | 1,433                          | ** ** | **4,749** |   | 4,283 | ** ** | **2,188** |   | 1,453 | ** ** | **4,747** |   | 4,317 |   |
|   Total retail                  | ** ** | **$**                            | **286,952** |                           | $          | 284,134 | ** ** | **$** | **605,069** |   | $ | 588,681 | ** ** | **$** | **248,730** |   | $ | 246,245 | ** ** | **$** | **531,512** |   | $ | 518,100 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Wholesale                            | ** ** | **39,854**                       |        | 30,418                         | ** ** | **96,925** |   | 87,103 | ** ** | **78,755** |   | 68,975 | ** ** | **171,810** |   | 159,007 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| RTO and capacity  revenues           | ** ** | **48,969**                       |        | 25,894                         | ** ** | **87,022** |   | 41,556 | ** ** | **48,968** |   | 25,894 | ** ** | **87,022** |   | 41,556 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Other revenues,  net of fuel costs   | ** ** | **3,042**                        |        | 2,694                          | ** ** | **5,899** |   | 5,493 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                | ** ** | **$**                            | **378,817** |                           | $          | 343,140 | ** ** | **$** | **794,915** |   | $ | 722,833 | ** ** | **$** | **376,453** |   | $ | 341,114 | ** ** | **$** | **790,344** |   | $ | 718,663 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Electric  customers at end of period | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Residential                          | ** ** | **456,308**                      |        | 456,098                        | ** ** | **456,308** |   | 456,098 | ** ** | **456,308** |   | 456,098 | ** ** | **456,308** |   | 456,098 |   |
| Commercial                           | ** ** | **49,961**                       |        | 49,450                         | ** ** | **49,961** |   | 49,450 | ** ** | **49,961** |   | 49,450 | ** ** | **49,961** |   | 49,450 |   |
| Industrial                           | ** ** | **1,800**                        |        | 1,818                          | ** ** | **1,800** |   | 1,818 | ** ** | **1,800** |   | 1,818 | ** ** | **1,800** |   | 1,818 |   |
| Other                                | ** ** | **6,473**                        |        | 6,377                          | ** ** | **6,473** |   | 6,377 | ** ** | **6,473** |   | 6,377 | ** ** | **6,473** |   | 6,377 |   |
|                                 | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                | ** ** | **514,542**                      |        | 513,743                        | ** ** | **514,542** |   | 513,743 | ** ** | **514,542** |   | 513,743 | ** ** | **514,542** |   | 513,743 |   |

 

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*(a)   DP&Lsells power to DPLER (a subsidiary of DPL). These sales are classified as wholesale on DP&L’s financialstatements and retail sales for DPL.  ThekWh volumes contain all volumes distributed on the DP&L system whichinclude the retail sales by DPLER.  Thesales for resale volumes are omitted to avoid duplicate reporting.*

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

See the “MARKETRISK” section in Part I of Item 2 of this report.

 

**Item4.  Controls and Procedures**

 

OurChief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsiblefor establishing and maintaining our disclosure controls and procedures.  These controls and procedures were designedto ensure that material information relating to us and our subsidiaries iscommunicated to the CEO and CFO.  Weevaluated these disclosure controls and procedures as of the end of the periodcovered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFOconcluded that our disclosure controls and procedures are effective: (i) toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the SEC’s rules and formsand (ii) to ensure that information required to be disclosed by us in thereports that we submit under the Exchange Act is accumulated and communicatedto our management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate, to allowtimely decisions regarding required disclosure.

 

Therewas no change in our internal control over financial reporting during the threemonths ended June 30, 2008 that has materially affected, or is reasonablylikely to materially affect, internal control over reporting.

 

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**Part II – Other Information**

 

**Item 1**–**Legal Proceedings**

 

In the normal course of business, we are subject to various lawsuits,actions, proceedings, claims and other matters asserted under laws andregulations.  We believe the amountsprovided in our Condensed Consolidated Financial Statements, as prescribed byGAAP, for these matters are adequate in light of the probable and estimablecontingencies.  However, there can be noassurances that the actual amounts required to satisfy alleged liabilities fromvarious legal proceedings, claims, and other matters discussed below, and tocomply with applicable laws and regulations will not exceed the amountsreflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of June 30, 2008, cannot bereasonably determined.

 

The information set forth below is limited to certain recentdevelopments concerning our legal proceedings and should be read in conjunctionwith our Annual Report of Form 10-K for the fiscal year ended December 31, 2007and our Quarterly Report on Form 10 Q for the three months ended March 31,2008.  Information concerning the legalproceedings discussed in the UPDATES/OTHER MATTERS – Environmental Updatessection of Part 1, Item 2 of this Quarterly Report on Form 10-Q isincorporated by reference into this Item.

 

**StateIncome Tax Audit**

 

OnFebruary 13, 2006, we received correspondence from the Ohio Department ofTaxation (ODT) notifying us that ODT had completed its examination and reviewof our Ohio Corporation Franchise Tax Returns for tax years 2002 through 2004and that the final proposed audit adjustments resulted in a balance due of$90.8 million before interest and penalties.  On March 29, 2006, wefiled petitions for reassessment with the ODT to protest each assessment aswell as request corrected assessments for each tax year.  On October 12,2006, we signed a Memorandum of Understanding with the ODT that stated if theODT’s positions are ultimately sustained in judicial proceedings, the totaladditional tax liability that we would be subject to for tax years 2002 through2004 would be no more than $50.7 million before interest as opposed to the$90.8 million stated in the ODT’s correspondence of February 13, 2006. We reviewed the proposed audit adjustments and vigorously contested theODT findings and notice of assessment through administrative processes.  On June 27, 2008, we entered into a $42million settlement agreement with ODT resolving all outstanding audit issuesfor tax years 1998 through 2006, including the Board of Tax Appeals issue whichwas discussed in our Annual Report Form 10-K for the fiscal year ended December 31,2007.  This settlement is furtherdiscussed in Note 5 of Notes to Condensed Consolidated Financial Statements.

 

**Sierra Club**

 

InSeptember 2004, the Sierra Club filed a lawsuit against **DP&L**and the other owners of the Stuart generatingstation in the United States District Court for the Southern District of Ohiofor alleged violations of the Clean Air Act (CAA) and the station’s operatingpermit.  **DP&L**,on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has takenplace, including depositions, and most expert reports have been submitted.  Settlement negotiations are ongoing.

 

**InsuranceRecovery Claim**

 

OnMay 16, 2007, **DPL** filed an insuranceclaim with Energy Insurance Mutual (EIM) to recoup legal expenses associatedwith our litigation against three of our former executives.  The litigation against the former executiveswas settled on May 21, 2007. Mediation with EIM on this claim occurred on May 29, 2008, at whichtime the parties did not reach agreement. **DPL** and EIM are currently schedulingarbitration of this insurance claim.

 

**Item 1a – RiskFactors**

 

We consider the risk factorsprovided in our most recent Annual Report on Form 10-K and the riskfactors set forth below to be the most significant in your decision to investin our stock.  The Form 10-K may beobtained as discussed on Page 4 of this report.  If any of these events occur, our business,financial position or results of operation could be materially affected.

 

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**Clean Air Interstate Rule (CAIR)decision by the U.S. Court of Appeals for the District of Columbia Circuit**

 

On July 11, 2008, the United States Court of Appeals for theDistrict of Columbia Circuit issued a decision that vacated the USEPA’s CAIRand its associated Federal Implementation Plan. This decision remands these issuesback to the USEPA.  The USEPA issued CAIRon March 10, 2005 to regulate certain upwind states with respect to fineparticulate matter and ozone.  CAIRcreated interstate trading programs for annual nitrogen oxide (NOx) emissionallowances and made modifications to an existing trading program for sulfurdioxide (SO2)that were to take effect in 2010.  Thecourt’s decision, in part, invalidated the new NOx annual emission allowancetrading program and the modifications to the SO2 emission trading program.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emissions allowances, including annual NOx emission allowances and SO2 emissions allowances that were the subject ofCAIR trading programs.  In subsequentquarters, **DP&L**recognized gains from the saleof excess emission allowances to third parties.   The overall impact of the court’s decision,and the actions the EPA will take in response to this decision, on **DPL** and **DP&L** is notknown at this time, however, the court’s decision may impact  future sales of excess allowances. We do notexpect this decision to have a material effect on our financial position.

 

**Senate Bill 221**

 

On May 1, 2008,substitute Senate Bill 221, an Ohio electric energy bill, was signed by theGovernor and will become effective July 31, 2008.  This new law states that all Ohiodistribution utilities must file either an electric security plan or a marketrate option to be in effect January 1, 2009.  Under the market rate option, the retailgeneration price will be set by a periodic competitive bid process after theutility demonstrates that it can meet certain market criteria and bidrequirements set out in the bill.  Also,under this option, utilities that still own generation in the state arerequired to phase in the market rate operation over a period of not less thanfive years.  An electric security planwhich may allow for adjustments to the standard offer for costs associated withenvironmental compliance; fuel and purchased power; construction of new orinvestment in specified generating facilities; the provision of standby anddefault service, operating, maintenance, or other costs including taxes.  As part of its electric security plan, theutility is permitted to file an infrastructure improvement plan that willspecify the initiatives the utility will take to rebuild, upgrade, or replaceits electric distribution system, including cost recovery mechanisms.  On July 2, 2008, the Public UtilitiesCommission of Ohio (PUCO) issued the first set in a series of rules relatedto implementation of the new law, including what information must be includedin an electric security plan as well as a market rate option.  **DP&L** ispreparing to file its comments on the rules.

 

The new law contains annualtargets relating to advanced energy portfolio standards, renewable energy, andenergy efficiency standards.  Thestandards require that, by 2025, 12.5% of the generation used to supplystandard offer generation service by the utility must come from advanced energyresources, which may include distributed generation, cogeneration, clean coaltechnology, nuclear technology, or energy efficiency.  By 2025, another 12.5% of the generation usedto supply standard offer generation service by the utility must come fromrenewable energy resources, of which 0.5% must come from solar energyresources.  In addition, the proposedbill requires annual energy efficiency reductions that reach 22.3% by 2025 andpeak demand reduction requirements that reach 7.75% by 2018.  The advanced energy portfolio and energyefficiency standards begin to phase in during 2009, with increases inrequirement percentages each year.  Ifany targets are not met, compliance penalties will apply.  Rules relating to implementation ofthese targets are expected to be issued later this summer.

 

While the overall financialimpact of this new legislation on **DPL** and **DP&L** will not be known for some time, implementation ofthe new legislation by **DPL** and **DP&L** may materially impact our financial condition.

 

**Item 2 – UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3 – DefaultsUpon Senior Securities**

 

None

 

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**Item 4 – Submissionof Matters to a Vote of Security Holders**

 

**DPL**held its Annual Meeting of Shareholders on April 23, 2008, at whichsecurity holders elected the three directors nominated for three-year termsexpiring 2011.  The results of the votingwere as follows:

 
| ** **        | ** ** | ** ** | ** ** | ** **   | ** ** | **BROKER**   | ** ** |
|-------------------|------------|------------|------------|--------------|------------|--------------|------------|
| ** **        | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** | **NON-VOTE** | ** ** |
| Paul M. Barbas    |       | 92,095,761 |       | 1,273,802    |       | —       |       |
| Barbara S. Graham |       | 92,060,151 |       | 1,309,412    |       | —       |       |
| Glenn E. Harder   |       | 92,030,185 |       | 1,339,378    |       | —       |       |

 

The other directors whose terms of officecontinued after the Annual Meeting are Paul R. Bishop, Frank G. Gallaher, andGeneral Lester L. Lyles (Ret.) (each of the class of 2009) and Robert D. Biggs,W August Hillenbrand, and Ned J. Sifferlen (each of the class of 2010).

 

Security holders also voted to ratify theselection of KPMG LLP as **DPL’s**independent auditor for 2008.  Theresults of the voting were as follows:

 
| ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **BROKER**   | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------|------------|
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **NON-VOTE** | ** ** |
| 92,248,030 |       | 597,324     |       | 524,208     |       | —       |       |

 

Security holders also voted on a shareholderproposal to dissolve **DPL** and ournon-utility subsidiaries.  The results ofthe voting were as follows:

 
| ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **BROKER**   | ** ** |
|------------|------------|-------------|------------|-------------|------------|--------------|------------|
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **NON-VOTE** | ** ** |
| 2,549,862  |       | 70,588,289  |       | 1,769,898   |       | 18,461,513   |       |

 

**Item 5 – OtherInformation**

 

None

 

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** **

**Item 6 – Exhibits**

** **
| **DPL** | ** ** | **DP&L** | ** ** | **Exhibit   Number** | ** ** | **Exhibit**                                                                                                  | ** ** | **Location**                                                                         |
|---------|------------|--------------|------------|---------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|
| X       |       |         |       | 10(a)                     |       | Restricted Stock Agreement  by and   between DPL Inc. and Paul M. Barbas   dated May 6, 2008.           |       | Exhibit 99.1 to  Form 8-K filed on May 8, 2008 (File No. 1-9052) |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
| X       |       |         |       | 31(a)                     |       | Certification of Chief  Executive Officer   pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 31(a)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
| X       |       |         |       | 31(b)                     |       | Certification of Chief  Financial Officer   pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 31(b)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
|    |       | X            |       | 31(c)                     |       | Certification of Chief  Executive Officer   pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 31(c)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
|    |       | X            |       | 31(d)                     |       | Certification of Chief  Financial Officer   pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 31(d)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
| X       |       |         |       | 32(a)                     |       | Certification of Chief  Executive Officer   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   |       | Filed herewith as  Exhibit 32(a)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
| X       |       |         |       | 32(b)                     |       | Certification of Chief  Financial Officer   pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 32(b)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
|    |       | X            |       | 32(c)                     |       | Certification of Chief  Executive Officer   pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 32(c)                                                |
|    |       |         |       |                      |       |                                                                                                         |       |                                                                                 |
|    |       | X            |       | 32(d)                     |       | Certification of Chief  Financial Officer   pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002 |       | Filed herewith as  Exhibit 32(d)                                                |

 

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**SIGNATURES**

 

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, DPL Inc. and The Dayton Power and Light Company has duly causedthis report to be signed on their behalf by the undersigned, thereunto dulyauthorized.

 

 
|     | **DPL Inc.**                            |
|----------|-----------------------------------------|
|     | **The  Dayton Power and Light Company** |
|     | (Registrants)                           |
|     |                                    |
|     |                                    |
| Date:    | July 23, 2008                      |   | /s/ Paul M.  Barbas |
|     |                                    |   | Paul M. Barbas   President and Chief Executive Officer   (principal executive officer) |
|     |                                    |   |   |
| * * | * *                                | * * | * * |
| * * | July 23,  2008                     | * * | /s/ John J. Gillen |
| * * | *** ***                            | * * | John J. Gillen   Senior Vice President, Chief Financial Officer and Treasurer  (principal financial officer) |
| * * | *** ***                            | * * |   |
| * * | * *                                | * * |   |
| * * | July 23,  2008                     | * * | /s/ Frederick J. Boyle |
| * * | *** ***                            | * * | Frederick J. Boyle 

Vice President, Chief Accounting Officer  and Controller |
| * * | *** ***                            | * * | (principal accounting officer) |

 

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