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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(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 markwhether each registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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 markwhether each registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act).

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

 

Asof  October 27, 2008, each registrant had the following shares ofcommon stock outstanding:

 
| **Registrant**                          | ** ** | **Description**                    | ** ** | **Shares  Outstanding** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
|                                    |       |                               |       |                    |       |
| **DPL  Inc.**                           | ** ** | **Common  Stock, $0.01 par value** |       | 115,961,880             |       |
| ** **                              | ** ** | ** **                         | ** ** | ** **              | ** ** |
| **The  Dayton Power and Light Company** | ** ** | **Common  Stock, $0.01 par value** |       | 41,172,173              |       |

 

Thiscombined Form 10-Q is separately filed by DPL Inc. and The Dayton Powerand Light Company.  Information containedherein relating to any individual registrant is filed by such registrant on itsown behalf.  Each registrant makes norepresentation as to information 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 |       | 31                |
|                                   |                                                                                        |       |              |
|                                   | Electric Sales and Revenues                                                                 |       | 56                |
|                                   |                                                                                        |       |              |
| Item 3                                 | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 56                |
|                                   |                                                                                        |       |              |
| Item 4                                 | Controls and  Procedures                                                                    |       | 56                |
|                                   |                                                                                        |       |              |
| **Part II  Other Information**    |                                                                                        |       |
|                                   |                                                                                        |       |              |
| Item  1                                | Legal  Proceedings                                                                          |       | 57                |
|                                   |                                                                                        |       |              |
| Item 1a                                | Risk Factors                                                                                |       | 58                |
|                                   |                                                                                        |       |              |
| Item 2                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 59                |
|                                   |                                                                                        |       |              |
| Item 3                                 | Defaults  Upon Senior Securities                                                            |       | 59                |
|                                   |                                                                                        |       |              |
| Item 4                                 | Submission  of Matters to a Vote of Security Holders                                        |       | 59                |
|                                   |                                                                                        |       |              |
| Item 5                                 | Other Information                                                                           |       | 59                |
|                                   |                                                                                        |       |              |
| Item 6                                 | Exhibits                                                                                    |       | 60                |
|                                   |                                                                                        |       |              |
| **Other**                              |                                                                                        |       |              |
|                                   |                                                                                        |       |              |
| Signatures                             |                                                                                        |       | 61                |
|                                   |                                                                                        |       |              |
| Certifications                         |                                                                                        |       |              |
|                                        |                                                                                             |            |                   |  |

 

2

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

 

Our public internet siteis http://www.dplinc.com.  We makeavailable, free of charge, through our internet site, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andForms 3, 4 and 5 filed on behalf of our directors and executive officers, andamendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934, as amended, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the SEC.

 

In addition, our publicinternet site includes other items related to corporate governance matters,including, among other things, our governance guidelines, charters of variouscommittees of the Board of Directors and our code of business conduct andethics applicable to all employees, officers and directors.  You may obtain copies of these documents,free of charge, by sending a request, in writing, to DPL Investor Relations,1065 Woodman Drive, Dayton, Ohio 45432.

 

**Part I – Financial Information**

** **

This report includes thecombined filing of DPL Inc.**(DPL)** and TheDayton Power and Light Company **(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 99% of**DPL’s**total consolidated revenue andapproximately 95% 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 OFOPERATIONS**

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions except per share amounts** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| **Revenues**                                                             | ** ** | **$**                            | **414.5**  | ** **                      | $          | 422.0 |   | **$** | **1,209.4** | ** ** | $ | 1,145.6 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Cost of  revenues:**                                                   |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Fuel                                                                     | ** ** | **62.2**                         | ** ** | 95.9                            |       | **192.5** | ** ** | 250.5 |   |
| Purchased power                                                          | ** ** | **119.8**                        | ** ** | 82.1                            |       | **288.9** | ** ** | 217.5 |   |
| Total cost of  revenues                                                  | ** ** | **182.0**                        | ** ** | 178.0                           |       | **481.4** | ** ** | 468.0 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Gross  margin**                                                        | ** ** | **232.5**                        | ** ** | 244.0                           |       | **728.0** | ** ** | 677.6 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Operating  expenses:**                                                 |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Operation and  maintenance                                               | ** ** | **68.2**                         | ** ** | 67.3                            |       | **200.4** | ** ** | 198.1 |   |
| Depreciation and  amortization                                           | ** ** | **35.3**                         | ** ** | 33.9                            |       | **102.5** | ** ** | 102.9 |   |
| General taxes                                                            | ** ** | **30.7**                         | ** ** | 29.1                            |       | **93.0** | ** ** | 84.6 |   |
| Amortization of  regulatory assets                                       | ** ** | **2.1**                          | ** ** | 2.9                             |       | **7.6** | ** ** | 8.3 |   |
| Total operating  expenses                                                | ** ** | **136.3**                        | ** ** | 133.2                           |       | **403.5** | ** ** | 393.9 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Operating  income**                                                    | ** ** | **96.2**                         | ** ** | 110.8                           |       | **324.5** | ** ** | 283.7 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Net gain on  settlement of executive litigation                          | ** ** | **—**                       | ** ** | —                          |       | **—** | ** ** | 31.0 |   |
| Investment  income                                                       | ** ** | **0.5**                          | ** ** | 1.2                             |       | **3.1** | ** ** | 9.5 |   |
| Interest expense                                                         | ** ** | **(21.9**                        | **)**      | (16.9                           | )          | **(67.9** | **)** | (59.4 | ) |
| Other  income/(deductions)                                               | ** ** | **(0.4**                         | **)**      | 2.0                             |       | **(0.9** | **)** | 2.6 |   |
| Total other  income/(expense), net                                       | ** ** | **(21.8**                        | **)**      | (13.7                           | )          | **(65.7** | **)** | (16.3 | ) |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Earnings  from continuing operations before income tax**               | ** ** | **74.4**                         | ** ** | 97.1                            |       | **258.8** | ** ** | 267.4 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Income tax  expense                                                      | ** ** | **26.4**                         | ** ** | 36.4                            |       | **85.9** | ** ** | 101.9 |   |
|                                                                     | ** ** | ** **                       | ** ** |                            |       | ** ** | ** ** |   |   |
| **Earnings  from continuing operations**                                 | ** ** | **48.0**                         | ** ** | 60.7                            |       | **172.9** | ** ** | 165.5 |   |
| **Earnings  from discontinued operations, net of tax**                   | ** ** | **—**                       | ** ** | —                          |       | **—** | ** ** | 10.0 |   |
| ** **                                                               | ** ** | ** **                       | ** ** |                            |       | ** ** | ** ** |   |   |
| **Net  Income**                                                          | ** ** | **$**                            | **48.0**   | ** **                      | $          | 60.7 |   | **$** | **172.9** | ** ** | $ | 175.5 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Average  number of common shares outstanding (millions)**              |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Basic                                                                    | ** ** | **109.9**                        | ** ** | 108.0                           |       | **109.6** | ** ** | 107.8 |   |
| Diluted                                                                  | ** ** | **115.0**                        | ** ** | 115.4                           |       | **116.2** | ** ** | 118.1 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Earnings  per share of common stock**                                  |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Basic:                                                                   |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                            | **0.44**   | ** **                      | $          | 0.56 |   | **$** | **1.58** | ** ** | $ | 1.54 |   |
| Earnings from  discontinued operations                                   | ** ** | **—**                       | ** ** | —                          |       | **—** | ** ** | 0.09 |   |
| Total Basic                                                              | ** ** | **$**                            | **0.44**   | ** **                      | $          | 0.56 |   | **$** | **1.58** | ** ** | $ | 1.63 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Diluted:                                                                 |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Earnings from  continuing operations                                     | ** ** | **$**                            | **0.42**   | ** **                      | $          | 0.53 |   | **$** | **1.49** | ** ** | $ | 1.40 |   |
| Earnings from  discontinued operations                                   | ** ** | **—**                       | ** ** | —                          |       | **—** | ** ** | 0.09 |   |
| Total Diluted                                                            | ** ** | **$**                            | **0.42**   | ** **                      | $          | 0.53 |   | **$** | **1.49** | ** ** | $ | 1.49 |   |
|                                                                     |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Dividends  paid per share of common stock**                            | ** ** | **$**                            | **0.275**  | ** **                      | $          | 0.260 |   | **$** | **0.825** | ** ** | $ | 0.780 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**DPL INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| **$ in millions**                                                        | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                               |       |                            |       |   |   |
| **Cash  flows from operating activities:**                                         |       |                            |       |   |   |
| Net income                                                                         | ** ** | **$**                           | **172.9**  | ** ** | $ | 175.5 |   |
| Less: Earnings  from discontinued operations, net of tax                           | ** ** | **—**                      | ** ** | (10.0 | ) |
| Earnings from  continuing operations                                               | ** ** | **172.9**                       | ** ** | 165.5 |   |
|                                                                               |       |                            | ** ** |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                            | ** ** |   |   |
| Depreciation and  amortization                                                     | ** ** | **102.5**                       | ** ** | 102.9 |   |
| Net gain on  settlement of executive litigation                                    | ** ** | **—**                      | ** ** | (31.0 | ) |
| Gain on sale of  aircraft                                                          | ** ** | **—**                      | ** ** | (6.0 | ) |
| Amortization of  regulatory assets                                                 | ** ** | **7.6**                         | ** ** | 8.3 |   |
| Deferred income  taxes                                                             | ** ** | **32.7**                        | ** ** | 12.1 |   |
| Changes in  certain assets and liabilities:                                        |       |                            | ** ** |   |   |
| Accounts  receivable                                                               | ** ** | **0.7**                         | ** ** | (39.9 | ) |
| Accounts payable                                                                   | ** ** | **24.3**                        | ** ** | 22.4 |   |
| Accrued taxes  payable                                                             | ** ** | **(66.4**                       | **)**      | 5.7 |   |
| Accrued interest  payable                                                          | ** ** | **(7.6**                        | **)**      | (11.4 | ) |
| Prepayments                                                                        | ** ** | **0.4**                         | ** ** | 0.4 |   |
| Inventories                                                                        | ** ** | **(4.6**                        | **)**      | (18.8 | ) |
| Deferred  compensation assets                                                      | ** ** | **(4.1**                        | **)**      | 3.9 |   |
| Deferred  compensation obligations                                                 | ** ** | **(7.4**                        | **)**      | 1.1 |   |
| Other                                                                              | ** ** | **(8.5**                        | **)**      | 19.8 |   |
| **Net  cash provided by operating activities**                                     | ** ** | **242.5**                       | ** ** | 235.0 |   |
|                                                                               |       |                            | ** ** |   |   |
| **Cash  flows from investing activities:**                                         |       |                            | ** ** |   |   |
| Capital  expenditures                                                              | ** ** | **(173.8**                      | **)**      | (273.3 | ) |
| Purchases of  short-term investments                                               | ** ** | **(9.9**                        | **)**      | — |   |
| Proceeds from  the sale of peaking units, net                                      | ** ** | **—**                      | ** ** | 151.0 |   |
| Proceeds from  the sale of aircraft                                                | ** ** | **—**                      | ** ** | 7.4 |   |
| **Net  cash used for investing activities**                                        | ** ** | **(183.7**                      | **)**      | (114.9 | ) |
|                                                                               |       |                            | ** ** |   |   |
| **Cash  flows from financing activities:**                                         |       |                            | ** ** |   |   |
| Exercise of  stock options                                                         | ** ** | **1.7**                         | ** ** | 14.5 |   |
| Tax impact  related to exercise of stock options                                   | ** ** | **0.3**                         | ** ** | 0.5 |   |
| Retirement of  long-term debt                                                      | ** ** | **(100.0**                      | **)**      | (225.0 | ) |
| Withdrawals of restricted  funds held in trust, net                                | ** ** | **20.5**                        | ** ** | 10.1 |   |
| Dividends paid  on common stock                                                    | ** ** | **(89.9**                       | **)**      | (83.7 | ) |
| Repurchase of  pollution control bonds                                             | ** ** | **(90.0**                       | **)**      | — |   |
| Withdrawals from  revolving credit facility                                        | ** ** | **105.0**                       | ** ** | 95.0 |   |
| Repayment of  borrowings from revolving credit facility                            | ** ** | **(15.0**                       | **)**      | (95.0 | ) |
| **Net  cash used for financing activities**                                        | ** ** | **(167.4**                      | **)**      | (283.6 | ) |
| ** **                                                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents:**                                                    | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(108.6**                      | **)**      | (163.5 | ) |
| Balance at  beginning of period                                                    | ** ** | **134.9**                       | ** ** | 262.2 |   |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**                           | **26.3**   | ** ** | $ | 98.7 |   |
|                                                                               |       |                            | ** ** |   |   |
| **Supplemental  cash flow information:**                                           |       |                            | ** ** |   |   |
| Interest paid,  net of amounts capitalized                                         | ** ** | **$**                           | **71.6**   | ** ** | $ | 68.8 |   |
| Income taxes  paid, net                                                            | ** ** | **$**                           | **112.7**  | ** ** | $ | 87.6 |   |
| Non-cash  financing and investing activities:                                      |       |                            | ** ** |   |   |
| Restricted funds  held in trust                                                    | ** ** | **$**                           | **16.5**   | ** ** | $ | 0.5 |   |
| Accruals for  capital expenditures                                                 | ** ** | **$**                           | **43.3**   | ** ** | $ | 45.5 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                      | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                     | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                                                            |       |                   |        |                  |       |
| **ASSETS**                                                                                      |       |                   |        |                  |       |
|                                                                                            |       |                   |        |                  |       |
| **Current  assets:**                                                                            |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                      | ** ** | **$**                  | **26.3**    | ** **            | $          | 134.9 |   |
| Restricted funds  held in trust                                                                 | ** ** | **16.5**               | ** **  | 37.0                  |       |
| Short-term  investments                                                                         | ** ** | **9.9**                | ** **  | —                |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.6 and $1.5,  respectively |       | **235.3**              | ** **  | 241.2                 |       |
| Inventories, at  average cost                                                                   | ** ** | **109.6**              | ** **  | 105.0                 |       |
| Taxes applicable  to subsequent years                                                           | ** ** | **13.7**               | ** **  | 48.0                  |       |
| Other current  assets                                                                           | ** ** | **21.5**               | ** **  | 11.8                  |       |
| Total current  assets                                                                           | ** ** | **432.8**              | ** **  | 577.9                 |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Property:**                                                                                   |       |                   | ** **  |                  |       |
| Property, plant  and equipment                                                                  | ** ** | **5,171.8**            | ** **  | 5,011.6               |       |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,321.4**           | **)**       | (2,234.6              | )          |
| Total net  property                                                                             | ** ** | **2,850.4**            | ** **  | 2,777.0               |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Other  noncurrent assets:**                                                                   |       |                   | ** **  |                  |       |
| Regulatory  assets                                                                              | ** ** | **166.7**              | ** **  | 165.2                 |       |
| Other deferred  assets                                                                          | ** ** | **50.3**               | ** **  | 46.5                  |       |
| Total other  noncurrent assets                                                                  | ** ** | **217.0**              | ** **  | 211.7                 |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Total  Assets**                                                                               | ** ** | **$**                  | **3,500.2** | ** **            | $          | 3,566.6 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**DPL INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                      | ** ** | **At**                           | ** ** | **At**                          | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **September 30,**           | ** ** | **December 31,**           | ** ** |
| **$  in millions**                               | ** ** | **2008**                         | ** ** | **2007**                        | ** ** |
|                                                            |       |                             |       |                            |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                  |       |                             |       |                            |       |
|                                                            |       |                             |       |                            |       |
| **Current  liabilities:**                                       |       |                             |       |                            |       |
| Current portion  - long-term debt                               | ** ** | **$**                            | **175.7**  |                            | $          | 100.7 |   |
| Accounts payable                                                | ** ** | **185.2**                        |       | 163.1                           |       |
| Accrued taxes                                                   | ** ** | **70.2**                         |       | 110.8                           |       |
| Accrued interest                                                | ** ** | **18.5**                         |       | 25.8                            |       |
| Revolving credit  borrowings                                    | ** ** | **90.0**                         |       | —                          |       |
| Other current  liabilities                                      | ** ** | **27.9**                         |       | 27.2                            |       |
| Total current  liabilities                                      | ** ** | **567.5**                        |       | 427.6                           |       |
|                                                            |       |                             |       |                            |       |
| **Noncurrent  liabilities:**                                    |       |                             |       |                            |       |
| Long-term debt                                                  | ** ** | **1,276.3**                      |       | 1,541.5                         |       |
| Deferred taxes                                                  | ** ** | **410.2**                        |       | 374.9                           |       |
| Unamortized  investment tax credit                              | ** ** | **38.7**                         |       | 40.7                            |       |
| Insurance and  claims costs                                     | ** ** | **20.1**                         |       | 20.0                            |       |
| Other deferred  credits                                         | ** ** | **196.7**                        |       | 266.3                           |       |
| Total noncurrent  liabilities                                   | ** ** | **1,942.0**                      |       | 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:                 |       |                             |       |                            |       |
|                                                            |       |                             |       |                            |       |
| ** **                                                      | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shares  authorized                                              |       | 250,000,000                      |       | 250,000,000                     |       |   |   |   |   |
| Shares issued                                                   |       | 163,724,211                      |       | 163,724,211                     |       |   |   |   |   |
| Shares  outstanding                                             |       | 115,942,280                      |       | 113,558,444                     | ** ** | **1.2** | ** ** | 1.1 |   |
|                                                            |       |                             |       |                            | ** ** | ** ** | ** ** |   |   |
| Warrants                                                        | ** ** | ** **                       |       |                            |       | **31.0** | ** ** | 50.0 |   |
| Common stock  held by employee plans                            | ** ** | ** **                       |       |                            |       | **(28.0** | **)** | (39.7 | ) |
| Accumulated  other comprehensive loss                           | ** ** | ** **                       |       |                            |       | **(10.2** | **)** | (9.2 | ) |
| Retained  earnings                                              | ** ** | ** **                       |       |                            |       | **973.8** | ** ** | 870.5 |   |
| Total common  shareholders’ equity                         | ** ** | ** **                       |       |                            |       | **967.8** | ** ** | 872.7 |   |
|                                                            |       |                             |       |                            |       |   | ** ** |   |   |
| **Total  Liabilities and Shareholders’ Equity**            | ** ** | ** **                       |       |                            |       | **$** | **3,500.2** | ** ** | $ | 3,566.6 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF RESULTS OFOPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                     | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Revenues**                                    | ** ** | **$**                            | **401.5**  | ** **                      | $          | 419.6 |   | **$** | **1,191.8** | ** ** | $ | 1,139.1 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Cost of  revenues:**                          |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Fuel                                            | ** ** | **57.0**                         | ** ** | 87.6                            |       | **183.6** | ** ** | 240.2 |   |
| Purchased power                                 | ** ** | **120.1**                        | ** ** | 91.7                            |       | **291.8** | ** ** | 228.2 |   |
| Total cost of  revenues                         | ** ** | **177.1**                        | ** ** | 179.3                           |       | **475.4** | ** ** | 468.4 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Gross  margin**                               | ** ** | **224.4**                        | ** ** | 240.3                           |       | **716.4** | ** ** | 670.7 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Operating  expenses:**                        |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Operation and  maintenance                      | ** ** | **65.4**                         | ** ** | 64.0                            |       | **191.0** | ** ** | 195.8 |   |
| Depreciation and  amortization                  | ** ** | **32.8**                         | ** ** | 31.4                            |       | **95.0** | ** ** | 95.2 |   |
| General taxes                                   | ** ** | **30.6**                         | ** ** | 28.8                            |       | **92.4** | ** ** | 83.8 |   |
| Amortization of  regulatory assets              | ** ** | **2.1**                          | ** ** | 2.9                             |       | **7.6** | ** ** | 8.3 |   |
| Total operating  expenses                       | ** ** | **130.9**                        | ** ** | 127.1                           |       | **386.0** | ** ** | 383.1 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Operating  income**                           | ** ** | **93.5**                         | ** ** | 113.2                           |       | **330.4** | ** ** | 287.6 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Net gain on  settlement of executive litigation | ** ** | **—**                       | ** ** | —                          |       | **—** | ** ** | 35.3 |   |
| Investment  income                              | ** ** | **0.6**                          | ** ** | 1.3                             |       | **6.3** | ** ** | 7.5 |   |
| Interest expense                                | ** ** | **(8.9**                         | **)**      | (3.9                            | )          | **(26.7** | **)** | (14.1 | ) |
| Other  income/(deductions)                      | ** ** | **(0.4**                         | **)**      | 2.1                             |       | **(1.0** | **)** | 2.7 |   |
| Total other  income/(expense), net              | ** ** | **(8.7**                         | **)**      | (0.5                            | )          | **(21.4** | **)** | 31.4 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Earnings  before income tax**                 | ** ** | **84.8**                         | ** ** | 112.7                           |       | **309.0** | ** ** | 319.0 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Income tax  expense                             | ** ** | **30.0**                         | ** ** | 42.1                            |       | **101.9** | ** ** | 119.5 |   |
|                                            | ** ** | ** **                       | ** ** |                            |       | ** ** | ** ** |   |   |
| **Net  income**                                 | ** ** | **54.8**                         | ** ** | 70.6                            |       | **207.1** | ** ** | 199.5 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Preferred dividends                             | ** ** | **0.2**                          | ** ** | 0.2                             |       | **0.6** | ** ** | 0.6 |   |
|                                            |       |                             | ** ** |                            |       |   | ** ** |   |   |
| **Earnings  on common stock**                   | ** ** | **$**                            | **54.6**   | ** **                      | $          | 70.4 |   | **$** | **206.5** | ** ** | $ | 198.9 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| **$ in millions**                                                        | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                               |       |                            |       |   |   |
| **Cash  flows from operating activities:**                                         |       |                            |       |   |   |
| Net income                                                                         | ** ** | **$**                           | **207.1**  | ** ** | $ | 199.5 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                            | ** ** |   |   |
| Depreciation and  amortization                                                     | ** ** | **95.0**                        | ** ** | 95.2 |   |
| Net gain on  settlement of executive litigation                                    | ** ** | **—**                      | ** ** | (35.3 | ) |
| Amortization of  regulatory assets                                                 | ** ** | **7.6**                         | ** ** | 8.3 |   |
| Deferred income  taxes                                                             | ** ** | **31.2**                        | ** ** | 11.0 |   |
| Changes in  certain assets and liabilities:                                        |       |                            | ** ** |   |   |
| Accounts  receivable                                                               | ** ** | **3.2**                         | ** ** | (40.0 | ) |
| Accounts payable                                                                   | ** ** | **23.5**                        | ** ** | 22.7 |   |
| Accrued taxes  payable                                                             | ** ** | **(61.1**                       | **)**      | (3.1 | ) |
| Accrued interest  payable                                                          | ** ** | **2.3**                         | ** ** | 2.4 |   |
| Prepayments                                                                        | ** ** | **(0.1**                        | **)**      | 0.7 |   |
| Inventories                                                                        | ** ** | **(4.7**                        | **)**      | (19.8 | ) |
| Deferred  compensation assets                                                      | ** ** | **1.0**                         | ** ** | 4.1 |   |
| Deferred  compensation obligations                                                 | ** ** | **(7.4**                        | **)**      | 1.1 |   |
| Other                                                                              | ** ** | **(23.8**                       | **)**      | 16.0 |   |
| **Net  cash provided by operating activities**                                     | ** ** | **273.8**                       | ** ** | 262.8 |   |
|                                                                               |       |                            | ** ** |   |   |
| **Cash  flows from investing activities:**                                         |       |                            | ** ** |   |   |
| Capital  expenditures                                                              | ** ** | **(173.1**                      | **)**      | (271.0 | ) |
| **Net  cash used for investing activities**                                        | ** ** | **(173.1**                      | **)**      | (271.0 | ) |
|                                                                               |       |                            | ** ** |   |   |
| **Cash  flows from financing activities:**                                         |       |                            | ** ** |   |   |
| Short-term loan  from parent                                                       | ** ** | **—**                      | ** ** | 105.0 |   |
| Withdrawals from  revolving credit facility                                        | ** ** | **105.0**                       | ** ** | 95.0 |   |
| Repurchase of  pollution control bonds                                             | ** ** | **(90.0**                       | **)**      | — |   |
| Repayment of  borrowings from revolving credit facility                            | ** ** | **(15.0**                       | **)**      | (95.0 | ) |
| Withdrawals of  restricted funds held in trust, net                                | ** ** | **20.5**                        | ** ** | 10.1 |   |
| Dividends paid  on preferred stock                                                 | ** ** | **(0.6**                        | **)**      | (0.7 | ) |
| Repayment of  short-term loan from parent                                          | ** ** | **(20.0**                       | **)**      | (15.0 | ) |
| Dividends paid  on common stock held by parent                                     | ** ** | **(80.0**                       | **)**      | (125.0 | ) |
| **Net  cash used for financing activities**                                        | ** ** | **(80.1**                       | **)**      | (25.6 | ) |
|                                                                               |       |                            | ** ** |   |   |
| **Cash  and cash equivalents:**                                                    |       |                            | ** ** |   |   |
| Net change                                                                         | ** ** | **20.6**                        | ** ** | (33.8 | ) |
| Balance at  beginning of period                                                    | ** ** | **13.2**                        | ** ** | 46.1 |   |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**                           | **33.8**   | ** ** | $ | 12.3 |   |
|                                                                               |       |                            | ** ** |   |   |
| **Supplemental  cash flow information:**                                           |       |                            | ** ** |   |   |
| Interest paid,  net of amounts capitalized                                         | ** ** | **$**                           | **21.7**   | ** ** | $ | 9.6 |   |
| Income taxes  paid, net                                                            | ** ** | **$**                           | **112.2**  | ** ** | $ | 86.8 |   |
| Non-cash  financing and investing activities:                                      |       |                            | ** ** |   |   |
| Restricted funds  held in trust                                                    | ** ** | **$**                           | **16.5**   | ** ** | $ | 0.5 |   |
| Accruals for  capital expenditures                                                 | ** ** | **$**                           | **43.3**   | ** ** | $ | 45.5 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                      | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                                                                     | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                                                            |       |                   |        |                  |       |
| **ASSETS**                                                                                      |       |                   |        |                  |       |
|                                                                                            |       |                   |        |                  |       |
| **Current  assets:**                                                                            |       |                   |        |                  |       |
| Cash and cash  equivalents                                                                      | ** ** | **$**                  | **33.8**    | ** **            | $          | 13.2 |   |
| Restricted funds  held in trust                                                                 | ** ** | **16.5**               | ** **  | 37.0                  |       |
| Accounts  receivable, less provision for uncollectible accounts of $1.6 and $1.5,  respectively |       | **215.6**              | ** **  | 221.8                 |       |
| Inventories, at  average cost                                                                   | ** ** | **108.2**              | ** **  | 103.6                 |       |
| Taxes applicable  to subsequent years                                                           | ** ** | **13.7**               | ** **  | 48.0                  |       |
| Other current  assets                                                                           | ** ** | **23.8**               | ** **  | 13.4                  |       |
| Total current  assets                                                                           | ** ** | **411.6**              | ** **  | 437.0                 |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Property:**                                                                                   |       |                   | ** **  |                  |       |
| Property, plant  and equipment                                                                  | ** ** | **4,916.7**            | ** **  | 4,757.0               |       |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,238.7**           | **)**       | (2,159.1              | )          |
| Total net  property                                                                             | ** ** | **2,678.0**            | ** **  | 2,597.9               |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Other  noncurrent assets:**                                                                   |       |                   | ** **  |                  |       |
| Regulatory  assets                                                                              | ** ** | **166.7**              | ** **  | 165.2                 |       |
| Other deferred  assets                                                                          | ** ** | **64.5**               | ** **  | 76.6                  |       |
| Total other  noncurrent assets                                                                  | ** ** | **231.2**              | ** **  | 241.8                 |       |
|                                                                                            |       |                   | ** **  |                  |       |
| **Total  Assets**                                                                               | ** ** | **$**                  | **3,320.8** | ** **            | $          | 3,276.7 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*These interimstatements are unaudited.*

 

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**THE DAYTON POWER AND LIGHT COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                      | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                      | ** ** | **September 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                                                | ** ** | **183.3**              | ** **  | 161.9                 |       |
| Accrued taxes                                                   | ** ** | **79.3**               | ** **  | 112.7                 |       |
| Accrued interest                                                | ** ** | **15.5**               | ** **  | 12.9                  |       |
| Revolving credit  borrowings                                    | ** ** | **90.0**               | ** **  | —                |       |
| Short-term debt  owed to parent                                 | ** ** | **—**             | ** **  | 20.9                  |       |
| Other current  liabilities                                      | ** ** | **27.8**               | ** **  | 26.9                  |       |
| Total current  liabilities                                      | ** ** | **396.6**              | ** **  | 336.0                 |       |
|                                                            |       |                   | ** **  |                  |       |
| **Noncurrent  liabilities:**                                    |       |                   | ** **  |                  |       |
| Long-term debt                                                  | ** ** | **784.2**              | ** **  | 874.6                 |       |
| Deferred taxes                                                  | ** ** | **396.0**              | ** **  | 367.0                 |       |
| Unamortized  investment tax credit                              | ** ** | **38.7**               | ** **  | 40.7                  |       |
| Other deferred  credits                                         | ** ** | **196.6**              | ** **  | 266.2                 |       |
| Total noncurrent  liabilities                                   | ** ** | **1,415.5**            | ** **  | 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 $0.01 per share                  | ** ** | **0.4**                | ** **  | 0.4                   |       |
| Other paid-in  capital                                          | ** ** | **782.9**              | ** **  | 784.8                 |       |
| Accumulated  other comprehensive (loss) income                  | ** ** | **(1.6**               | **)**       | 6.5                   |       |
| Retained  earnings                                              | ** ** | **704.1**              | ** **  | 577.6                 |       |
| Total common  shareholder’s equity                         | ** ** | **1,485.8**            | ** **  | 1,369.3               |       |
|                                                            |       |                   | ** **  |                  |       |
| **Total  Liabilities and Shareholder’s Equity**            | ** ** | **$**                  | **3,320.8** | ** **            | $          | 3,276.7 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

*Theseinterim statements are unaudited.*

 

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**Notes to Condensed ConsolidatedFinancial Statements**

**(unaudited)**

 

**1.****              Basis ofPresentation**

 

**Descriptionof Business**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio.  Our executive offices are located at 1065Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.

 

**DPL’s** principal subsidiary isThe Dayton Power and Light Company**(DP&L)**.  **DP&L**is a public utility incorporated in 1911 under the laws of Ohio.  **DP&L**sells electricity to residential, commercial, industrial, and 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 its retail customers. Electricity for **DP&L’s**24 county service area is primarily generated at eight coal-fired power plantsand is distributed to more than 513,000 retail customers.  Principal industries served includeautomotive, food processing, paper, plastic manufacturing, and defense.

 

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

 

**DPL’s**significant subsidiaries (all of which are wholly owned) include DPL Energy LLC(DPLE), which engages in the operation of peaking generating facilities andsells power in wholesale markets; DPLER, which sells retail electric energyunder contract to major industrial and commercial customers in West CentralOhio; and Miami Valley Insurance Company (MVIC), our captive insurance companythat provides insurance sources to us and our subsidiaries.  **DP&L**hasone significant subsidiary, DPL Finance Company, Inc., which is whollyowned and provides financing to **DPL**,**DP&L,** and other affiliatedcompanies.

 

**DPL**and **DP&L** conduct theirprincipal business in one business segment - Electric.

 

**FinancialStatement Presentation**

 

Weprepare consolidated 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 theirmajority-owned subsidiaries.  Investmentsthat are not majority owned are accounted for using the equity method when ourinvestment allows us the ability to exert significant influence, as defined byGAAP.  Undivided interests in jointlyowned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts andtransactions are eliminated in consolidation. Interim results for the three months and nine months ended September 30,2008 may not be indicative of our results that will be realized for the fullyear ending December 31, 2008.

 

Pursuant to theSecurities and Exchange Commission (SEC) rules, certain information andfootnote disclosures normally included in the annual financial statementsprepared in accordance with GAAP have been omitted from interim reports.Therefore, our interim financial statements in this report should be read alongwith the annual financial statements included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.  In the opinion of our management, thecondensed consolidated financial statements in this report contain alladjustments necessary to fairly state our financial condition as of September 30,2008; our results of operations for the three months and nine months ended September 30,2008; and our cash flows for the nine months ended September 30, 2008 inaccordance with GAAP.  Certain amountsfrom prior periods have been reclassified to conform to the current reportingpresentation.

 

**Estimatesand Judgments**

 

The preparation offinancial statements in conformity with GAAP requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and the revenue and expenses of the periods reported.  Werecord liabilities for probable estimated losses in accordance with Statementof Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies.”  To the extent a probable loss can only be estimated byreference to a range of equally probable outcomes and no amount within therange appears to be a better estimate than any other amount, we accrue for thelow end of the range.  Because of uncertainties related to these matters,accruals are based on the best information available at the time.  Weevaluate the potential liability related to probable losses quarterly and mayrevise our estimates.  Judgments and uncertainties affecting theapplication of these estimates may result in materially different amounts beingreported under different conditions or circumstances that may affect ourfinancial position and results of operations.  Significant items subjectto such estimates and judgments include: the carrying value of property, plantand equipment; unbilled revenues; the valuation 

 

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of derivativeinstruments; the valuation of insurance and claims costs; the valuation ofallowances for receivables and deferred income taxes; regulatory assets andliabilities; reserves recorded for income tax exposures; litigation;contingencies; and assets and liabilities related to employee benefits.

 

**Reclassifications**

 

During thequarter ended December 31, 2007, we identified immaterial changes incertain accounts payable balances that had not been correctly presented in ourprior period cash flow statements.  Changes in accounts payable balancesrepresenting capital expenditures had previously been classified with cashflows from operating activities and should have been classified with capitalexpenditures as part of investing activities.  Accordingly, the CondensedConsolidated Statement of Cash Flows for the nine months ended September 30,2007 has been reclassified to conform to the current presentation.  As aresult of these reclassifications, cash provided by operating activities for **DPL** increased by $23.2 million from $211.8million to $235.0 million for the nine months ended September 30, 2007.This same adjustment also increased cash used for capital expenditures to$273.3 million from $250.1 million for the nine months ended September 30,2007.  Cash provided by operating activities for **DP&L** increased by $23.2 million from$239.6 million to $262.8 million for the nine months ended September 30,2007.  This same adjustment alsoincreased cash used for capital expenditures to $271.0 million from $247.8million for the nine months ended September 30, 2007.  The reclassifications did not impactoperating income or net income, working capital, any earnings per sharemeasures, or net change in cash and cash equivalents as previously reported.

 

**DepreciationExpense and Study Update**

 

Depreciationexpense is calculated using the straight-line method which depreciates the costof property over its estimated useful life. For **DPL’s** and **DP&L’s**generation, transmission, and distribution assets, straight-line depreciationis applied on an average annual composite basis using group rates.  In July 2007, **DPL**and**DP&L** completed a depreciation ratestudy for non-regulated generation property based on property, plant, andequipment balances as of December 31, 2005, with adjustments forsubsequent scrubber additions.  Theresults of the depreciation study concluded that **DPL’s**and **DP&L’s** depreciation rates should bereduced due to asset lives being extended beyond previously estimatedlives.  **DPL**and **DP&L** adjusted the depreciationrates for non-regulated generation property, effective August 1, 2007,reducing depreciation expense.  For thethree months ended September 30, 2007, the reduction in depreciationexpense increased income from continuing operations by $3.8 million, increasednet income by approximately $2.4 million, and increased earnings per share(EPS) by approximately $0.02 per share.

 

**Short-termInvestments**

 

Short-term investments comprise corporate bonds that are classified asheld-to-maturity.  Held-to-maturitysecurities are those securities that we have the intent and ability to holduntil maturity in accordance with the provisions of Statement of FinancialAccounting Standards No. 115 (SFAS 115), “Accounting for Certain Investments inDebt and Equity Securities.”  Theheld-to-maturity securities are carried at amortized cost which is determinedbased on specific identification.

 

At September 30, 2008, the corporate bonds had an amortized cost of$9.9 million, a fair value of $9.2 million, and are scheduled to mature byFebruary 2009.  The unrecognized lossesrelating to the bonds amounted to $0.7 million through September 30, 2008.  The decline in fair value below the amortizedcost is considered to be temporary.  Whenthe bonds mature, we expect to receive the full $10 million face value of thebonds and their accumulated interest.

 

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**Deferral of Storm Costs**

 

On September 14,2008, the Midwest region was severely affected by hurricane-force winds whichresulted in significant property damage and disruptions to the supply ofelectric energy to retail customers. Through September 30, 2008, we deferred approximately $7.4 millionof the costs associated with the storm restoration.  We plan to file a request for an accountingorder seeking approval to defer these costs.

 

**Taxes Collected from Customersand Remitted to Governmental Authorities**

 

**DP&L**collects certain excise taxes levied by state or local governments from itscustomers.  **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 nine months ended September 30, 2008 and 2007,respectively, as follows:

** **
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| State/local  excise taxes   | ** ** | **$**                            | **14.0**   |                            | $          | 14.6 | ** ** | **$** | **40.1** |   | $ | 41.0 |   |
|                             |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**RecentlyAdopted Accounting Standards**

 

**Accounting for Fair ValueMeasurements**

 

We adopted Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (SFAS157), on January 1, 2008.  SFAS 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value.  SFAS 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In support of this principle, SFAS 157establishes a fair value hierarchy that prioritizes the information used todevelop those standards.  The fair valuehierarchy gives the highest priority to quoted prices in active markets and thelowest priority to unobservable data, for example, the reporting entity’s owndata.  Under SFAS 157, fair valuemeasurements would be separately disclosed by level within the fair valuehierarchy.  SFAS 157 does not expand theuse of fair value in any new circumstances. SFAS 157 did not have a material effect on our overall results ofoperations, financial position, or cash flows. See Note 8 of Notes to Condensed Consolidated Financial Statements.

 

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

 

We adopted Staff PositionFIN 39-1, “Amendment of FASB Interpretation 39” (FSP FIN 39-1), on January 1,2008.  FSP FIN 39-1 amends paragraph 10of FIN 39 to “permit a reporting entity to offset fair value amounts recognizedfor the right to reclaim cash collateral (a receivable) or the obligation toreturn cash collateral (a payable) against fair value amounts recognized forderivative instruments executed with the same counterparty under the samemaster netting arrangement that have been offset in accordance with thatparagraph.”  We do not have receivablesor payables in relation to cash collateral. All collateral either posted or received is in the form of a letter ofcredit or parental guarantee.  FSP FIN39-1 did not have an effect on our overall results of operations, financialposition, or cash flows.

 

**Accounting for Income TaxBenefits of Dividends on Share-Based Payment Awards**

 

We adopted EITF Issue No. 06-11,“Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”(EITF 06-11), on January 1, 2008. The FASB ratified the EITF consensus that a realized income tax benefitfrom dividends that are charged to retained earnings, and are paid to employeesfor equity classified non-vested equity shares, should be recognized as anincrease in additional paid-in capital and should be included in the pool ofexcess tax benefits available to absorb potential future tax deficiencies onshare-based payment awards.  EITF 06-11did not have a material effect on our overall results of operations, financialposition, or cash flows.

 

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**RecentlyIssued Accounting Standards**

 

**Business Combinations**

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141R, “BusinessCombinations” (SFAS 141R), effective for fiscal years beginning after December 15,2008.  Under SFAS 141R, an acquiringentity in a business combination is required to recognize all assets acquiredand liabilities 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 inConsolidated Financial Statements**

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 160, “Non-controllingInterests in Consolidated Financial Statements – an amendment of ARB No. 51”(SFAS 160), effective for fiscal years beginning after December 15,2008.  SFAS 160 requires all entities toreport non-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 DerivativeInstruments and Hedging Activities**

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities-an amendment to FASBStatement No. 133” (SFAS 161), effective for fiscal years beginning after November 15,2008.  SFAS 161 requires an entity toprovide enhanced disclosures about: (a) how and why an entity usesderivative instruments; (b) how derivative instruments and related hedgeditems are accounted 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 the impact ofadopting SFAS 161 and do not expect these new rules to have a materialimpact on our overall results of operations, financial position, or cash flows.

 

**GAAP Hierarchy**

 

In May 2008, theFASB issued Statement of Financial Accounting Standards No. 162, “TheHierarchy of Generally Accepted Accounting Principles” (SFAS 162), effectivefor fiscal years beginning after December 15, 2008.  SFAS 162 identifies a consistent frameworkfor 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 andEarnings per Share (EPS)**

 

In June 2008, theFASB issued Staff Position EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (FSPEITF 03-6-1), effective for fiscal years beginning after December 15,2008.  FSP EITF 03-6-1 clarifies thatunvested share-based awards that contain non-forfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andmust be included in the computation of EPS pursuant to the two-classmethod.  We have evaluated the impact ofadopting FSP EITF 03-6-1 and do not expect these new rules to have amaterial impact on our overall results of operations, financial position, orcash flows.

 

**Meaning of “Indexed to a Company’sOwn Stock”**

 

In June 2008, theFASB approved the consensus of the Emerging Issues Task Force (EITF) on “DeterminingWhether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”(EITF 07-5), effective for fiscal years beginning after December 15,2008.  EITF 07-5 gives guidance on when afinancial instrument is considered to be indexed to a company’s own stock tomeet the criteria for paragraph 11(a) of FASB Statement No. 133, “Accountingfor Derivative and Hedging Activities” and the criteria in EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock.”  We have evaluatedthe impact of adopting EITF 07-5 and do not expect these new rules to havea material impact on our overall results of operations, financial position, orcash flows.

 

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**2.****              SupplementalFinancial Information**

 

**DPL Inc.**

 
| ** **                                          | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                |       |                   |        |                  |       |
| **Accounts  receivable, net:**                      |       |                   |        |                  |       |
| Retail customers                                    | ** ** | **$**                  | **75.6**    | ** **            | $          | 71.7 |   |
| Unbilled revenue                                    | ** ** | **65.6**               | ** **  | 68.4                  |       |
| Partners in  commonly-owned plants                  | ** ** | **42.6**               | ** **  | 56.7                  |       |
| PJM including  financial transmission rights        | ** ** | **24.1**               | ** **  | 23.2                  |       |
| Coal sales                                          | ** ** | **16.5**               | ** **  | 1.9                   |       |
| Wholesale customers                                 | ** ** | **8.5**                | ** **  | 12.7                  |       |
| Refundable  franchise tax                           | ** ** | **—**             | ** **  | 5.2                   |       |
| Other                                               | ** ** | **4.0**                | ** **  | 2.9                   |       |
| Provision for  uncollectible accounts               | ** ** | **(1.6**               | **)**       | (1.5                  | )          |
| **Total  accounts receivable, net**                 | ** ** | **$**                  | **235.3**   | ** **            | $          | 241.2 |   |
|                                                |       |                   | ** **  |                  |       |
| **Inventories,  at average cost:**                  |       |                   | ** **  |                  |       |
| Fuel and  emission allowances                       | ** ** | **$**                  | **73.4**    | ** **            | $          | 70.5 |   |
| Plant materials  and supplies                       | ** ** | **36.0**               | ** **  | 34.1                  |       |
| Other                                               | ** ** | **0.2**                | ** **  | 0.4                   |       |
| **Total  inventories, at average cost**             | ** ** | **$**                  | **109.6**   | ** **            | $          | 105.0 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  current assets:**                          |       |                   | ** **  |                  |       |
| Deposits and  other advances                        | ** ** | **$**                  | **7.9**     | ** **            | $          | 1.1 |   |
| Prepayments                                         | ** ** | **5.6**                | ** **  | 5.9                   |       |
| Current deferred  income taxes                      | ** ** | **3.2**                | ** **  | 2.1                   |       |
| Other                                               | ** ** | **4.8**                | ** **  | 2.7                   |       |
| **Total  other current assets**                     | ** ** | **$**                  | **21.5**    | ** **            | $          | 11.8 |   |
|                                                |       |                   | ** **  |                  |       |
| **Property,  plant and equipment:**                 |       |                   | ** **  |                  |       |
| Construction  work in process                       | ** ** | **$**                  | **135.8**   | ** **            | $          | 364.5 |   |
| Property, plant  and equipment                      | ** ** | **5,036.0**            | ** **  | 4,647.1               |       |
| **Total  property, plant and equipment**            | ** ** | **$**                  | **5,171.8** | ** **            | $          | 5,011.6 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  deferred assets:**                         |       |                   | ** **  |                  |       |
| Prepaid pension                                     | ** ** | **$**                  | **13.4**    | ** **            | $          | 9.9 |   |
| Master Trust  assets                                | ** ** | **13.1**               | ** **  | 9.6                   |       |
| Unamortized debt  expense                           | ** ** | **8.5**                | ** **  | 10.9                  |       |
| Investments                                         | ** ** | **8.2**                | ** **  | 8.8                   |       |
| Commercial activities  tax benefit                  | ** ** | **6.8**                | ** **  | 6.8                   |       |
| Other                                               | ** ** | **0.3**                | ** **  | 0.5                   |       |
| **Total  other deferred assets**                    | ** ** | **$**                  | **50.3**    | ** **            | $          | 46.5 |   |
|                                                |       |                   | ** **  |                  |       |
| **Accounts  payable:**                              |       |                   | ** **  |                  |       |
| Trade payables                                      | ** ** | **$**                  | **83.8**    | ** **            | $          | 65.6 |   |
| Fuel accruals                                       | ** ** | **58.8**               | ** **  | 34.4                  |       |
| Other                                               | ** ** | **42.6**               | ** **  | 63.1                  |       |
| **Total  accounts payable**                         | ** ** | **$**                  | **185.2**   | ** **            | $          | 163.1 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  current liabilities:**                     |       |                   | ** **  |                  |       |
| Customer  security deposits                         | ** ** | **$**                  | **19.8**    | ** **            | $          | 19.2 |   |
| Low income  service plan                            | ** ** | **3.2**                | ** **  | 2.2                   |       |
| Pension and  retiree benefits payable               | ** ** | **0.8**                | ** **  | 0.8                   |       |
| Other                                               | ** ** | **4.1**                | ** **  | 5.0                   |       |
| **Total  other current liabilities**                | ** ** | **$**                  | **27.9**    | ** **            | $          | 27.2 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  deferred credits:**                        |       |                   | ** **  |                  |       |
| Asset retirement  obligations - regulated property  | ** ** | **$**                  | **95.3**    | ** **            | $          | 91.5 |   |
| Pension and  retiree benefits                       | ** ** | **37.9**               | ** **  | 40.6                  |       |
| SECA net revenue  subject to refund                 | ** ** | **20.1**               | ** **  | 20.1                  |       |
| Deferred  compensation obligations                  | ** ** | **15.1**               | ** **  | 20.4                  |       |
| Asset retirement  obligations - generation property | ** ** | **12.7**               | ** **  | 12.5                  |       |
| Employee benefit  reserves                          | ** ** | **4.2**                | ** **  | 4.3                   |       |
| Litigation and  claims reserve                      | ** ** | **3.9**                | ** **  | 4.3                   |       |
| Customer  advances in aid of construction           | ** ** | **3.4**                | ** **  | 3.5                   |       |
| Taxes payable                                       | ** ** | **—**             | ** **  | 65.3                  |       |
| Other                                               | ** ** | **4.1**                | ** **  | 3.8                   |       |
| **Total  other deferred credits**                   | ** ** | **$**                  | **196.7**   | ** **            | $          | 266.3 |   |

 

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**2.****                                      SupplementalFinancial Information (continued)**

 

**DP&L**

 
| ** **                                          | ** ** | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| **$ in millions**                         | ** ** | **2008**               | ** **  | **2007**              | ** ** |
|                                                |       |                   |        |                  |       |
| **Accounts  receivable, net:**                      |       |                   |        |                  |       |
| Retail customers                                    | ** ** | **$**                  | **75.6**    | ** **            | $          | 71.8 |   |
| Unbilled revenue                                    | ** ** | **58.3**               | ** **  | 60.5                  |       |
| Partners in  commonly-owned plants                  | ** ** | **42.6**               | ** **  | 56.7                  |       |
| PJM including financial  transmission rights        | ** ** | **20.8**               | ** **  | 23.1                  |       |
| Coal sales                                          | ** ** | **16.5**               | ** **  | 1.9                   |       |
| Wholesale  customers                                | ** ** | **1.4**                | ** **  | 3.5                   |       |
| Refundable  franchise tax                           | ** ** | **—**             | ** **  | 3.1                   |       |
| Other                                               | ** ** | **2.0**                | ** **  | 2.7                   |       |
| Provision for  uncollectible accounts               | ** ** | **(1.6**               | **)**       | (1.5                  | )          |
| **Total  accounts receivable, net**                 | ** ** | **$**                  | **215.6**   | ** **            | $          | 221.8 |   |
|                                                |       |                   | ** **  |                  |       |
| **Inventories,  at average cost:**                  |       |                   | ** **  |                  |       |
| Fuel and  emission allowances                       | ** ** | **$**                  | **73.4**    | ** **            | $          | 70.5 |   |
| Plant materials  and supplies                       | ** ** | **34.6**               | ** **  | 32.7                  |       |
| Other                                               | ** ** | **0.2**                | ** **  | 0.4                   |       |
| **Total  inventories, at average cost**             | ** ** | **$**                  | **108.2**   | ** **            | $          | 103.6 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  current assets:**                          |       |                   | ** **  |                  |       |
| Deposits and  other advances                        | ** ** | **$**                  | **7.9**     | ** **            | $          | 0.9 |   |
| Prepayments                                         | ** ** | **7.8**                | ** **  | 7.5                   |       |
| Current deferred  income taxes                      | ** ** | **3.2**                | ** **  | 2.1                   |       |
| Other                                               | ** ** | **4.9**                | ** **  | 2.9                   |       |
| **Total  other current assets**                     | ** ** | **$**                  | **23.8**    | ** **            | $          | 13.4 |   |
|                                                |       |                   | ** **  |                  |       |
| **Property,  plant and equipment:**                 |       |                   | ** **  |                  |       |
| Construction work  in process                       | ** ** | **$**                  | **135.4**   | ** **            | $          | 363.8 |   |
| Property, plant  and equipment                      | ** ** | **4,781.3**            | ** **  | 4,393.2               |       |
| **Total  property, plant and equipment**            | ** ** | **$**                  | **4,916.7** | ** **            | $          | 4,757.0 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  deferred assets:**                         |       |                   | ** **  |                  |       |
| Master Trust  assets                                | ** ** | **$**                  | **42.6**    | ** **            | $          | 56.0 |   |
| Prepaid pension                                     | ** ** | **13.3**               | ** **  | 9.9                   |       |
| Unamortized debt  expense                           | ** ** | **7.6**                | ** **  | 9.6                   |       |
| Other                                               | ** ** | **1.0**                | ** **  | 1.1                   |       |
| **Total  other deferred assets**                    | ** ** | **$**                  | **64.5**    | ** **            | $          | 76.6 |   |
|                                                |       |                   | ** **  |                  |       |
| **Accounts  payable:**                              |       |                   | ** **  |                  |       |
| Trade payables                                      | ** ** | **$**                  | **83.8**    | ** **            | $          | 64.8 |   |
| Fuel accruals                                       | ** ** | **57.0**               | ** **  | 34.1                  |       |
| Other                                               | ** ** | **42.5**               | ** **  | 63.0                  |       |
| **Total  accounts payable**                         | ** ** | **$**                  | **183.3**   | ** **            | $          | 161.9 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  current liabilities:**                     |       |                   | ** **  |                  |       |
| Customer  security deposits                         | ** ** | **$**                  | **19.8**    | ** **            | $          | 19.2 |   |
| Low income  service plan                            | ** ** | **3.2**                | ** **  | 2.2                   |       |
| Pension and  retiree benefits payable               | ** ** | **0.8**                | ** **  | 0.8                   |       |
| Other                                               | ** ** | **4.0**                | ** **  | 4.7                   |       |
| **Total  other current liabilities**                | ** ** | **$**                  | **27.8**    | ** **            | $          | 26.9 |   |
|                                                |       |                   | ** **  |                  |       |
| **Other  deferred credits:**                        |       |                   | ** **  |                  |       |
| Asset retirement  obligations - regulated property  | ** ** | **$**                  | **95.3**    | ** **            | $          | 91.5 |   |
| Pension and  retiree benefits                       | ** ** | **37.8**               | ** **  | 40.5                  |       |
| SECA net revenue  subject to refund                 | ** ** | **20.1**               | ** **  | 20.1                  |       |
| Deferred  compensation obligations                  | ** ** | **15.1**               | ** **  | 20.4                  |       |
| Asset retirement  obligations - generation property | ** ** | **12.7**               | ** **  | 12.5                  |       |
| Litigation and  claims reserve                      | ** ** | **3.9**                | ** **  | 4.3                   |       |
| Employee benefit  reserves                          | ** ** | **4.2**                | ** **  | 4.3                   |       |
| Customer  advances in aid of construction           | ** ** | **3.4**                | ** **  | 3.5                   |       |
| Taxes payable                                       | ** ** | **—**             | ** **  | 65.3                  |       |
| Other                                               | ** ** | **4.1**                | ** **  | 3.8                   |       |
| **Total  other deferred credits**                   | ** ** | **$**                  | **196.6**   | ** **            | $          | 266.2 |   |

 

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**2.****              SupplementalFinancial Information (continued)**

 

**DPL Inc.**

 
| ** **                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**          | ** ** |
| **$ in millions**          | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Cash  flows - other:**             |       |                            | ** ** |   |   |
| Deposits and  other advances         | ** ** | **$**                           | **(3.7**   | **)** | $ | 16.2 |   |
| Deferred  regulatory and other costs | ** ** | ** **                      | **(10.5**  | **)** |   | 2.2 |   |
| Other                                | ** ** | **5.7**                         | ** ** | 1.4 |   |
| **Total  cash flows - other**        | ** ** | **$**                           | **(8.5**   | **)** | $ | 19.8 |   |

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Comprehensive  income:**                                                      |       |                             | ** ** |                            | ** ** |   | ** ** |   |   |
| Net income                                                                      | ** ** | **$**                            | **48.0**   | ** **                      | $          | 60.7 | ** ** | **$** | **172.9** | ** ** | $ | 175.5 |   |
| Net change in  unrealized gains (losses) on financial instruments               |       | **(0.2**                         | **)**      | 0.2                             | ** ** | **(0.6** | **)** | (1.3 | ) |
| Net change in  deferred gains (losses) on cash flow hedges                      | ** ** | **2.5**                          | ** ** | (1.5                            | **)**      | **(2.2** | **)** | (5.9 | ) |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       | **0.5**                          | ** ** | 0.5                             | ** ** | **1.5** | ** ** | 1.6 |   |
| Deferred income  taxes related to unrealized gains and (losses)                 | ** ** | **(1.1**                         | **)**      | 0.3                             | ** ** | **0.3** | ** ** | 2.2 |   |
| **Comprehensive  income**                                                       | ** ** | **$**                            | **49.7**   | ** **                      | $          | 60.2 | ** ** | **$** | **171.9** | ** ** | $ | 172.1 |   |

 

**DP&L**

 
| ** **                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**          | ** ** |
| **$ in millions**          | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                 |       |                            |       |   |   |
| **Cash  flows - other:**             |       |                            |       |   |   |
| Deposits and  other advances         | ** ** | **$**                           | **(3.9**   | ) | $ | 15.6 |   |
| Deferred  regulatory and other costs | ** ** | **(10.5**                       | )          | 2.2 |   |
| Other deferred  credits              | ** ** | **(3.4**                        | )          | 0.8 |   |
| Other                                | ** ** | **(6.0**                        | )          | (2.6 | ) |
| **Total  cash flows - other**        | ** ** | **$**                           | **(23.8**  | ) | $ | 16.0 |   |

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Comprehensive  income:**                                                      |       |                             | ** ** |                            |       |   | ** ** |   |   |
| Net income                                                                      | ** ** | **$**                            | **54.8**   | ** **                      | $          | 70.6 |   | **$** | **207.1** | ** ** | $ | 199.5 |   |
| Net change in  unrealized gains (losses) on financial instruments               |       | **(2.2**                         | **)**      | (5.0                            | )          | **(12.5** | **)** | (5.4 | ) |
| Net change in  deferred gains (losses) on cash flow hedges                      | ** ** | **2.5**                          | ** ** | (1.5                            | )          | **(2.2** | **)** | (5.9 | ) |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       | **0.5**                          | ** ** | 0.6                             |       | **1.5** | ** ** | 1.7 |   |
| Deferred income  taxes related to unrealized gains and (losses)                 | ** ** | **(0.4**                         | **)**      | 2.2                             |       | **5.1** | ** ** | 4.3 |   |
| **Comprehensive  income**                                                       | ** ** | **$**                            | **55.2**   | ** **                      | $          | 66.9 |   | **$** | **199.0** | ** ** | $ | 194.2 |   |

 

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**3.****              DiscontinuedOperations**

 

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, MVE entered into alternative closingarrangements with AlpInvest/Lexington 2005, LLC for funds where legal title tosaid funds could not be transferred until a later time.  Pursuant to these arrangements, MVEtransferred the economic aspects of the remaining private equity funds,consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005,LLC without a change in ownership of the interests.  The ownership interest in these funds wastransferred in 2006 and 2007, at which time **DPL**recognized previously deferred gains. During the three months ended March 31, 2007, the remaining $7.9million ($4.9 million after tax) of deferred gains (net of associated expenses)relating to this transaction were recorded in discontinued operations.

 

As a result of the May 21,2007 settlement of the litigation with three former executives (see Note 11 ofNotes to Condensed Consolidated Financial Statements), the three formerexecutives relinquished all of their rights to certain deferred compensation,restricted stock units, MVE incentives, stock options, and reimbursement oflegal fees.  The reversal of accrualsrelated to the performance of the financial asset portfolio was recorded indiscontinued operations.  Additionally, aportion of the $25 million settlement expense was allocated to discontinuedoperations.  These transactions resultedin a gain of $8.1 million, net of associated expenses ($5.1 million after tax),on the settlement of litigation being recorded in discontinued operationsduring the three months ended June 30, 2007.

 

There were nodiscontinued operations recorded during the three months and nine months ended September 30,2008.

 

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**4.****              Long-term Debt**

 

**DPL Inc.**

 
| ** **                  | ** **                                                  | **At**                 | ** **  | **At**                | ** ** |
|-----------------------------|-------------------------------------------------------------|------------------------|-------------|-----------------------|------------|
| ** **                  | ** **                                                  | **September 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 -                  | Obligation for capital lease                                |                   | **0.7**     | ** **            | 1.3        |   |
| Unamortized debt  discount  | ** **                                                  | **(1.2**               | **)**       | (1.6                  | )          |
| Total                       | ** **                                                  | **$**                  | **1,276.3** |                  | $          | 1,541.5 |   |

 

----

*(a)  Weighted average interest rate.*

 

**DP&L**

 
| ** **                  | ** **                                                  | **At**                 | ** ** | **At**                | ** ** |
|-----------------------------|-------------------------------------------------------------|------------------------|------------|-----------------------|------------|
| ** **                  | ** **                                                  | **September 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 -                  | Obligation for capital lease                                |                   | **0.7**    | ** **            | 1.3        |   |
| Unamortized debt  discount  | ** **                                                  | **(0.9**               | **)**      | (1.1                  | )          |
| Total                       | ** **                                                  | **$**                  | **784.2**  |                  | $          | 874.6 |   |

 

----

| *(a)*    | *Weighted average interest rate.*                                                 |
|----------|-----------------------------------------------------------------------------------|
| * * | * *                                                                          |
| * * | **Note:**  The tables above do not include the current portion of long-term debt. |

 

At September 30, 2008, **DPL’s** scheduled maturities of long-termdebt, including a capital lease obligation, over the next five years are $175.7million through September 30, 2009; $0.7 million from October 1,2009 through September 30, 2010; and $297.4 million from October 1,2010 through September 30, 2011. Thereafter, there are no scheduled debt payments through September 30,2013.

 

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At September 30, 2008, **DP&L’s** scheduled maturities oflong-term debt, including a capital lease obligation, over the next five yearsare $0.7 million through September 30, 2009 and $0.7 million from October 1,2009 through September 30, 2010. Thereafter, there are no scheduled debt payments through September 30,2013.  Substantially all property of **DP&L** is subject to the mortgage liensecuring the first mortgage bonds.

 

At September 30, 2008, the $175 million8.00% Senior Notes due March 31, 2009 are reflected within the currentportion of long-term debt in **DPL’s** CondensedConsolidated Balance Sheet.

 

OnMarch 1, 2007, pursuant to our strategy of reducing long-term debt, **DPL** redeemed the $225 million 8.25% Senior Notes when theybecame due.  On May 15, 2008, **DPL** redeemed the $100 million 6.25% Senior Notes when theybecame due.

 

Duringthe 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 of qualified tax-exempt financingfrom the ODOD’s 2005 volume cap carryforward. The financing is to be used to partially fund ongoing flue gasdesulfurization (FGD) capital projects. The PUCO approved **DP&L’s**application for this additional financing on July 26, 2006.

 

OnSeptember 13, 2006, the Ohio Air Quality Development Authority (OAQDA)issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series Adue September 1, 2036.  In turn, **DP&L** borrowed these funds from the OAQDA.  The payment of principal and interest on thebonds, when due, is insured by an insurance policy issued by Financial GuarantyInsurance Company.  **DP&L**used the proceeds from these borrowings to assist in financing its portion ofthe costs of acquiring, constructing, and installing certain solid wastedisposal and air quality facilities at Miami Fort, Killen, and Stuartgenerating stations.

 

OnNovember 15, 2007, the OAQDA issued $90 million 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 0.23% and will beheld in trust while we continue to evaluate market conditions and exploresuitable long-term financing alternatives. Accordingly, at September 30, 2008, the $90 million variable rateOAQDA Revenue bonds are not treated as being outstanding in the CondensedConsolidated Balance Sheets for both **DPL** and **DP&L**.

 

OnNovember 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.  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 thecounterparties to seek additional surety under certain conditions.  As of September 30, 2008, **DP&L** had no outstanding letters of credit against thefacility.  As of September 30, 2008,****the outstanding borrowings under this credit facilityamounted to $90 million.

 

During the second quarterended June 30, 2007, **DPL** provided ashort-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.****              Income Taxes**

 

OnJune 27, 2008, we entered into a $42.0 million settlement agreement withthe Ohio Department of Taxation (ODT) resolving all outstanding audit issuesand appeals, including uncertain tax positions for tax years 1998 through 2006.  The $42.0 million payment was made to the ODTin July 2008.  Due to thissettlement agreement, the balance of our unrecognized state tax liabilitiesrecorded at March 31, 2008, in the amount of $56.3 million, was reversedresulting in an income tax benefit of $8.5 million, net of federal tax impact,being recorded during the three months ended June 30, 2008.

 

**DPL’s** effective income tax rate for the ninemonths ended September 30, 2008 was 33.2% as compared to 38.1% for thenine months ended September 30, 2007.

 

**DP&L’s** effective income tax rate for the ninemonths ended September 30, 2008 was 33.0% as compared to 37.5% for thenine months ended September 30, 2007.

 

Thedecreases in the effective tax rates for **DPL**and **DP&L** was primarily theresult of the $8.5 million income tax benefit discussed above.  This income tax benefit had no impact on theeffective income tax rates for the three months ended September 30, 2008and 2007.

 

Wecurrently have no uncertain tax positions but will continue to examine taxpositions taken in accordance with FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes.”

 

Werecognize interest and penalties related to unrecognized tax positions inincome taxes.  As of September 30,2008, we do not have any interest accrued related to uncertain tax positions.

 

**6.****              Pension andPostretirement Benefits**

 

We sponsor a definedbenefit plan for substantially all employees. For collective bargaining employees, the defined benefits are based on aspecific dollar amount per year of service. For all other employees, the defined benefit plan is based primarily oncompensation and years of service. We fund pension plan benefits as accrued inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 (ERISA).  Inaddition, we have a Supplemental Executive Retirement Plan (SERP) for certainactive and retired key executives.  We****also have unfunded liabilities related to retirementbenefits for certain active, terminated, and retired key executives.  These liabilities totaled approximately $1.1million at September 30, 2008 and $0.9 million at December 31, 2007.

 

Qualified employees whoretired prior to 1987 and their dependents are eligible for health care andlife insurance benefits, while qualified employees who retired after 1987 areeligible for life insurance benefits.  Wehave funded the union-eligible health benefit using a Voluntary EmployeeBeneficiary Association Trust.

 

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Thenet periodic benefit cost of the pension and postretirement benefit plans forthe three months ended September 30, 2008 and 2007 was:

 

**Net periodicbenefit cost**

 
| ** **                     | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|--------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**    | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                   | ** ** | **$**       | **0.8**    |               | $          | 0.2 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                  | ** ** | **4.1**     |       | 4.0                | ** ** | **0.4** |   | 0.4 |   |
| Expected return  on assets (a) | ** ** | **(6.0**    | **)**      | (5.5               | )          | **(0.1** | **)** | (0.1 | ) |
|                           |       |        |       |               |       |   |   |   |   |
| Amortization of  unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain)  loss         | ** ** | **0.7**     |       | 0.8                | ** ** | **(0.2** | **)** | (0.2 | ) |
| Prior service  cost            | ** ** | **0.6**     |       | 0.6                | ** ** | **—** |   | — |   |
| Transition  obligation         | ** ** | **—**  |       | —             | ** ** | **—** |   | — |   |
| Net periodic  benefit cost     | ** ** | **$**       | **0.2**    |               | $          | 0.1 | ** ** | **$** | **0.1** |   | $ | 0.1 |   |

 

----

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

 

Thenet periodic benefit cost of the pension and postretirement benefit plans forthe nine months ended September 30, 2008 and 2007 was:

 

**Net periodicbenefit cost**

 
| ** **                     | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|--------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**    | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                   | ** ** | **$**       | **2.4**    |               | $          | 2.4 | ** ** | **$** | **—** |   | $ | — |   |
| Interest cost                  | ** ** | **12.3**    |       | 12.2               | ** ** | **1.2** |   | 1.1 |   |
| Expected return  on assets (a) | ** ** | **(18.0**   | **)**      | (16.4              | )          | **(0.3** | **)** | (0.3 | ) |
|                           |       |        |       |               |       |   |   |   |   |
| Amortization of  unrecognized: |       |        |       |               |       |   |   |   |   |
| Actuarial (gain)  loss         | ** ** | **2.1**     |       | 2.6                | ** ** | **(0.6** | **)** | (0.7 | ) |
| Prior service  cost            | ** ** | **1.8**     |       | 1.8                | ** ** | **—** |   | — |   |
| Transition  obligation         | ** ** | **—**  |       | —             | ** ** | **—** |   | 0.1 |   |
| Net periodic  benefit cost     | ** ** | **$**       | **0.6**    |               | $          | 2.6 | ** ** | **$** | **0.3** |   | $ | 0.2 |   |

 

----

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

 

Thefollowing estimated benefit payments, which reflect future service, areexpected to be paid as follows:

 

**EstimatedFuture Benefit Payments:**

 
| **$ in millions** | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------|------------|-------------|------------|--------------------|------------|
| 2008                        |       | $           | 4.9        |               | $          | 0.7 |   |
| 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-BasedCompensation**

 

The following tablesummarizes share-based compensation expense:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                                             | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock options                                                           | ** ** | **$**                            | **—** |                            | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Restricted stock  units (RSUs)                                          | ** ** | **—**                       |       | (0.2                            | )          | **(0.1** | **)** | — |   |
| Performance  shares                                                     | ** ** | **0.4**                          |       | 0.5                             | ** ** | **1.0** |   | 1.3 |   |
| Restricted  shares                                                      | ** ** | **0.2**                          |       | 0.1                             | ** ** | **0.4** |   | 0.2 |   |
| Non-employee  directors’ RSUs                                      | ** ** | **0.1**                          |       | 0.1                             | ** ** | **0.3** |   | 0.2 |   |
| Management  performance shares                                          | ** ** | **0.1**                          |       | —                          | ** ** | **0.2** |   | — |   |
| Share-based  compensation included in operation and maintenance expense | ** ** | **$**                            | **0.8**    |                            | $          | 0.5 | ** ** | **$** | **1.8** |   | $ | 1.7 |   |
| Income tax  benefit                                                     | ** ** | **(0.3**                         | **)**      | (0.2                            | )          | **(0.7** | **)** | (0.7 | ) |
| Total  share-based compensation, net of tax                             | ** ** | **$**                            | **0.5**    |                            | $          | 0.3 | ** ** | **$** | **1.1** |   | $ | 1.0 |   |

 

Share-based awards issuedin **DPL’s**common stock will be distributedfrom treasury stock.  **DPL** believes it has sufficient treasury stock to satisfy alloutstanding share-based awards.

 

Summarized share-basedcompensation activity for the nine months ended September 30, 2008 and2007 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**                  |       | 1,334,339 | ** ** | **142,108** |   | 154,768 |   |
| Granted                           | ** ** | **—**  |       | —     | ** ** | **—**                  |       | — | ** ** | **93,298** |   | 78,559 |   |
| Dividends                         | ** ** | **—**  |       | —     | ** ** | **—**                  |       | 11,656 | ** ** | **—** |   | — |   |
| Exercised                         | ** ** | **(90,400** | **)**      | (520,000   | )          | **(11,253**                 | **)**      | (20,097 | ) | **—** |   | (22,462 | ) |
| Expired                           | ** ** | **—**  |       | —     | ** ** | **—**                  |       | — | ** ** | **(37,426** | **)** | (21,583 | ) |
| Forfeited                         | ** ** | **—**  |       | (3,620,000 | )          | **(1,603**                  | **)**      | (1,302,922 | ) | **(7,253** | **)** | (34,243 | ) |
| Outstanding at  period end        | ** ** | **856,100** |       | 951,500    | ** ** | **10,120**                  |       | 22,976 | ** ** | **190,727** |   | 155,039 |   |
| Exercisable at  period end        | ** ** | **856,100** |       | 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                           | ** ** | **39,347**                 |       | 23,200                 | ** ** | **15,752**                            |       | 14,920 | ** ** | **39,144** |   | — |   |
| Dividends                         | ** ** | **—**                 |       | —                 | ** ** | **630**                               |       | 231 | ** ** | **—** |   | — |   |
| Exercised                         | ** ** | **(1,000**                 | )          | —                 | ** ** | **(13,721**                           | )          | (142 | **)** | **—** |   | — |   |
| Expired                           | ** ** | **—**                 |       | —                 | ** ** | **—**                            |       | — | ** ** | **—** |   | — |   |
| Forfeited                         | ** ** | **—**                 |       | —                 | ** ** | **(1,149**                            | )          | (1,553 | **)** | **—** |   | — |   |
| Outstanding at  period end        | ** ** | **80,547**                 |       | 42,200                 | ** ** | **15,085**                            |       | 13,456 | ** ** | **39,144** |   | — |   |
| Exercisable at  period end        | ** ** | **—**                 |       | —                 | ** ** | **—**                            |       | — | ** ** | **—** |   | — |   |

 

On May 28, 2008, theBoard of Directors granted compensation awards for select managementemployees.  A total of 39,144 managementperformance shares was 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.

 

On July 23, 2008,the Board of Directors granted compensation awards to a select group ofmanagement employees.  A total of 10,347restricted shares was granted.  Themanagement restricted stock awards have a three year requisite service periodfrom July 23, 2008 to July 23, 2011, carry full voting privileges andreceive dividends as declared and paid on all **DPL**common stock.  The management restrictedstock can only be awarded in **DPL** commonshares.

 

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**8.****              FairValue Measurements**

 

Effective January 1,2008, we adopted Statement of Financial Accounting Standards No.157, “FairValue Measurements” (SFAS 157), which provides a framework for measuring fairvalue under GAAP.  SFAS 157 requires thatthe impact of this change in accounting for fair valued assets and liabilitiesbe recorded as an adjustment to beginning retained earnings in the period ofadoption.  We did not have anyadjustments to beginning retained earnings at adoption.

 

FSP SFAS 157-2 allows fora deferral from the SFAS 157 disclosures for non-financial assets orliabilities until fiscal years beginning after November 15, 2008.  We did not elect this deferral and havedisclosed an additional layer to an asset retirement obligation.

 

SFAS 157 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair value hierarchy that requires an entityto maximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value.  Thestandard describes three levels of inputs that may be used to measure fairvalue:

 

**Level 1**

 

Level 1 inputs aredefined as quoted prices in active markets for identical assets orliabilities.  Our Level 1 assets andliabilities include equity securities held in various deferred compensationtrusts and futures contracts that are traded in an active exchange market.

 

**Level 2**

 

Level 2 inputs areobservable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities, quoted prices in markets that are not active, or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities includeopen-ended investment funds and forward contracts with quoted prices from over-the-counter(OTC) markets or direct broker quotes that are traded less frequently thanexchange-traded instruments.

 

**Level3**

 

Level 3 inputs areunobservable inputs that are supported by little or no market activity and thatare significant to the fair value of the assets or liabilities.  Our Level 3 assets and liabilities includeasset retirement obligations that are initially recognized at fair value.

 

Valuations of assets andliabilities reflect the value of the instrument including the values associatedwith counterparty risk and performance risk. With the issuance of SFAS 157, the accounting industry clarified thatthese values must also take into account our own credit standing.

 

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The fair value of assetsand liabilities measured 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** | ** ** | **Based on** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Fair Value at**                                            | ** ** | **Prices in Active** | ** ** | **Other Observable** | ** ** | **Unobservable** | ** ** |
| ** **                  | ** ** | **September 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        |       | $                                                                      | 13.0       |   | $ | 42.4 |   | $ | — |   | $ | 29.4 |   | $ | 13.0 |   | $ | 13.0 |   | $ | — |   | $ | — |   |
| Derivative  Assets          |       | 0.1                                                                    |       | 0.1 |   | — |   | — |   | 0.1 |   | 0.1 |   | — |   | — |   |
| Total                       |       | $                                                                      | 13.1       |   | $ | 42.5 |   | $ | — |   | $ | 29.4 |   | $ | 13.1 |   | $ | 13.1 |   | $ | — |   | $ | — |   |
|                        |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**             |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative  Liabilities     |       | $                                                                      | 2.1        |   | $ | 2.1 |   | $ | — |   | $ | — |   | $ | 2.1 |   | $ | 2.1 |   | $ | — |   | $ | — |   |
| Total                       |       | $                                                                      | 2.1        |   | $ | 2.1 |   | $ | — |   | $ | — |   | $ | 2.1 |   | $ | 2.1 |   | $ | — |   | $ | — |   |

 

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

 

Generally, for financialassets held by the Master Trust and for heating oil futures, fair value isdetermined by reference to quoted market prices and other relevant informationgenerated by market transactions.  Level2 inputs are used to value derivatives such as financial transmission rightswhere the quoted prices are from a relatively inactive market; forward powercontracts which are valued using prices on the New York Mercantile Exchange(NYMEX) for similar contracts on the OTC market; and open-ended funds that arevalued using the end of day Net Asset Value (NAV).

 

The fair value of assetsand liabilities measured on a non-recurring basis 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** | ** ** |
| ** **                                           | ** ** | **September 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 anasset retirement obligation (ARO) is estimated by discounting expected cashoutflows to their present value.  Cashoutflows are based on the approximate future disposal cost as determined bymarket information, historical information, or management judgment.  During the three months ended September 30,2008, **DP&L** added an additional layer tothe asbestos removal ARO in the amount of $0.2 million due to the accelerationof the removal of some asbestos.

 

At September 30,2008, **DPL** had no investments in money marketmutual funds classified as cash and cash equivalents in its CondensedConsolidated Balance Sheet.

 

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**9.****              Earnings per Share**

 

Basic earnings per share(EPS) is based on the weighted-average number of **DPL** common shares outstanding during the year.  Diluted EPS is based on the weighted-averagenumber of **DPL** common and common-equivalent shares outstanding during the year, except in periods where theinclusion of such common-equivalent shares is anti-dilutive.  Excluded from outstanding shares for theseweighted-average computations are shares held by **DP&L’s** Master Trust Plan for deferred compensation andunreleased shares held by **DP&L’s**Employee Stock Ownership Plan (ESOP).

 

The following tablerepresents common-equivalent shares excluded from the calculation of dilutedEPS because they were anti-dilutive. These shares may be dilutive in the future.

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **In millions**      | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                      |       |                             |       |                            |       |   |   |   |   |
| Common equivalent  shares | ** ** | **0.3**                          |       | 0.3                             | ** ** | **0.3** |   | 0.1 |   |

 

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedearnings per share computations for income after discontinued operations:

 
| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                                  | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                               | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**                                                    | **48.0**   | ** ** | **109.9** | ** ** | **$** | **0.44** |   | $ | 60.7 |   | 108.0 |   | $ | 0.56 |   |
|                                              |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**               |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock  units                           | ** ** | ** **                                               |       | **—** |   |   |   |   |   | — |   |   |   |
| Warrants (a)                                      | ** ** | ** **                                               |       | **4.9** |   |   |   |   |   | 7.1 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** **                                               |       | **0.2** |   |   |   |   |   | 0.3 |   |   |   |
|                                              |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                  | ** ** | **$**                                                    | **48.0**   | ** ** | **115.0** | ** ** | **$** | **0.42** |   | $ | 60.7 |   | 115.4 |   | $ | 0.53 |   |

** **
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| **$ in millions except per**  | ** ** | **Net**                                                 | ** ** | ** ** | ** ** | **Per** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per** | ** ** |
| **share amounts**                            | ** ** | **Income**                                              | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**                                                   | **172.9**  | ** ** | **109.6** | ** ** | **$** | **1.58** |   | $ | 175.5 |   | 107.8 |   | $ | 1.63 |   |
|                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**               |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Restricted stock  units                           | ** ** | ** **                                              |       | **—** |   |   |   |   |   | 0.7 |   |   |   |
| Warrants (a)                                      | ** ** | ** **                                              |       | **6.4** |   |   |   |   |   | 8.7 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** **                                              |       | **0.2** |   |   |   |   |   | 0.9 |   |   |   |
|                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                  | ** ** | **$**                                                   | **172.9**  | ** ** | **116.2** | ** ** | **$** | **1.49** |   | $ | 175.5 |   | 118.1 |   | $ | 1.49 |   |

 

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| *(a)* | *On  September 18, 2008, Lehman Brothers Inc. exercised 12 million warrants  under a cashless exercise transaction resulting in the issuance by **DPL** of 2.3 million shares of common stock. See Note 12 of  Notes to Condensed Consolidated Financial Statements.* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**10.****       Commitments andContingencies**

 

**ContractualObligations**

 

Therehave been no material changes, outside the ordinary course of business, to theinformation disclosed in the contractual obligations table in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007 except thoserelating to the following transactions:

 

·                  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 was made to the ODTin July 2008.  This transaction isfurther discussed in Note 5 of Notes to Condensed Consolidated FinancialStatements.

 

·                  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 September 30,2008, test operations of FGD equipment on Stuart station units 1 and 2 werecompleted.  The open contractualobligations relating to the installation of FGD equipment was therefore reducedto $8.8 million at September 30, 2008. It is expected that these open contractual obligations will be satisfiedwithin the next twelve months.

 

**CommercialCommitments**

 

With the exception of thetransactions discussed in the preceding paragraph, there have been no othermaterial changes, outside the ordinary course of business, to our commercialcommitments as disclosed in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2007.

 

**Contingencies**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed consolidated financial statements, as prescribed by GAAP, areadequate 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 September 30, 2008, cannot bereasonably determined.

 

**CoalSupply Agreement**

 

In February 2007, wefiled a lawsuit against a coal supplier seeking damages incurred due to thesupplier’s failure to supply approximately 1.5 million tons of coal to twojointly owned plants under a coal supply agreement, of which approximately 570thousand tons is our share.  The supplierhas denied liability and trial is scheduled for April 2009.  We are unable to determine the ultimateresolution of this matter at this time. In accordance with accounting for gain contingencies, we will not recordan amount for this matter until it is resolved.

 

**EnvironmentalMatters**

 

**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.

 

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**Sierra Club**

 

In September 2004,the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the Clean AirAct (CAA) and the station’s operating permit. On August 7, 2008, a consent decree was filed in the United StatesDistrict Court in full settlement of these CAA claims.  Under the terms ofthe consent decree, **DP&L** andthe other co-owners of the Stuart generating station agreed to (i) certainemission targets related to nitrogen oxides (NOx),sulfur dioxide (SO2) and particulate matter; (ii) makeenergy efficiency and renewable energy commitments that are conditioned onreceiving Public Utilities Commission of Ohio approval for the recovery ofcosts; (iii) forfeit 5,500 sulfur dioxide allowances; and (iv) providefunding to a third party non-profit organization to establish a solar waterheater rebate program.  **DP&L** and the other owners of the station also enteredinto an attorneys’ fee agreement to pay a portion of the Sierra Club’s attorneyand expert witness fees.  The parties tothe lawsuit filed a joint motion on October 22, 2008, seeking an order bythe United States District Court approving the consent decree with funding forthe third party non-profit organization set at $300,000.  On October 23, 2008, the United StatesDistrict Court approved the consent decree. We have determined that the termsof the consent decree will not have a material impact on our overall results ofoperations, financial position, or cash flows.

 

**Noticesof Violation Involving Wholly-Owned Plants**

 

In 2007, the Ohio EPA andthe United States Environmental Protection Agency (USEPA) issued Notices ofViolation (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.  **DP&L** has provided data regarding **DP&L’s**maintenance expenses and operating results to the Ohio EPA and the USEPA and tothe DOJ, which is providing legal support to the USEPA.  Discussions, monitored by Ohio EPA, areon-going between **DP&L** and the DOJ and USEPAregarding a possible resolution of this matter. A settlement of this matter could include a combination of 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.

 

**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.

 

**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.  A petition for a writ of certiorari was filedwith the U.S. Supreme Court on September 17, 2008.  If the petition is not accepted by theSupreme Court, or if the Supreme Court grants certiorari and upholds the D.C.Circuit’s decision, USEPA will have to move forward to set Maximum AvailableControl Technology (MACT) standards for coal- and oil-fired electric generatingunits.  It is likely the USEPA would takeat least three years to gather new data to promulgate updated MACT standardsand another three years for the regulations to become effective.  At this time, **DP&L**is unable to determine the impact of the promulgation of new MACT standards onits****financial position or results ofoperations.

 

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OnJuly 11, 2008, the United States Court of Appeals for the District ofColumbia Circuit issued a decision that vacated the USEPA’s Clean AirInterstate Rule (CAIR) and its associated Federal Implementation Plan.This decision remands these issues back to the USEPA.  The USEPA and a group representing utilitiesfiled a request for a rehearing en banc on September 24, 2008.  The USEPA issued CAIR on March 10, 2005 toregulate certain upwind states with respect to fine particulate matter andozone.  CAIR created interstate tradingprograms for annual NOx emission allowances and made modifications toan existing trading program for SO2 that were to take effect in 2010.  The court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program andthe modifications to the SO2 emission trading program, and created uncertainty regardingfuture NOx and SO2 emission reduction requirements and their timing.  CAIR remains in effect pending a mandate bythe court implementing its decision.  OnOctober 21, 2008, the court requested that the litigation parties submittheir views as to an appropriate court mandate.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emission allowances, including annual NOx emission allowances and SO2 emissionallowances that were the subject of CAIR trading programs.  In subsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decision hasaffected the trading market for excess allowances and impacted **DP&L**’s program for selling additional excessallowances.  Although this impact on thesale of excess allowances has not had, nor do we expect it to have, a materialeffect on our financial position, the overall impact of the court’s decision,and of the actions the USEPA or others will take in response to this decision,on **DPL** and **DP&L**is not fully known at this time and could have an adverse effect on us.

 

**Environmental Regulation andLitigation Related 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 weresubmitted 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 DischargeElimination System (NPDES) Permit, that requires us to implement one of twodiffuser options for the discharge of water from the Stuart station into theOhio River as identified in the thermal discharge study conducted pursuant torequirements contained in a previous permit. The two diffuser optionsidentified by Ohio EPA could cost approximately $33 million based onpreliminary cost estimates, of which our pro-rata ownership share would beapproximately $11.5 million.  On March 6,2008, representatives from **DP&L** metwith Ohio EPA to discuss the issue and reiterate **DP&L’s**position that diffusers were not cost-effective.  We agreed to explore other potentialsolutions and share findings with Ohio EPA. On June 6, 2008, we sent a letter to Ohio EPA stating that we wouldbe willing to restrict public access to the thermal discharge during thewarmest months of the year.  On August 22,2008, we received word from Ohio EPA that this option would be acceptable andwould be incorporated in the NPDES permit.

 

**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.

 

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Similarly, **DP&L** realized a net pre-tax gain in continuing operationsof approximately $35.3 million.  Accruedobligations associated with the former executives’ litigation were recorded by **DP&L**since the obligations were associated with ournon-qualified benefit plans.  **DP&L**had no ownership of **DPL’s**discontinued financial asset portfolio business; therefore, these liabilitieswere reversed and **DP&L’s**netpre-tax gain was recorded within continuing operations.

 

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.

 

**12.  Common Shareholders’ Equity**

 

In February 2000, **DPL** entered into a series of recapitalization transactionswhich included the issuance of 31.6 million warrants for an aggregate purchaseprice of $50 million.  The warrants areexercisable, in whole or in part, for common shares at any time during thetwelve-year period commencing on March 13, 2000.  Each warrant is exercisable for one commonshare, subject to anti-dilution adjustments (e.g., stock split, stock dividend)at an exercise price of $21.00 per common share.

 

During December 2004and January 2005, these warrants were acquired by Lehman Brothers Inc.(Lehman) who, in turn, subsequently transferred 19.6 million of these warrantsto unaffiliated third parties.  On September 18,2008, Lehman exercised the 12 million warrants, that it had retained, under acashless exercise transaction resulting in the issuance by **DPL**of 2.3 million shares of common stock. Such shares were issued from treasury stock.  Lehman no longer holds any **DPL** warrants.

 

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

 

This report includes thecombined filing of DPL Inc.**(DPL)** and TheDayton Power and Light Company **(DP&L).  DP&L**is the principalsubsidiary of **DPL**providing approximately 99% of**DPL’s**total consolidated revenue andapproximately 95% 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.

 

Certainstatements contained in this discussion are “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relateto events or developments that are expected to occur in the future, includingmanagement’s expectations, strategic objectives, business prospects,anticipated economic performance and financial condition and other similarmatters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs,assumptions and expectations of future economic performance, taking intoaccount the information currently available to management.  These statements are not statements ofhistorical fact and are typically identified by terms and phrases such as “anticipate,”“believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,”“plan,” “project,” “predict,” “will,” and similar expressions.  Such forward-looking statements are subjectto risks and uncertainties, and investors are cautioned that outcomes andresults may vary materially from those projected due to various factors beyondour control, including but not limited to: abnormal or severe weather andcatastrophic weather-related damage; unusual maintenance or repairrequirements; changes in fuel costs and purchased power, coal, environmentalemissions, natural gas, oil, and other commodity prices; volatility and changesin markets for electricity and other energy-related commodities; performance ofour suppliers and other counterparties; increased competition and deregulationin the electric utility industry; increased competition in the retailgeneration market; changes in interest rates; state, federal and foreignlegislative and regulatory initiatives that affect cost and investmentrecovery, emission levels and regulations, rate structures or tax laws; changesin 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; growth in our serviceterritory and changes in demand and demographic patterns; changes in accountingrules and the effect of accounting pronouncements issued periodically byaccounting standard-setting bodies; financial market conditions; the outcomes oflitigation and regulatory investigations, proceedings or inquiries; generaleconomic conditions; and the risks and other factors discussed in **DPL’s** and **DP&L’s**filingswith the Securities and Exchange Commission.

 

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Forward-lookingstatements speak only as of the date of the document in which they aremade.  We disclaim any obligation orundertaking to provide any updates or revisions to any forward-lookingstatement to reflect any change in our expectations or any change in events,conditions or circumstances on which the forward-looking statement is based.

 

The following discussionshould be read in conjunction with the accompanying unaudited financialstatements and related footnotes included in Part 1 – FinancialInformation.

 

**BUSINESSOVERVIEW**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio.  Our executive offices are located at 1065Woodman 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 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 its retail customers. Electricity for **DP&L’s**24 county service area is primarily generated at eight coal-fired power plantsand is distributed to more than 513,000 retail customers.  Principal industries served includeautomotive, food processing, paper, plastic manufacturing, and defense.

 

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

 

**DPL’s**significant subsidiaries (all of which are wholly owned) include DPL Energy LLC(DPLE), which engages in the operation of peaking generating facilities andsells power in wholesale markets; DPLER, which sells retail electric energyunder contract to major industrial and commercial customers in West CentralOhio; and Miami Valley Insurance Company (MVIC), our captive insurance companythat provides insurance sources to us and our subsidiaries.  **DP&L**hasone significant subsidiary, DPL Finance Company, Inc., which is whollyowned and provides financing to **DPL**,**DP&L** and other affiliatedcompanies.

 

**DPL**and **DP&L** conduct their principalbusiness in one business segment - Electric.

 

As we look forward, thereare a number of issues that we believe may have a significant impact on ourbusiness and operations described above. The following issues mentioned below are not meant to be exhaustive butto provide insight to matters that have or are likely to have an effect on ourindustry and business:

 

·      **Clean AirInterstate Rule (CAIR) decision by the U.S. Court of Appeals for theDistrict of Columbia Circuit**

 

On July 11, 2008,the United States Court of Appeals for the District of Columbia Circuit issueda decision that vacated the United States Environmental Protection Agency’s(USEPA) CAIR and its associated Federal Implementation Plan. This decisionremands these issues back to the USEPA.  TheUSEPA issued CAIR on March 10, 2005 to regulate certain upwind states withrespect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to anexisting trading program for sulfur dioxide (SO2)that were to take effect in 2010.  Thecourt’s decision, in part, invalidated the new NOx annual emission allowance trading program andthe modifications to the SO2 emission trading program, and createduncertainty regarding future NOx and SO2 emission reduction requirements and theirtiming.  CAIR remains in effect pending amandate by the court implementing its decision. On October 21, 2008, the court requested that the litigationparties submit their views as to an appropriate court mandate.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emission allowances, including annual NOx emission allowances and SO2 emissionallowances that were the subject of CAIR trading programs.  In subsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decision hasaffected the trading market for excess allowances and impacted **DP&L**’s program for selling additional excessallowances.  Although this impact on thesale of excess allowances has not had, nor do we expect it to have, a materialeffect on our financial position, the overall impact of the court’s decision,and of the actions the USEPA or others will take in response to this decision, on**DPL** and **DP&L**is not fully known at this time and could have an adverse effect on us.

 

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·      **Ohio SenateBill 221**

 

On May 1, 2008, substitute Senate Bill 221,an Ohio electric energy bill, was signed by the Governor and went into effect July 31,2008.  In compliance with Senate Bill221, **DP&L** filed its electric securityplan on October 10, 2008.  The billand **DP&L’s**electric security planfiling are further discussed in the UPDATES / OTHER MATTERS section below.  While the overall financial impact of thisnew legislation on **DPL** and **DP&L** will not be known for some time, it may materiallyimpact our financial condition.

 

·      **GreenhouseGases**

 

The rules issued bythe USEPA and Ohio Environmental Protection Agency (Ohio EPA) that requiresubstantial reductions in SO2, NOX, and mercury emissions may impact our business andoperations.  We are installing (and have installed) emission controltechnology and are taking other measures to comply with required reductions.

 

In addition to therequirements 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).  This concern hasled to increased interest in legislation at the federal level and actions atthe state level as well as litigation relating to greenhouse gas emissions,including a recent U.S. Supreme Court decision holding that the USEPA has theauthority 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 achieving such reductions could be material to us.

 

·      **Fuel andCommodity Prices**

 

Recently, the coal markethas experienced significant price volatility. We are now in a global market for coal in which our domestic price isincreasingly affected by international supply disruptions and demandbalance.  Coal exports from the U.S. haveincreased significantly in recent years. In addition, domestic issues like government-imposed direct costs andpermitting issues are affecting mining costs and supply availability.  Our approach is to hedge the fuel costs forour anticipated electric sales.  For theyears ended December 31, 2009 and 2010, we have hedged our coalrequirements with coal mine operators and financial institutions to meet ourcommitted sales.  We may not be able tohedge the entire exposure of our operations from commodity pricevolatility.  To the extent our suppliersdo not meet their contractual commitments or we are not hedged against pricevolatility, our results of operations, financial position, or cash flows couldbe materially affected.  As part of **DP&L’s** electric security plan filing, the Company isrequesting regulatory authority to defer fuel and fuel related costs thatexceed the amount that is in current rates. A final regulatory decision on our plan is expected in the first quarterof 2009.

 

·      **CreditMarket**

 

The current global credit crisis may adverselyaffect our business and financial results. During 2007, higher interest rates, falling property prices, and asignificant increase in the number of sub-prime mortgages originated in 2005and 2006 contributed to dramatic increases in mortgage delinquencies anddefaults in 2007 and the nine months ended September 30, 2008.  The anticipated future delinquencies amonghigh-risk, or sub-prime, borrowers in the United States is expected to continuein the foreseeable future.  Thewidespread dispersion of credit risk related to mortgage delinquencies anddefaults through the securitization of mortgage-backed securities (MBS), salesof collateralized debt obligations (CDOs) and the creation of structuredinvestment vehicles (SIVs), as well as the unclear impact on large banks ofMBS, CDOs, and SIVs, caused banks to reduce their loans to each other or makethem at higher interest rates.  Liquidityand credit concerns were further exacerbated in September 2008 with LehmanBrothers’ bankruptcy filing, the sale of Merrill Lynch to Bank of America, theU.S. government conservatorship of Fannie Mae and Freddie Mac, and the U.S.government loan to AIG.  Because of this,the ability of corporations to obtain funds through the issuance of debt wasnegatively impacted.  We issue debt tocover the costs of certain of our operations and expenditures and the inabilityto issue such debt on reasonable terms, or at all, could negatively affect ourbusiness and financial results.

 

Despite the unprecedented volatility in thecapital and credit markets, we believe that our liquidity position remainsstrong and is further strengthened by the completion of our major constructionprojects during 2008.  We expect ourexisting sources of liquidity to remain sufficient to meet our anticipatedobligations and those of our subsidiaries, and currently do not anticipate anyneed for significant changes in our operational plans.

 

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·      **Storm Costs**

 

On September 14, 2008, the Midwest regionwas severely affected by hurricane-force winds which resulted in significantproperty damage and disruptions to the supply of electric energy to retailcustomers.  Through September 30,2008, we deferred approximately $7.4 million of the costs associated with thestorm restoration.  We plan to file arequest for an accounting order seeking approval to defer these costs.

 

·      **Collective Bargaining Agreement**

 

During the threemonths ended September 30, 2008, we began negotiations with employees coveredunder our collective bargaining agreement which is set to expire on October 31,2008.  On October 24, 2008, we reached atentative agreement with these employees on a new three year laboragreement.  This tentative agreement issubject to a ratification vote by the covered employees anticipated to occurduring the fourth quarter of 2008.  Thecurrent agreement is expected to expire before the new agreement is finalized.  Though we expect the tentative agreement tobe ratified and that our employees will continue to work during theratification process, it is possible that this tentative agreement will not beratified which could result in labor disruptions affecting some or all of ouroperations.  We have contingency plans inplace to mitigate the impact that any labor stoppages could have on ourcustomers.  A lengthy strike by ouremployees could have an adverse effect on our operations and financialcondition.

 

**UPDATES / OTHER MATTERS**

 

**Competitionand Regulation Updates**

 

**OhioMatters Updates**

 

***Ohio Retail Rates***

 

On May 1, 2008,substitute Senate Bill 221 (SB 221), an Ohio electric energy bill, was signedby the Governor and went into effect 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, a periodiccompetitive bid process will set the retail generation price after the utilitydemonstrates that it can meet certain market criteria and bid requirements setout in the bill.  Also, under this option, utilities that still owngeneration in the state are required to phase in the market rate option over aperiod of not less than five years.  Anelectric security plan may allow for adjustments to the standard offer forcosts associated with environmental compliance; fuel and purchased power;construction of new or investment in specified generating facilities; theprovision of standby and default service, operating, maintenance, or othercosts including taxes.  As part of its electric security plan, the utilityis permitted to file an infrastructure improvement plan that will specify theinitiatives the utility will take to rebuild, upgrade, or replace its electricdistribution system, including cost recovery mechanisms.  Both the marketrate option and electric security plan option involve a “substantiallyexcessive earnings” test based on the earnings of other companies with similarbusiness and financial risks.  The PUCOissued three sets of rules related to implementation of the new law.  The first set of rules was issued infinal form on September 17, 2008 and addressed topics such as theinformation that must be included in an electric security plan as well as amarket rate option, the earnings test requirements, corporate separationrevisions, and rules relating to the recovery of transmission andancillary service costs.

 

This new law containsannual targets relating to advanced energy portfolio standards, renewableenergy, demand reduction, 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, theproposed bill requires annual energy efficiency reductions that reach 22.3% by2025 and peak demand reduction requirements that reach 7.75% by 2018.  The advanced energy portfolio and energyefficiency standards begin in 2009 with increases in requirement percentageseach year.  If any targets are not met,compliance penalties will apply.  Rules relatingto implementation of these targets were issued in draft form on August 20,2008.  **DP&L**provided comments on the rules as did many other interested parties.  While the overall financial impact of thisbill will not be known for some time, implementation of the bill and compliancewith its requirements could have a material impact on our financial condition.

 

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In compliance with SB221, **DP&L**filed its electric securityplan at the PUCO on October 10, 2008. This plan contains three parts: 1) a standard offer plan, 2) a customerconservation and energy management plan, and 3) an alternative energyplan.  The standard offer plan statesthat **DP&L**intends to maintain itscurrent rate plan through December 31, 2010, and addresses complianceissues related to the PUCO rules.  Theplan also contains revisions to**DP&L’s**corporate separation plan that would allow the utility to provide competitive,behind the meter services, and seeks PUCO approval to defer fuel, purchasedpower, and fuel-related costs that exceed the amount that is currently beingrecovered in rates.  The energyconservation and demand management part of the plan seeks PUCO approval of asuite of energy efficiency and demand response programs, as well as acomprehensive advanced meter infrastructure and smart grid deploymentinitiative, designed to provide customers with programs, tools, and informationto better control their energy usage. The alternative energy part of the plan seeks recovery of costsassociated with complying with the alternative energy targets contained in SB221 and associated administrative costs. The PUCO has the authority to approve or modify **DPL’s**electric security plan request.  The PUCOhas not yet set a hearing schedule for this proceeding. A final decision fromthe PUCO regarding **DP&L’s**electric security plan is expected in the first quarter of 2009.

 

**Federal Matters Updates**

 

As a member of PJM, **DP&L** is subject to charges and costs associated with PJMoperations as approved by the Federal Energy Regulatory Commission (FERC).  FERC Orders issued in 2007, regarding theallocation of costs of large transmission facilities within PJM, could resultin additional costs being allocated to **DP&L**ofapproximately $12 million or more annually by 2012.  **DP&L** fileda notice of appeal to the U.S. Court of Appeals, D.C. Circuit on March 18,2008.  The appeal has been consolidatedwith other appeals taken by other interested parties of the same FERC Ordersand the consolidated cases have been assigned 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 capacity is affected by changes in and theclearing results ofthe PJM capacity market.  The market utilizes a Reliability Pricing Model(RPM) that changes the way generation capacity is priced and planned for byPJM.  PJM held a series of auctions with the most recent taking place in May 2008 for the 2011/2012 planning year.  The results of these auctions have not had amaterial impact on our results of operations, financial position or cashflows.  The FERC decisions establishingRPM have been appealed by various entities to a Federal appeals court.  RPM remains in effect pending the outcome of the appeal.  **DP&L** has intervened in supportof the FERC decisions.  On March 19, 2008, a large coalitionof consumers filed a motion to request a FERC Technical Conference to evaluatewhether the RPM market is performing as expected, and proposed that the RPM market structure shouldbe modified or replaced.  In a related,but separate action, many of the same group of consumers filed a complaint, on May 30, 2008, alleging thatbidding approaches and other actions taken by unspecified market participants have resultedin unjust and unreasonable allocation of costs of $26 billion across PJM.  On September 18, 2008, FERC dismissedthe complaint, but directed PJM and its stakeholders to evaluate the design ofthe RPM with theintention of making changes on a prospective basis, and to file a progressreport with the FERC by December 15, 2008.  The FERC also directed its staff to convene atechnical conference in February 2009 on the issues raisedby the complaint.  **DP&L** is unable to predict anypotential changes in the PJM capacity market that may result from theseproceedings.

 

InApril 2008, **DPL** was notified that the IRSwould audit its 2005 federal income tax return. That IRS audit has commenced and **DPL** cannotdetermine the outcome of the audit.

 

**EnvironmentalUpdates**

 

**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 imposingcontinuing compliance obligations, these laws and regulations authorize theimposition of substantial penalties for noncompliance, including fines,injunctive relief and other sanctions. In the normal course of business, wehave investigatory and remedial activities underway at these facilities tocomply, or to determine compliance, with such regulations.  We recordliabilities for probable estimated loss in accordance with Statement ofFinancial Accounting Standards No. 5 “Accounting for Contingencies” (SFAS 5),as discussed in Note 1 of Notes to Condensed Consolidated FinancialStatements. **DPL,** through itswholly owned captive insurance subsidiary MVIC, has an actuarially calculatedreserve for environmental matters.  Weevaluate the potential 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.

 

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**Sierra Club**

 

In September 2004,the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the Clean AirAct (CAA) and the station’s operating permit. On August 7, 2008, a consent decree was filed in the United StatesDistrict Court in full settlement of these CAA claims.  Under the terms ofthe consent decree, **DP&L** andthe other owners of the Stuart generating station agreed to (i) certainemission targets related to nitrogen oxides (NOx),sulfur dioxide (SO2) and particulate matter; (ii) makeenergy efficiency and renewable energy commitments that are conditioned onreceiving Public Utilities Commission of Ohio approval for the recovery ofcosts; (iii) forfeit 5,500 sulfur dioxide allowances; and (iv) providefunding to a third party non-profit organization to establish a solar waterheater rebate program.  **DP&L** and the other owners of the station also enteredinto an attorneys’ fee agreement to pay a portion of the Sierra Club’s attorneyand expert witness fees.  The parties tothe lawsuit filed a joint motion on October 22, 2008, seeking and order bythe United States District Court approving the consent decree with funding forthe third party non-profit organization set at $300,000.  On October 23, 2008, the United StatesDistrict Court approved the consent decree. We have determined that the termsof the consent decree will not have a material impact on our overall results ofoperations, financial position, or cash flows.

 

**Noticesof Violation Involving Wholly Owned Plants**

 

In 2007, the Ohio EPA andthe USEPA issued Notices of Violation (NOVs) to **DP&L**for alleged violations of the CAA at the O.H. Hutchings station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions.  **DP&L** has provided data regarding **DP&L’s**maintenance expenses and operating results to the Ohio EPA and the USEPA and tothe DOJ, which is providing legal support to the USEPA.  Discussions, monitored by Ohio EPA, areon-going between **DP&L** and the DOJ and USEPAregarding a possible resolution of this matter. A settlement of this matter could include a combination of 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.

 

**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.  A petition for a writ of certiorari was filedwith the U.S. Supreme Court on September 17, 2008.  If the petition is not accepted by theSupreme Court, or if the Supreme Court grants certiorari and upholds the D.C.Circuit’s decision, USEPA will have to move forward to set Maximum AvailableControl Technology (MACT) standards for coal- and oil-fired electric generatingunits.  It is likely the USEPA would takeat least three years to gather new data to promulgate updated MACT standardsand another three years for the regulations to become effective.  At this time, **DP&L**is unable to determine the impact of the promulgation of new MACT standards onits****financial position or results ofoperations.

 

OnJuly 11, 2008, the United States Court of Appeals for the District ofColumbia Circuit issued a decision that vacated the USEPA’s CAIR and itsassociated Federal Implementation Plan. This decision remands these issues backto the USEPA.  The USEPA and a group representingutilities filed a request for a rehearing en banc on September 24,2008.  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 NOx emission allowances and made modifications toan existing trading program for SO2 that were to take effect in 2010.  The court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program andthe modifications to the SO2 emission trading program, and created uncertainty regardingfuture NOx and SO2 emission reduction requirements and theirtiming.  CAIR remains in effect pending amandate by the court implementing its decision. On October 21, 2008, the court requested that the litigationparties submit their views as to an appropriate court mandate.

 

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In the fourth quarter of 2007, **DP&L** begana program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that werethe subject of CAIR trading programs.  Insubsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decision hasaffected the trading market for excess allowances and impacted **DP&L**’s program for selling additional excessallowances.  Although this impact on thesale of excess allowances has not had, nor do we expect it to have, a materialeffect on our financial position, the overall impact of the court’s decision,and of the actions the USEPA or others will take in response to this decision,on **DPL** and **DP&L**is not fully known at this time and could have an adverse effect on us.

 

**Environmental Regulation andLitigation Related to Water Quality**

 

On July 9, 2004, theUSEPA issued final rules pursuant to the Clean Water Act governingexisting facilities that have cooling water intake structures.  The rules requirean assessment of impingement and/or entrainment of organisms as a result ofcooling water withdrawal.  A number ofparties appealed the rules to the Federal Court of Appeals for the SecondCircuit in New York and the Court issued an opinion on January 25, 2007remanding several aspects of the rule to USEPA for reconsideration. Several parties 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 weresubmitted to the Court this summer and oral argument will likely be held in November orDecember 2008.  A decision may berendered 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 DischargeElimination System (NPDES) Permit, that requires us to implement one of twodiffuser options for the discharge of water from the Stuart station into theOhio River as identified in the thermal discharge study conducted pursuant torequirements 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.  On June 6, 2008, we sent a letter toOhio EPA stating that we would be willing to restrict public access to thethermal discharge during the warmest months of the year.  On August 22, 2008, we received wordfrom Ohio EPA that this option would be acceptable and would be incorporated inthe NPDES permit.

 

**FGDProject Implementation**

 

Test operations of theflue gas desulfurization (FGD) equipment on Stuart station units 1 and 2 werecompleted during the three months ended September 30, 2008.  The equipment is currently in service.

 

**FINANCIAL OVERVIEW**

 

As more fullydiscussed in later sections of this Form 10-Q, the following weresignificant themes and events for the three months and nine months ended September 30,2008:

 

·      During the nine months endedSeptember 30, 2008, **DP&L** soldexcess emission allowances to various counterparties realizing total net gainsof $30.5 million.  There were no gainsrecorded from sales of emission allowances during the three months ended September 30,2008.

 

·      During the three months andnine months ended September 30, 2008, **DP&L**realized total net gains of $28.5 million and $40.3 million, respectively, fromcoal sales to various counterparties related to both **DP&L**and partner-operated generating facilities.

 

·      On June 27, 2008, we entered into a $42.0 million settlementagreement with the Ohio Department of Taxation (ODT) resolving all outstandingaudit issues and appeals, including uncertain tax positions for tax years 1998through 2006.  The $42.0 million paymentwas made to the ODT in July 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 nine months ended September 30,2008.

 

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Also, for the threemonths ended September 30, 2008:

 

·      **DPL’s**revenue decreased by 2% over the same period in 2007 mainly due to decreasedretail and wholesale sales volume, partially offset by increased retail andwholesale prices and increased RTO capacity and other RTO revenues.

 

·      **DPL’s**fuel costs decreased by 35% over the same period in 2007 mainly due todecreased generation output and gains from the sale of excess coal.

 

·      **DPL’s**purchased power costs increased by 46% mainly due to increased RTO capacitycharges and increased purchased power volumes and prices.  Operation and maintenance expense increasedslightly by 1%.

 

·      **DP&L’s**revenues decreased by 4% over the same period in 2007 mainly due to decreasedretail and wholesale sales volume, partially offset by increased retail andwholesale prices and increased RTO capacity and other RTO revenues.

 

·      **DP&L’s**fuel costs decreased by 35% over the same period in 2007 mainly due todecreased generation output and gains from the sale of excess coal.

 

·      **DP&L’s**purchased power costs increased by 31% mainly due to increased RTO capacitycharges, and increased purchased power volumes and prices.  Operation and maintenance expense increasedby 2%.

 

For the nine months endedSeptember 30, 2008:

 

·      **DPL’s**revenue increased by 6% over the same period in 2007 mainly due to increasedRTO capacity and other RTO revenues, and increased retail prices, partiallyoffset by decreased retail and wholesale sales volume.

 

·      **DPL’s**fuelcosts, excluding the gains from the sale of emission allowances discussedabove, decreased by 12% over the same period in 2007 mainly due to decreasedgeneration output and gains from the sale of excess coal.

 

·      **DPL’s**purchased power costs increased by 33% mainly due to increased RTO capacity andother RTO charges, partially offset by reduced purchased power volumes.  Operation and maintenance expense increasedslightly by 1%.

 

·      **DP&L’s**revenue increased by 5% over the same period in 2007 mainly due to increasedRTO capacity and other RTO revenues, and increased retail prices, partiallyoffset by decreased retail and wholesale sales volumes.

 

·      **DP&L’s**fuel costs, excluding the gains from the sale of emission allowances discussedabove, decreased by 11% over the same period in 2007 mainly due to decreasedgeneration output and gains from sales of excess coal.

 

·      **DP&L’s**purchased power costs increased by 28% mainly due to increased RTO capacity andother RTO charges partially offset by reduced purchased power volumes.  Operation and maintenance expense decreasedby 2%.

 

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** **

**RESULTS OF OPERATIONS – DPL Inc.**

 

**DPL’s**results of operations include the results of itssubsidiaries, including the consolidated results of **DP&L**and all of **DP&L’s** consolidatedsubsidiaries.  **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.

 

**IncomeStatement Highlights – DPL**

** **
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                 | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Revenues:**                               |       |                             |       |                            |       |   |   |   |   |
| Retail                                      | ** ** | **$**                            | **315.7**  |                            | $          | 326.2 | ** ** | **$** | **920.8** |   | $ | 915.7 |   |
| Wholesale                                   | ** ** | **27.9**                         |       | 52.9                            | ** ** | **124.8** |   | 140.0 |   |
| RTO revenues                                | ** ** | **31.3**                         |       | 26.6                            | ** ** | **84.4** |   | 63.8 |   |
| RTO Capacity  revenues                      | ** ** | **36.8**                         |       | 13.3                            | ** ** | **70.7** |   | 17.6 |   |
| Other revenues                              | ** ** | **2.8**                          |       | 3.0                             | ** ** | **8.7** |   | 8.5 |   |
| Total revenues                              | ** ** | **$**                            | **414.5**  |                            | $          | 422.0 | ** ** | **$** | **1,209.4** |   | $ | 1,145.6 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Cost of  revenues:**                      |       |                             |       |                            |       |   |   |   |   |
| Fuel                                        | ** ** | **$**                            | **62.2**   |                            | $          | 95.9 | ** ** | **$** | **223.0** |   | $ | 251.7 |   |
| Gains from sale  of emission allowances (a) | ** ** | **—**                       |       | —                          | ** ** | **(30.5** | ) | (1.2 | ) |
| Purchased power                             | ** ** | **56.8**                         |       | 35.9                            | ** ** | **122.2** |   | 129.9 |   |
| RTO charges (b)                             | ** ** | **29.2**                         |       | 34.0                            | ** ** | **101.7** |   | 71.4 |   |
| RTO Capacity  charges (b)                   | ** ** | **33.8**                         |       | 12.2                            | ** ** | **65.0** |   | 16.2 |   |
| Total cost of  revenues                     | ** ** | **$**                            | **182.0**  |                            | $          | 178.0 | ** ** | **$** | **481.4** |   | $ | 468.0 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Gross  margins (c)**                      | ** ** | **$**                            | **232.5**  |                            | $          | 244.0 | ** ** | **$** | **728.0** |   | $ | 677.6 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Gross margin as  a percentage of revenues   | ** ** | **56**                           | %          | 58                              | **%**      | **60** | % | 59 | % |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Operating  income**                       | ** ** | **$**                            | **96.2**   |                            | $          | 110.8 | ** ** | **$** | **324.5** |   | $ | 283.7 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Basic  earnings per share:**              |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                      | ** ** | **$**                            | **0.44**   |                            | $          | 0.56 | ** ** | **$** | **1.58** |   | $ | 1.54 |   |
| Discontinued  operations                    | ** ** | **—**                       |       | —                          | ** ** | **—** |   | 0.09 |   |
| Total basic                                 | ** ** | **$**                            | **0.44**   |                            | $          | 0.56 | ** ** | **$** | **1.58** |   | $ | 1.63 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Diluted  earnings per share:**            |       |                             |       |                            |       |   |   |   |   |
| Continuing  operations                      | ** ** | **$**                            | **0.42**   |                            | $          | 0.53 | ** ** | **$** | **1.49** |   | $ | 1.40 |   |
| Discontinued  operations                    | ** ** | **—**                       |       | —                          | ** ** | **—** |   | 0.09 |   |
| Total diluted                               | ** ** | **$**                            | **0.42**   |                            | $          | 0.53 | ** ** | **$** | **1.49** |   | $ | 1.49 |   |

 

----

| *(a)* | *Gains from the sale of emission allowances are included in  fuel costs in the Condensed Consolidated Statements of Results of Operations.*                                                                                                                                                                       |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(b)* | *RTO capacity and other RTO 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.* |

 

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**DPLInc. – Revenues**

 

Retail customers,especially residential and commercial customers, consume more electricity onwarmer and colder days. Therefore,**DPL’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since**,**generally, **DPL**plans to utilize its internal generating capacity to supply its retailcustomers’ needs first, increases in retail demand will decrease the volume ofinternal generation available to be sold in the wholesale market and viceversa.

 

The wholesale marketcovers a multi-state area and settles on an hourly basis throughout the year.Factors impacting**DPL’s** wholesalesales volume each hour of the year include commodity and wholesale marketprices;**DPL’s** retail demand;retail demand elsewhere throughout the entire wholesale market area;**DPL** and non-**DPL** plants’ availability to sell into the wholesale market 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 tableprovides a summary of changes in revenues from the prior period:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**      | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**     | ** ** |
|                             |       |                             |       |                            |       |
| **Retail**                       |       |                             |       |                            |       |
| Rate                             |       | $                                | 7.9        |                            | $          | 33.3 |   |
| Volume                           |       | (18.2                            | )          | (27.6                           | )          |
| Other                            |       | (0.2                             | )          | (0.6                            | )          |
| **Total retail change**          | ** ** | **$**                            | **(10.5**  | **)**                           | **$**      | **5.1** | ** ** |
|                             |       |                             |       |                            |       |
| **Wholesale**                    |       |                             |       |                            |       |
| Rate                             |       | $                                | 9.1        |                            | $          | 31.5 |   |
| Volume                           |       | (34.1                            | )          | (46.7                           | )          |
| **Total wholesale change**       | ** ** | **$**                            | **(25.0**  | **)**                           | **$**      | **(15.2** | **)** |
|                             |       |                             |       |                            |       |
| **RTO capacity and other**       | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| RTO  capacity and other revenues | ** ** | **$**                            | **28.0**   | ** **                      | **$**      | **73.9** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| **Total revenues**               | ** ** | **$**                            | **(7.5**   | **)**                           | **$**      | **63.8** | ** ** |

 

For the three monthsended September 30, 2008, revenues decreased $7.5 million, or 2%, over thesame period of the prior year.  This decrease was primarily the result oflower retail and wholesale sales volume, partially offset by an increase in RTOcapacity and other RTO revenues and higher average rates for retail andwholesale sales.

 

·      The net decrease in retailrevenues results primarily from a 6% decrease in sales volume, partially offsetby a 3% increase in average retail rates due largely to the second phase of anenvironmental investment rider.

 

·      The decrease in retail salesvolume is primarily the result of milder weather which caused cooling degreedays to decrease 19%.

 

·      The net decrease inwholesale revenues is primarily a result of a 65% decrease in sales volume duelargely to unplanned outages, partially offset by a 48% increase in wholesaleaverage rates.

 

·      RTO capacity and other RTOrevenues, 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 $28.0million over the same three month period of the prior year.  This increase primarily resulted from additionalincome of $28.2 million realized from the PJM capacity auction and other RTOrevenues.

 

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For the nine months endedSeptember 30, 2008, revenues increased $63.8 million, or 6%, over the sameperiod in the prior year.  This increase was primarily the result ofhigher average rates for retail and wholesale sales and an increase in RTOcapacity and other RTO revenues, partially offset by lower retail and wholesalesales volume.

 

·      The net increase in retailrevenues results primarily from a 4% increase in average retail rates duelargely to the second phase of an environmental investment rider, partiallyoffset by a 3% decrease in sales volume.

 

·      The decrease in sales volumeis primarily a result of milder weather which caused cooling degree days todecrease 23%, partially offset by an increase in heating degree days of 5%.

 

·      The net decrease inwholesale revenues is primarily a result of a 33% decrease in sales volume duelargely to unplanned outages, partially offset by a 34% increase in wholesaleaverage rates.

 

·      RTO capacity and other RTOrevenues, consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operating reserves,and capacity payments under the RPM construct, increased $73.9 million over thesame period of the prior year.  Thisincrease primarily resulted from additional income of $73.7 million realizedfrom the PJM capacity auction and other RTO revenues.

 

## **DPLInc. – Cost of Revenues**

## ** **

For the three monthsended September 30, 2008:

 

·      Fuel costs, which includecoal (net of sales), gas, oil, and emission allowance sales and costs,decreased $33.7 million, or 35%, compared to the same period in 2007.  This decrease is primarily due to increasednet gains of $27.8 million realized from sales of excess coal combined withdecreased fuel usage due primarily to a 25% decrease in generation outputlargely attributable to unplanned outages. These decreases were partially offset by increased fuel prices.  The successful installation of FGD equipmentat Miami Fort, Killen and Stuart stations has allowed us the ability to burncoal with a wide range of sulfur content and, accordingly, we purchase and sellcoal as we seek to achieve optimum levels of production efficiency.  Gains or losses from sales of coal arerecorded as a component of fuel costs.

 

·      Purchased power increased$37.7 million, or 46%, compared to the same period in 2007.  This increase primarily results from a $5.0million increase relating to higher average market rates, a $16.0 millionincrease relating to higher volumes of purchased power due largely to unplannedoutages, and a $16.8 million increase in RTO capacity and other RTO charges.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unplanned outages, or when market prices arebelow the marginal costs associated with our generating facilities.

 

For the nine months endedSeptember 30, 2008:

 

·      Fuel costs decreased $58.0million, or 23%, compared to the same period in 2007, primarily due toincreases in net gains of $29.3 million from the sale of **DP&L’s**excess emission allowances and $39.8 million realized from the sale of **DP&L’s** excess coal combined with a decrease in the usageof fuel due mainly to a 6% decrease in generation output largely attributableto unplanned outages.  These decreaseswere partially offset by increased fuel prices. The successful installation of FGD equipment at Miami Fort, Killen andStuart stations has allowed us the ability to burn coal with a wide range ofsulfur content and, accordingly, we purchase and sell coal as we seek toachieve optimum levels of production efficiency.  Gains or losses from sales of coal and emissionallowances are recorded as components of fuel costs.

 

·      Purchased power increased$71.4 million, or 33%, compared to the same period in 2007.  The increase in purchased power primarilyresults from a $16.2 million increase relating to higher average market ratesand a $79.1 million increase in RTO capacity and other RTO charges, partially offset by a $23.8 million decrease relatingto lower volumes of purchased power.  We purchase power to satisfy retail salesvolume when generating facilities are not available due to planned andunplanned outages, or when market prices are below the marginal costsassociated with our generating facilities.

 

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**DPL Inc.– Gross Margins**

 

For the three monthsended September 30, 2008, gross margin of $232.5 million decreased $11.5million, or 5%, from $244.0 million in the same period of the prior year.  As a percentage of total revenues, grossmargin decreased to 56% in 2008 compared to 58% in 2007.

 

For the nine months endedSeptember 30, 2008, gross margin of $728.0 million increased $50.4million, or 7%, from $677.6 million in the same period of the prior year.  As a percentage of total revenues, grossmargin increased to 60% in 2008 compared to 59% in 2007.

 

These gross marginresults reflect the impact of revenues and cost of revenues discussed above.

 

**DPL Inc.****– Operation and Maintenance**

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                                   | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**     | ** ** |
| Insurance  settlement                                         |       | $                                | —     |                            | $          | 14.5 |   |
| Generating  facilities operating expenses                     |       | 3.8                              |       | 7.1                             |       |
| Gain on sale of  corporate aircraft                           |       | —                           |       | 6.0                             |       |
| Turbine  maintenance costs                                    |       | 0.4                              |       | 4.3                             |       |
| Legal costs                                                   |       | (0.9                             | )          | (17.3                           | )          |
| Deferred  compensation (primarily mark-to-market adjustments) |       | (0.8                             | )          | (7.2                            | )          |
| Boiler  maintenance costs                                     |       | 0.3                              |       | (2.1                            | )          |
| Pension                                                       |       | 0.1                              |       | (2.0                            | )          |
| Other, net                                                    |       | (2.0                             | )          | (1.0                            | )          |
| **Total  operation and maintenance expense**                  |       | $                                | 0.9        |                            | $          | 2.3 |   |

 

For the three monthsended September 30, 2008, operation and maintenance expense increased $0.9million, or 1%, compared to the same period in 2007.  This variance was primarily due to anincrease in operating expenses at our generating facilities largely due to theoperation of the FGD and Selective Catalytic Reduction (SCR) equipment, andgypsum disposal.  Gypsum is a by-productof the operation of the FGD equipment. This increase was partially offset by:

 

·      a decrease in legal costsdue largely to the litigation settlement with three of our former executives inMay 2007, and

 

·      a decrease in deferredcompensation costs (primarily mark-to-market adjustments) associated to a largedegree with deferred compensation liabilities for the former executives.

 

For the ninemonths ended September 30, 2008, operation and maintenance expenseincreased $2.3 million, or 1%, compared to the same period in 2007.  This variance was primarily due to:

 

·      the 2007 insurance settlement whichreimbursed us for legal fees relating to the litigation with three formerexecutives,

 

·      an increase in operating expenses largely due tothe operation of the FGD and SCR equipment, and gypsum disposal,

 

·      the gain on sale of the corporate aircraftrealized in 2007, and

 

·      an increase in turbine maintenance costs incurreddue to an unplanned outage at a jointly-owned production unit.

 

These increases were partially offset by:

 

·      a decrease in legal costs due largely tothe litigation settlement with three of our former executives in May 2007,

 

·      a decrease in deferred compensation costs(primarily mark-to-market adjustments) associated to a large degree withdeferred compensation liabilities for the former executives,

 

·      lower boiler maintenance costs largelyattributable to timing of scheduled outages, and

 

·      lower pension costs primarily due to theplan funding made in November 2007.

 

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**DPLInc. – Depreciation and Amortization**

 

For the threemonths ended September 30, 2008, depreciation and amortization expenseincreased $1.4 million compared to the same period in 2007.  This increase was primarily the result ofhigher plant balances due largely to installation of the FGD equipment,partially offset by the impact of lower depreciation rates for generationproperty which were put into effect on August 1, 2007.

 

For the ninemonths ended September 30, 2008, depreciation and amortization expense decreased$0.4 million compared to the same period in 2007.  This decrease was primarily a result of theimpact of lower depreciation rates for generation property which were put intoeffect on August 1, 2007, partially offset by an increase to the depreciationexpense related to higher plant balances due largely to installation of the FGDequipment.

 

**DPLInc. – General Taxes**

 

For the threemonths and nine months ended September 30, 2008, general taxes increased$1.6 million and $8.4 million, respectively, compared to the same periods in2007.  These increases were primarily theresult of higher property taxes due mainly to capital improvements which haveled to higher assessed property values, combined with increased tax rates.

 

**DPLInc. – Net Gain on Settlement of Executive Litigation**

 

On May 21,2007, we settled litigation with three former executives.  In exchange for our payment of $25 million,the three former executives relinquished and dismissed all of their claims,including those related to deferred compensation, restricted stock units(RSUs), MVE incentives, stock options, and legal fees.  As a result of this settlement, during thenine months ended September 30, 2007, **DPL** realized anet pre-tax gain in continuing operations of approximately $31.0 million.

 

## **DPLInc. – Investment Income**

## ** **

For the three monthsended September 30, 2008, investment income remained relatively flatcompared to the same period in 2007.

 

For the nine months endedSeptember 30, 2008, investment income decreased $6.4 million, to $3.1million, compared to the same period in 2007. This decrease was primarily the result of:

 

·      $3.2 million of gainsrealized in 2007 from the sale of financial assets held in **DP&L’s**MasterTrust Plan for deferred compensation which were used for the settlement paymentto the three former executives, and

 

·      lower cash and short-terminvestment balances combined with overall lower market yields on investments in2008 compared to 2007.

 

**DPL Inc.****– Interest Expense**

 

Forthe three months ended September 30, 2008, interest expense increased $5.0 million, or 30%, compared to thesame period in 2007, resulting primarily from lower capitalized interest due tothe completion of the FGD project at the Stuart station, partially offset bythe redemption of the $100 million 6.25% Senior Notes in May 2008.

 

Forthe nine months ended September 30, 2008, interest expense increased $8.5 million, or 14%, compared to thesame period in 2007 resulting primarily from:

 

·      lowercapitalized interest due to the completion of the FGD projects at Miami Fort,Killen, and Stuart stations,

 

·      additionalinterest expense associated with **DP&L’s** $90million variable rate pollution control bonds issued November 15, 2007,and

 

·      the write-offof unamortized debt issuance costs relating to pollution control bondsfollowing their repurchase from the bondholders on April 4, 2008.  See Note 4 of Notes to Condensed ConsolidatedFinancial Statements.

 

Theseincreases were partially offset by:

 

·      theredemption of the $225 million 8.25% Senior Notes in March 2007 and the$100 million 6.25% Senior Notes in May 2008.

 

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## **DPLInc. – Other Income / (Deductions)**

## ** **

For the three months andnine months ended September 30, 2008, other deductions of $0.4 million and$0.9 million, respectively, changed from other income of $2.0 million and $2.6million, respectively, recorded for the same periods of the prior year.  These changes from other income to otherdeductions primarily resulted from the recognition in 2007 of a $2.1 milliondeferred credit related to a litigation settlement (which was not part of theexecutive litigation settlement).

 

## **DPLInc. – Income Tax Expense**

## ** **

For the three monthsended September 30, 2008, income taxes decreased $10.0 million, or 27%,compared to the same period in the prior year, primarily reflecting:

 

·      a 23% decrease in pre-taxbook income, and

 

·      a decrease in the effectivetax rate resulting from the phase-out of the Ohio Franchise Tax.

 

For the nine months endedSeptember 30, 2008, income taxes decreased $16.0 million, or 16%, comparedto the same period in 2007, primarily reflecting:

 

·      a 3% decrease in pre-taxbook income,

 

·      a decrease in the effectivetax rate resulting from the phase-out of the Ohio Franchise Tax, and

 

·      a decrease in tax expensedue to the settlement of the Ohio Franchise Tax issues.  See Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

**RESULTS OF OPERATIONS – The DaytonPower and Light Company (DP&L)**

 

**IncomeStatement Highlights – DP&L**

** **
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                 | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Revenues:**                               |       |                             |       |                            |       |   |   |   |   |
| Retail                                      | ** ** | **$**                            | **278.0**  |                            | $          | 285.7 | ** ** | **$** | **809.5** |   | $ | 804.7 |   |
| Wholesale                                   | ** ** | **61.9**                         |       | 94.0                            | ** ** | **233.7** |   | 253.0 |   |
| RTO revenues                                | ** ** | **30.4**                         |       | 26.6                            | ** ** | **83.5** |   | 63.8 |   |
| RTO Capacity  revenues                      | ** ** | **31.2**                         |       | 13.3                            | ** ** | **65.1** |   | 17.6 |   |
| Total revenues                              | ** ** | **$**                            | **401.5**  |                            | $          | 419.6 | ** ** | **$** | **1,191.8** |   | $ | 1,139.1 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Cost of  revenues:**                      |       |                             |       |                            |       |   |   |   |   |
| Fuel                                        | ** ** | **$**                            | **57.0**   |                            | $          | 87.6 | ** ** | **$** | **214.1** |   | $ | 241.4 |   |
| Gains from sale  of emission allowances (a) | ** ** | **—**                       |       | —                          | ** ** | **(30.5** | **)** | (1.2 | ) |
| Purchased power                             | ** ** | **58.0**                         |       | 45.5                            | ** ** | **126.0** |   | 140.5 |   |
| RTO charges (b)                             | ** ** | **28.3**                         |       | 34.0                            | ** ** | **100.8** |   | 71.5 |   |
| RTO Capacity  charges (b)                   | ** ** | **33.8**                         |       | 12.2                            | ** ** | **65.0** |   | 16.2 |   |
| Total cost of  revenues                     | ** ** | **$**                            | **177.1**  |                            | $          | 179.3 | ** ** | **$** | **475.4** |   | $ | 468.4 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Gross  margins**(c)                       | ** ** | **$**                            | **224.4**  |                            | $          | 240.3 | ** ** | **$** | **716.4** |   | $ | 670.7 |   |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Gross margin as a  percentage of revenues   |       | **56**                           | **%**      | 57                              | %          | **60** | **%** | 59 | % |
|                                        |       |                             |       |                            |       |   |   |   |   |
| **Operating  Income**                       | ** ** | **$**                            | **93.5**   |                            | $          | 113.2 | ** ** | **$** | **330.4** |   | $ | 287.6 |   |

 

----

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

*(b)**    **RTO capacity and other RTO chargesare included in total purchased power in the Condensed Consolidated Statementsof Results 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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**DP&L– Revenues**

 

Retail customers,especially residential and commercial customers, consume more electricity onwarmer and colder days. Therefore,**DP&L’s**retail sales volume is impacted by the number of heating and cooling degreedays occurring during a year.  Since, generally,**DP&L** plans to utilize its internal generating capacity tosupply its retail customers’ needs first, increases in retail demand willdecrease the volume of internal generation available to be sold in thewholesale market and vice versa.

 

Thewholesale market covers a multi-state area and settles on an hourly basisthroughout the year. Factors impacting**DP&L’s** wholesale sales volume each hour of the year includecommodity and wholesale market prices;**DP&L’s** retail demand; retail demand elsewhere throughout theentire 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.

 

The following tableprovides a summary of changes in revenues from the prior period:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**     | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**     | ** ** |
|                            |       |                             |       |                            |       |
| **Retail**                      |       |                             |       |                            |       |
| Rate                            |       | $                                | 8.3        |                            | $          | 29.6 |   |
| Volume                          |       | (15.9                            | )          | (24.3                           | )          |
| Other                           |       | (0.1                             | )          | (0.5                            | )          |
| **Total retail change**         | ** ** | **$**                            | **(7.7**   | **)**                           | **$**      | **4.8** | ** ** |
|                            |       |                             |       |                            |       |
| **Wholesale**                   |       |                             |       |                            |       |
| Rate                            |       | $                                | 32.3       |                            | $          | 68.7 |   |
| Volume                          |       | (64.4                            | )          | (88.0                           | )          |
| **Total wholesale change**      | ** ** | **$**                            | **(32.1**  | **)**                           | **$**      | **(19.3** | **)** |
|                            |       |                             |       |                            |       |
| **RTO capacity and other**      |       |                             |       |                            |       |
| RTO capacity and other revenues | ** ** | **$**                            | **21.7**   | ** **                      | **$**      | **67.2** | ** ** |
|                            |       |                             |       |                            |       |
| **Total revenues**              | ** ** | **$**                            | **(18.1**  | **)**                           | **$**      | **52.7** | ** ** |

 

For the three monthsended September 30, 2008, revenues decreased $18.1 million, or 4%, overthe same period of the prior year.  This decrease was primarily the resultof lower retail and wholesale sales volume, partially offset by higher averagerates for retail and wholesale sales, and an increase in RTO capacity and otherRTO revenues.

 

·      The net decrease in retailrevenues results primarily from a 6% decrease in sales volume, partially offsetby a 3% increase in average retail rates due largely to the second phase of anenvironmental investment rider.

 

·      The decrease in retail salesvolume is primarily a result of milder weather which caused cooling degree daysto decrease 19%.

 

·      The net decrease inwholesale revenues is primarily the result of a 68% decrease in sales volumedue largely to unplanned outages, partially offset by an increase in wholesaleaverage rates.

 

·      RTO capacity and other RTOrevenues, 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 $21.7million over the same period of the prior year. This increase resulted from additional income realized from the PJMcapacity auction and other RTO revenues.

 

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For the nine months endedSeptember 30, 2008, revenues increased $52.7 million, or 5%, over the sameperiod of the prior year.  This increase was primarily the result ofhigher average rates for retail and wholesale sales, and an increase in RTOcapacity and other RTO revenues, partially offset by lower retail and wholesalesales volume.

 

·      The net increase in retailrevenues results primarily from a 4% increase in average retail rates due largelyto the second phase of an environmental investment rider, partially offset by a3% decrease in sales volume.

 

·      The decrease in retail salesvolume is primarily a result of milder weather which caused cooling degree daysto decrease 23%, partially offset by an increase in heating degree days of 5%.

 

·      The net decrease inwholesale revenues is primarily a result of a 35% decrease in sales volume duelargely to unplanned outages, partially offset by a 42% increase in wholesaleaverage rates.

 

·      RTO capacity and other RTOrevenues, 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 $67.2million over the same period of the prior year. This increase resulted from additional income realized from the PJMcapacity auction and other RTO revenues.

 

## **DP&L– Cost of Revenues**

## ** **

For the three monthsended September 30, 2008:

 

·      Fuel costs, which includecoal (net of sales), gas, oil, and emission allowance sales and costs,decreased $30.6 million, or 35%, compared to the same period in 2007.  This decrease is primarily due to increasednet gains of $27.8 million realized from sales of excess coal combined withdecreased fuel usage due primarily to a 24% decrease in generation outputlargely attributable to unplanned outages. These decreases were partially offset by increased fuel prices.  The successful installation of FGD equipmentat Miami Fort, Killen, and Stuart stations has allowed us the ability to burncoal with a wide range of sulfur content and, accordingly, we purchase and sellcoal as we seek to achieve optimum levels of production efficiency.  Gains or losses from sales of coal arerecorded as a component of fuel costs.

 

·      Purchased power increased$28.4 million, or 31%, compared to the same period in 2007.  This increase primarily results from a $11.5million increase relating to higher volumes of purchased power due largely tounplanned outages and a $15.9 million increase in RTO capacity and other RTO charges.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unplanned outages or when market prices are belowthe marginal costs associated with our generating facilities.

 

For the nine months endedSeptember 30, 2008:

 

·      Fuel costs decreased $56.6million, or 24%, compared to the same period in 2007, primarily due toincreases in net gains of $29.3 million from the sale of **DP&L’s**excess emission allowances and $39.8 million realized from the sale of **DP&L’s** excess coal, combined with a decrease in theusage of fuel due mainly to a 6% decrease in generation output largelyattributable to unplanned outages.  Thesedecreases were partially offset by an increase in fuel prices.  The successful installation of FGD equipmentat the Miami Fort, Killen, and Stuart stations has allowed us the ability toburn coal with a wide range of sulfur content and, accordingly, we purchase andsell coal as we seek to achieve optimum levels of production efficiency.  Gains or losses from sales of coal andemission allowances are recorded as components of fuel costs.

 

·      Purchased power increased$63.6 million, or 28%, compared to the same period in 2007.  The increase in purchased power primarilyresults from a $14.8 million increase relating to higher average market ratesand a $78.1 million increase in RTO capacity and other RTO charges, partiallyoffset by a $29.3 million decrease relating to lower volumes of purchasedpower.  We purchase power to satisfy retail sales volume when generating facilitiesare not available due to planned and unplanned outages, or when market pricesare below the marginal costs associated with our generating facilities.

 

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**DP&L– Gross Margins**

 

For the three monthsended September 30, 2008, gross margin of $224.4 million decreased $15.9million, or 7%, from $240.3 million in the same period of the prior year.  As a percentage of total revenues, grossmargin decreased to 56% in 2008 compared to 57% in 2007.

 

For the nine months endedSeptember 30, 2008, gross margin of $716.4 million increased $45.7million, or 7%, from $670.7 million in the same period of the prior year.  As a percentage of total revenues, grossmargin increased to 60% in 2008 compared to 59% in 2007.

 

These gross marginresults reflect the impact of revenues and cost of revenues discussed above.

 

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

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **$ in millions**                                   | ** ** | **2008 vs. 2007**      | ** ** | **2008 vs. 2007**     | ** ** |
| Deferred  compensation (primarily mark-to-market adjustments) |       | $                                | (0.3       | )                               | $          | (5.9 | ) |
| Legal costs                                                   |       | (0.6                             | )          | (3.2                            | )          |
| Boiler  maintenance costs                                     |       | 0.3                              |       | (2.1                            | )          |
| Pension                                                       |       | 0.1                              |       | (2.0                            | )          |
| Generating  facilities operating expenses                     |       | 3.9                              |       | 7.2                             |       |
| Turbine  maintenance costs                                    |       | 0.4                              |       | 4.3                             |       |
| Other, net                                                    |       | (2.4                             | )          | (3.1                            | )          |
| **Total  operation and maintenance expense**                  |       | $                                | 1.4        |                            | $          | (4.8 | ) |

 

For the three monthsended September 30, 2008, operation and maintenance expense increased $1.4million compared to the same period in 2007. This variance was primarily due to an increase in operating expenses atour generating facilities largely due to the operation of the FGD and SCR equipment,and gypsum disposal.  Gypsum is aby-product of the operation of the FGD equipment.  This increase was partially offset by adecrease in deferred compensation costs (primarily mark-to-market adjustments)associated to a large degree with deferred compensation liabilities for theformer executives, and legal costs.

 

For the nine months ended September 30, 2008,operation and maintenance expense decreased $4.8 million compared to the sameperiod in 2007.  This variance wasprimarily due to:

 

·      a decrease in deferred compensation costs (primarilymark-to-market adjustments) associated to a large degree with deferredcompensation liabilities for the former executives,

 

·      a decrease in legal fees,

 

·      lower boiler maintenance costs largelyattributable to timing of scheduled outages, and

 

·      lower pension costs primarily due to the planfunding made in November 2007.

 

These decreases were partially offset by:

 

·      an increase in operating expenses at ourgenerating facilities largely due to the operation of the FGD and SCRequipment, and gypsum disposal, and

 

·      an increase in turbine maintenance costs incurreddue to an unplanned outage at a jointly-owned production unit.

 

**DP&L– Depreciation and Amortization**

 

For the threemonths ended September 30, 2008, depreciation and amortization expenseincreased $1.4 million compared to the same period in 2007.  This increase was primarily the result ofhigher plant balances due largely to installation of the FGD equipment,partially offset by the impact of lower depreciation rates for generationproperty which were put into effect on August 1, 2007.

 

For the ninemonths ended September 30, 2008, depreciation and amortization expensedecreased $0.2 million compared to the same period in 2007.  This decrease was primarily a result of theimpact of lower depreciation rates for generation property which were put intoeffect on August 1, 2007, partially offset by an increase to thedepreciation expense related to higher plant balances due largely to theinstallation of the FGD equipment.

 

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**DP&L– General Taxes**

 

For the threemonths and nine months ended September 30, 2008, general taxes increased$1.8 million and $8.6 million, respectively, compared to the same periods in2007.  These increases were primarily theresult of higher property taxes due mainly to capital improvements which haveled to higher assessed property values, combined with increased tax rates.

 

**DP&L– Net Gain on Settlement of Executive Litigation**

 

On May 21, 2007, we settled litigation with threeformer executives.  In exchange for ourpayment of $25 million, the three former executives relinquished and dismissedall of their claims, including those related to deferred compensation, RSUs,MVE incentives, stock options, and legal fees. As a result of this settlement, during the nine months ended September 30,2007, **DP&L** realized a net pre-tax gain incontinuing operations of approximately $35.3 million.

 

**DP&L**–**Interest Expense**

 

For the three monthsended September 30, 2008, interest expense increased $5.0 million comparedto the same period in 2007 primarily resulting from lower capitalized interestdue to the completion of the FGD project at the Stuart station.

 

For the nine months endedSeptember 30, 2008, interest expense increased $12.6 million compared tothe same period in 2007 primarily from:

 

·      lower capitalized interest due to the completionof the FGD projects at Miami Fort, Killen, and Stuart stations,

 

·      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 issuance costsrelating to pollution control bonds following their repurchase from thebondholders on April 4, 2008.  SeeNote 4 of Notes to Condensed Consolidated Financial Statements.

 

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

## ** **

For the three months andnine months ended September 30, 2008, other deductions of $0.4 million and$1.0 million, respectively, changed from other income of $2.1 million and $2.7million, respectively, recorded for the same periods of the prior year.  These changes from other income to otherdeductions primarily resulted from the recognition in 2007 of a $2.1 milliondeferred credit related to a litigation settlement (which was not part of theexecutive litigation settlement).

 

## **DP&L– Income Tax Expense**

## ** **

For the three monthsended September 30, 2008, income taxes decreased $12.1 million, or 29%,compared to the same period in 2007, primarily reflecting:

 

·      a 25% decrease in pre-taxbook income, and

 

·      a decrease in the effectivetax rate resulting from the phase-out of the Ohio Franchise Tax.

 

For the nine months endedSeptember 30, 2008, income taxes decreased $17.6 million, or 15%, comparedto the same period in the prior year, primarily reflecting:

 

·      a 3% decrease in pre-taxbook income,

 

·      a decrease in the effectivetax rate resulting from the phase-out of the Ohio Franchise Tax, and

 

·      a decrease in tax expensedue to the settlement of the Ohio Franchise Tax issues.  See Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

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**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL REQUIREMENTS**

 

**DPL’s**financial condition, liquidity, and capital requirementsinclude the consolidated results of **DP&L**and all of **DP&L’s** consolidatedsubsidiaries.  All material intercompanyaccounts and transactions have been eliminated in consolidation.

 

During the fourthquarter ended December 31, 2007, we identified immaterial changes incertain accounts payable balances that had not been correctly presented in ourprior period cash flow statements.  Changes in accounts payable balancesrepresenting capital expenditures had previously been classified with cashflows from operating activities and should have been classified with capitalexpenditures as part of investing activities.  Accordingly, the CondensedConsolidated Statements of Cash Flows for all periods presented have beenreclassified to conform to the current presentation.  See Note 1 of Notes to Condensed ConsolidatedFinancial Statements.

 

**DPL’s Cash Position**

 

**DPL’s** cash andcash equivalents totaled $26.3 million at September 30, 2008, compared to$134.9 million at December 31, 2007, a decrease of $108.6 million.  The decrease in cash and cash equivalents wasprimarily attributed to cash used to retire $100.0 million in long-term debt,$173.8 million in capital expenditures, $89.9 million in dividends paid oncommon stock, and $9.9 million in purchases of short-term investments.  This decrease was partially offset by cashprovided by operating activities of $242.5 million and $20.5 million ofrestricted funds drawn to fund pollution control capital expenditures.  At September 30, 2008, **DPL** had $16.5 million in restricted funds held in trustrelating to the 2007 issuance of $90.0 million in pollution control bonds.  On April 4, 2008, **DP&L**repurchased the bonds from bondholders, and holds them in trust while itcontinues to evaluate market conditions and explore suitable long-termfinancing alternatives.  See Note 4 ofNotes to Condensed Consolidated Financial Statements.

 

**DP&L’s Cash Position**

 

**DP&L’s** cashand cash equivalents totaled $33.8 million at September 30, 2008, comparedto $13.2 million at December 31, 2007, an increase of $20.6 million.  The increase in cash and cash equivalents wasprimarily attributed to $273.8 million in cash generated from operatingactivities, and $20.5 million of restricted funds drawn to fund pollutioncontrol capital expenditures, partially offset by $173.1 million in capitalexpenditures, $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 September 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 holds 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.

 

In July 2008, **DPL** and **DP&L** made a$42 million payment to the Ohio Department of Taxation (ODT) in accordance withthe settlement agreement reached on June 27, 2008.  See Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

**OperatingActivities**

 

For the nine months endedSeptember 30, 2008 and 2007, cash flows from operations were as follows:

 

**Net Cashprovided by Operating Activities**

 
| ** **                  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**          | ** ** |
| **$ in millions** | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                        |       |                            |       |   |   |
| **DPL**                     | ** ** | **$**                           | **242.5**  |   | $ | 235.0 |   |
| ** **                  | ** ** | ** **                      |       |   |   |
| **DP&L**                | ** ** | **$**                           | **273.8**  |   | $ | 262.8 |   |

 

The tariff-based revenuefrom our energy business continues to be the principal source of cash fromoperating activities.  Managementbelieves that the diversified retail customer mix of residential, commercial,and industrial classes coupled with the rate relief approved by the PUCO willprovide us with a reasonably predictable cash flow from operations.

 

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**DPL’s Cash provided by OperatingActivities**

 

**DPL**generated net cash from operating activities of $242.5 million and $235.0million during the nine-month periods ended September 30, 2008 and 2007,respectively.  The net cash provided byoperating activities for 2008 and 2007 was primarily the result of cashreceived from utility customers, partially offset by cash used for fuel,purchased power, operating expenditures, interest, and taxes.  The fluctuations in working capital resultfrom the timing of payments made and cash receipts from our utility customers.

 

**DP&L’s Cash provided byOperating Activities**

 

**DP&L**generated net cash from operating activities of $273.8 million and $262.8million during the nine-month periods ended September 30, 2008 and 2007,respectively.  The net cash provided byoperating activities for 2008 and 2007 was primarily the result of cashreceived from utility customers, partially offset by cash used for fuel,purchased power, operating expenditures, interest and taxes.  The fluctuations in working capital resultfrom the timing of payments made and cash receipts from our utility customers.

 

**InvestingActivities**

 

For the nine months endedSeptember 30, 2008 and 2007, cash flows from investing activities were asfollows:

 

**Net Cashused for Investing Activities**

 
| ** **                  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**          | ** ** |
| **$ in millions** | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                        |       |                            |       |   |   |
| **DPL**                     | ** ** | **$**                           | **(183.7** | **)** | $ | (114.9 | ) |
|                        |       |                            |       |   |   |
| **DP&L**                | ** ** | **$**                           | **(173.1** | **)** | $ | (271.0 | ) |

 

**DPL’s Cash used for InvestingActivities**

 

**DPL’s**net cash used for investing activities was$183.7 million and $114.9 million during the nine-month periods ended September 30,2008 and 2007, respectively.  For2008, net cash flows used for investing activities were related to capitalexpenditures and the purchase of investment grade corporate bonds.  The corporate bonds have an effective yieldof 6.67%, and mature in November 2008 and February 2009.  Net cash flows used for investing activitiesduring the nine months ended September 30, 2007 were related to capitalexpenditures that were largely offset by proceeds from the sale of two peakingunits and a corporate aircraft.

 

**DP&L’s Cash used forInvesting Activities**

 

**DP&L’s**net cash used for investing activities was $173.1 million and $271.0 millionduring the nine-month periods ended September 30, 2008 and 2007,respectively.  Net cash flows used forinvesting activities during both these periods were related to capitalexpenditures.

 

**FinancingActivities**

 

For the nine months endedSeptember 30, 2008 and 2007, cash flows from financing activities were asfollows:

 

**Net Cashused for Financing Activities**

 
| ** **                  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **September 30,**          | ** ** |
| **$ in millions** | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                        |       |                            |       |   |   |
| **DPL**                     | ** ** | **$**                           | **(167.4** | **)** | $ | (283.6 | ) |
|                        |       |                            |       |   |   |
| **DP&L**                | ** ** | **$**                           | **(80.1**  | ) | $ | (25.6 | ) |

 

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**DPL’s Cash used for FinancingActivities**

 

**DPL’s**net cash used for financing activities duringthe nine months ended September 30, 2008 was $167.4 million compared to $283.6 million during the same period of the prior year.  Net cash flows used for financing activitiesduring the nine months ended September 30, 2008 were primarily the resultof cash used to redeem the $100 million 6.25% Senior Notes in May 2008 andto pay dividends of $89.9 million to stockholders, partially offset bywithdrawals of $20.5 million from the restricted funds held in trust.  Net cash flows used for financing activitiesin the nine months ended September 30, 2007 were the result of cash usedto redeem the $225 million 8.25% Senior Notes in March 2007 and to paydividends to stockholders of $83.7 million, partially offset by cash receivedfrom the exercise of stock options, including tax effect, of $15.0 million andwithdrawals of $10.1 million from the restricted funds held in trust.

 

**DP&L’s Cash used forFinancing Activities**

 

**DP&L’s**net cash used for financing activities during the nine months ended September 30,2008 was $80.1 million compared to $25.6 million during the same period of theprior year.  Net cash flows used forfinancing activities during the nine months ended September 30, 2008 wereprimarily the result of cash used to pay common stock dividends of $80.0million to our parent **DPL** and ashort-term loan repayment to **DPL** of $20.0million, partially offset by withdrawals of $20.5 million from restricted fundsheld in trust.  Net cash flows used forfinancing activities for 2007 were primarily the result of cash used to paycommon stock dividends to our parent **DPL** of $125.0million, partially offset by a net short-term loan from our parent **DPL** of $90.0 million and withdrawals of $10.1 million fromrestricted funds held in trust.

 

**DPL** and **DP&L** have obligations to make future payments forcapital expenditures, debt agreements, lease agreements and other long-termpurchase obligations, and have certain contingent commitments such asguarantees.  We believe our cash flowsfrom operations, the credit facilities (existing or future arrangements), thesenior notes and other short- and long-term debt financing, will be sufficientto satisfy our future working capital, capital expenditures, and otherfinancing requirements for the foreseeable future.  Our ability to generate positive cash flowsis dependent on general economic conditions, competitive pressures and otherbusiness and risk factors described in Item 1a of our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007 and supplemented by thosedescribed in Item 1a of Part II of this quarterly report.  If we are unable to generate sufficient cashflows, or otherwise comply with the terms of our credit facilities, the seniornotes and other long-term debt, we may be required to refinance all or aportion of our existing debt or seek additional financing alternatives.  A discussion of each of our criticalliquidity commitments is outlined below.

 

**CapitalRequirements**

 

**DPL’s**construction additions were $168.1 million and $275.4 million during thenine-month periods ended September 30, 2008 and 2007, respectively.  **DPL** is expectedto spend approximately $75 million for the remainder of 2008.  Planned construction additions for 2008relate to **DP&L’s** environmentalcompliance program, power plant equipment, and its transmission anddistribution system.

 

**DP&L’s**construction additions were $166.9 million and $273.5 million during thenine-month periods ended September 30, 2008 and 2007, respectively.  **DP&L**is****expected to spend approximately $75 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 aresubject to continuing review and are revised in light of changes in financialand economic conditions, load forecasts, legislative and regulatorydevelopments and changing environmental standards, among other factors.  **DPL,** through its subsidiary **DP&L,**is projecting to spend anestimated $665 million in capital projects for the period 2008 through2010.  **DP&L** filed itselectric security plan (ESP) with the PUCO on October 10, 2008. Included in the filing were proposed capital investments related to the company’sCustomer Conservation and Energy Management Programs (CCEM).  If approvedby the PUCO, for the period 2009 to 2010, **DP&L** isprojecting to spend an estimated $120 million of the aforementioned $665million in CCEM capital projects.  A final decision from the PUCOregarding **DP&L’s** electricsecurity plan is expected in the first quarter of 2009.  Our ability tocomplete capital projects and the reliability of future service will beaffected by our financial condition, the availability of internal funds, andthe reasonable cost of external funds.  We expect to finance ourconstruction additions with a combination of cash on hand, short-termfinancing, long-term debt, and cash flows from operations.

 

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**Debt andLiquidity**

 

Duringthe 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 qualified tax-exempt financing from theODOD’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.

 

OnNovember 15, 2007, the OAQDA issued $90 million 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.

 

The$175 million 8.00% **DPL** SeniorNotes are due on March 31, 2009.  **DPL**expects to repay this debt obligation using the cashflows to be generated from future operating activities.  Our future liquidity is further strengtheneddue to the completion and installation of FGD equipment at the Stuart station,which had required significant cash outlays. In addition, our $220 million revolving credit facility, which does notexpire until November 2011, is available to fund working capital needs,property acquisitions, and construction until long-term funding, if needed, isarranged.  As of September 30, 2008,the outstanding borrowings under this credit facility amounted to $90 million.

 

**Debt Covenants**

 

Therehave been no changes to our debt covenants as disclosed in our Annual Report onForm 10-K for the fiscal year ended December 31, 2007.  We are in compliance with all of our debtcovenants.

 

**CreditRatings**

 

The following tableoutlines the rating of each company and date of the rating:

 
| ** **                             | ** ** | **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-BalanceSheet Arrangements**

 

**DPLInc. - Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with ourwholly owned generating subsidiary DPLE providing financial or performanceassurance to third parties.  Theseagreements are entered into primarily to support or enhance thecreditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension ofsufficient credit to accomplish DPLE’s intended commercial purposes.  Suchagreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” There have been no material changes to our guarantees as disclosed inour Annual Report on Form 10-K for the fiscal year ended December 31,2007.

 

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**ContractualObligations**

 

Therehave been no material changes, outside the ordinary course of business, to theinformation disclosed in the contractual obligations table in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007 except thoserelating to the following transactions:

 

·      On April 4, 2008, **DP&L**repurchasedall of the issued and outstanding $90 million variable rate OAQDA Revenue bondsfrom the bondholders and placed them in a custody account.  This transaction is further discussed in Note4 of Notes to Condensed Consolidated Financial Statements.

 

·      On June 27, 2008, **DPL**enteredinto a $42 million settlement agreement with the Ohio Department of Taxation(ODT) resolving all outstanding audit issues and appeals, including uncertaintax positions for tax years 1998 through 2006. The $42 million payment was made to the ODT in July 2008.  This transaction is further discussed in Note5 of Notes to Condensed Consolidated Financial Statements.

 

·      At December 31, 2007, **DP&L**had contractual obligations relating to the installation of FGD equipment inthe amount of $144 million.  During thethree months ended September 30, 2008, test operations of FGD equipment onStuart station units 1 and 2 were completed and the equipment was placed inservice.  The open contractualobligations relating to the installation of FGD equipment was therefore reducedto $8.8 million at September 30, 2008. It is expected that these open contractual obligations will be satisfiedwithin the next twelve months.

 

**CommercialCommitments**

 

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

 

**MARKET RISK**

 

Inthe normal course of business, we are subject to certain market risksincluding, but not limited to, reliance on third parties; changes in commodityprices for electricity, coal, environmental emissions and gas; and fluctuationsin interest rates.  We rely on manysuppliers for the purchase and delivery of inventory, including coal andequipment components, to operate our energy production, transmission, anddistribution functions.  Unanticipateddisruptions in our purchasing processes, delays, and supplier availability mayaffect our business and operating results. In addition, we rely on others to provide professional services, suchas, but not limited to, actuarial calculations, internal audit services,payroll processing, and various consulting services.  Commodity pricing exposure includes theimpacts of weather, internal generation plant performance, market demand,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.

 

OurRisk Management Committee (RMC) is responsible for establishing risk managementpolicies and the monitoring and reporting of risk exposures. The RMC meets on aregular basis with the objective of identifying, assessing, and quantifyingmaterial risk issues and developing strategies to manage these risks.

 

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**CommodityPricing Risk**

 

Recently, the coal markethas experienced significant price volatility. We are now in a global market for coal in which our domestic price isincreasingly affected by international supply disruptions and demandbalance.  Coal exports from the U.S. haveincreased significantly in recent years. In addition, domestic issues like government-imposed direct costs andpermitting issues are affecting mining costs and supply availability.  Our approach is to hedge the fuel costs forour anticipated electric sales.  For theyears ended December 31, 2009 and 2010, we have hedged our coalrequirements with coal mine operators and financial institutions to meet ourcommitted sales.  We may not be able tohedge the entire exposure of our operations from commodity pricevolatility.  To the extent we are nothedged against price volatility, our results of operations, financial position,or cash flows could be materially affected. As part of **DP&L’s**electricsecurity plan filing, the Company is requesting regulatory authority to deferfuel and fuel related costs that exceed the amount that is in current rates.  A final regulatory decision on our plan isexpected in the first quarter of 2009.

 

Approximately10% of **DPL’s** and 20% of **DP&L’s** electric revenues for the ninemonths ended September 30, 2008 werefrom sales 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 September 30, 2008, ahypothetical increase or decrease of 10% in **DPL’s**annual wholesale revenues could result in approximately an $11 million increaseor decrease to net income, assuming no increases in fuel and purchased powercosts.  As of September 30, 2008, ahypothetical increase or decrease of 10% in **DP&L’s**annual wholesale revenues could result in approximately a $21 million increaseor decrease to net income, assuming no increases in fuel and purchased powercosts.

 

**DPL’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs in both the nine months ended September 30,2008 and 2007 were 54%.  **DP&L’s** fuel (including coal, gas, oiland emission allowances) and purchased power costs as a percent of totaloperating costs were 55% for both the nine-month periods ending September 30,2008 and 2007.  We have substantially allof the total expected coal volume needed to meet our retail and firm wholesalesales requirements for 2008 under contract. The majority of our contracted coal is purchased at fixed prices.  Some contracts provide for periodicadjustment and some are priced based on market indices.  Substantially all contracts have featuresthat limit price escalations in any given year. Our consumption of SO2 allowances should decline in 2008 due toemission control upgrades.  We do notexpect to purchase SO2 allowances for 2008.  The exact consumption of SO2 allowances will depend on market prices forpower, availability of our generation units, the operation of emission controlequipment, and the actual sulfur content of the coal burned.  **DP&L** doesnot plan to purchase NOX allowances for the remainder of 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 lower volume and gainsrealized from coal sales (and excluding the effect of emission allowancesales), fuel costs are forecast to be approximately 10% lower in 2008 comparedto 2007.

 

Purchased power costs depend,in part, upon the timing and extent of planned and unplanned outages of ourgenerating capacity.  We will purchasepower on a discretionary basis when wholesale market conditions provideopportunities to obtain power at a cost below our internal production costs. Asof September 30, 2008, a hypothetical increase or decrease of 10% in **DPL’s** annual fuel and purchased power costscould result in approximately a $31 million increase or decrease to netincome.  As of September 30, 2008, ahypothetical increase or decrease of 10% in **DP&L’s**annual fuel and purchased power costs could result in approximately a $30million increase or decrease to net income.

 

**InterestRate Risk**

 

As a result of our normalinvesting and borrowing activities, our financial results are exposed tofluctuations in interest rates, which we manage through our regular financingactivities.  We maintain both cash ondeposit and investments in cash equivalents that may be affected by adverseinterest rate fluctuations.  At September 30,2008, we maintained only fixed rate long-term debt.  As discussed in Note 4 of Notes to CondensedConsolidated Financial Statements, we repurchased $90 million of our OAQDARevenue bonds on April 4, 2008.

 

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The carrying value of **DPL’s** debt was $1,542.0 million at September 30,2008, consisting of **DP&L’s**first mortgage bonds, **DP&L’s**tax-exempt pollution control bonds, **DPL’s** unsecurednotes, **DP&L’s** borrowings on its revolvingcredit facility, and **DP&L’s**capital leases.  The fair value of thisdebt was $1,487.2 million, based on current market prices or discounted cashflows using current rates for similar issues with similar terms and remainingmaturities.

 

The carrying value of **DP&L’s** debt was $874.9 million at September 30,2008, consisting of **DP&L’s**first mortgage bonds, tax-exempt pollution control bonds, borrowings on itsrevolving credit facility, and capital leases. The fair value of this debt was $812.6 million, based on current marketprices or discounted cash flows using current rates for similar issues withsimilar terms and remaining maturities.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

**DPL’s**and **DP&L’s** condensed consolidatedfinancial 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 couldhave a material effect on our financial results. Judgments and uncertaintiesaffecting the application of these policies and estimates may result inmaterially different amounts being reported under different conditions orcircumstances.  Historically, however,recorded estimates have 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 andother obligations.  Actual results may differfrom those estimates.  Refer to ourAnnual Report on Form 10-K for the fiscal year ended December 31,2007 for a complete listing of our critical accounting policies andestimates.  There have been no materialchanges to these critical accounting policies and estimates.

 

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**ELECTRIC SALES AND REVENUES**

 
| ** **                                | ** ** | **DPL Inc.**                | ** **  | **DP&L (a)**           | ** ** |
|-------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                | ** ** | **September 30,**           | ** **  | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2008**                         | ** **  | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Electric sales  (millions of kWh)         |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **1,375**                        |        | 1,505                           | ** ** | **4,144** |   | 4,276 | ** ** | **1,375** |   | 1,505 | ** ** | **4,144** |   | 4,276 |   |
| Commercial                                | ** ** | **1,055**                        |        | 1,101                           | ** ** | **3,001** |   | 3,038 | ** ** | **1,055** |   | 1,101 | ** ** | **3,001** |   | 3,038 |   |
| Industrial                                | ** ** | **1,099**                        |        | 1,139                           | ** ** | **3,062** |   | 3,233 | ** ** | **1,099** |   | 1,139 | ** ** | **3,062** |   | 3,233 |   |
| Other retail                              | ** ** | **380**                          |        | 397                             | ** ** | **1,096** |   | 1,111 | ** ** | **380** |   | 397 | ** ** | **1,096** |   | 1,111 |   |
| Total retail                              | ** ** | **3,909**                        |        | 4,142                           | ** ** | **11,303** |   | 11,658 | ** ** | **3,909** |   | 4,142 | ** ** | **11,303** |   | 11,658 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **343**                          |        | 967                             | ** ** | **1,762** |   | 2,645 | ** ** | **305** |   | 967 | ** ** | **1,724** |   | 2,645 |   |
| Total                                     | ** ** | **4,252**                        |        | 5,109                           | ** ** | **13,065** |   | 14,303 | ** ** | **4,214** |   | 5,109 | ** ** | **13,027** |   | 14,303 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenues ($ in thousands) |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **$**                            | **139,759** |                            | $          | 148,419 | ** ** | **$** | **409,349** |   | $ | 410,736 | ** ** | **$** | **139,759** |   | $ | 148,419 | ** ** | **$** | **409,349** |   | $ | 410,736 |   |
| Commercial                                | ** ** | **84,402**                       |        | 85,619                          | ** ** | **249,073** |   | 241,381 | ** ** | **78,831** |   | 80,085 | ** ** | **232,240** |   | 226,960 |   |
| Industrial                                | ** ** | **64,039**                       |        | 64,525                          | ** ** | **182,246** |   | 185,014 | ** ** | **36,955** |   | 34,720 | ** ** | **101,642** |   | 101,244 |   |
| Other retail                              | ** ** | **25,121**                       |        | 25,049                          | ** ** | **72,973** |   | 70,879 | ** ** | **19,949** |   | 19,907 | ** ** | **59,028** |   | 57,974 |   |
| Other  miscellaneous revenues             | ** ** | **2,444**                        |        | 2,570                           | ** ** | **7,193** |   | 7,701 | ** ** | **2,452** |   | 2,581 | ** ** | **7,199** |   | 7,747 |   |
| Total retail                              | ** ** | **$**                            | **315,765** |                            | $          | 326,182 | ** ** | **$** | **920,834** |   | $ | 915,711 | ** ** | **$** | **277,946** |   | $ | 285,712 | ** ** | **$** | **809,458** |   | $ | 804,661 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wholesale                                 | ** ** | **27,820**                       |        | 52,892                          | ** ** | **124,745** |   | 139,995 | ** ** | **61,937** |   | 94,025 | ** ** | **233,747** |   | 253,032 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| RTO and capacity  revenues                | ** ** | **68,101**                       |        | 39,833                          | ** ** | **155,123** |   | 81,389 | ** ** | **61,583** |   | 39,833 | ** ** | **148,605** |   | 81,389 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other revenues,  net of fuel costs        | ** ** | **2,810**                        |        | 3,052                           | ** ** | **8,709** |   | 8,545 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
|                                      | ** ** | ** **                       |        |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                     | ** ** | **$**                            | **414,496** |                            | $          | 421,959 | ** ** | **$** | **1,209,411** |   | $ | 1,145,640 | ** ** | **$** | **401,466** |   | $ | 419,570 | ** ** | **$** | **1,191,810** |   | $ | 1,139,082 |   |
|                                      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Electric  customers at end of period      |       |                             |        |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                               | ** ** | **455,537**                      |        | 455,801                         | ** ** | **455,537** |   | 455,801 | ** ** | **455,537** |   | 455,801 | ** ** | **455,537** |   | 455,801 |   |
| Commercial                                | ** ** | **50,071**                       |        | 49,665                          | ** ** | **50,071** |   | 49,665 | ** ** | **50,071** |   | 49,665 | ** ** | **50,071** |   | 49,665 |   |
| Industrial                                | ** ** | **1,806**                        |        | 1,813                           | ** ** | **1,806** |   | 1,813 | ** ** | **1,806** |   | 1,813 | ** ** | **1,806** |   | 1,813 |   |
| Other                                     | ** ** | **6,489**                        |        | 6,425                           | ** ** | **6,489** |   | 6,425 | ** ** | **6,489** |   | 6,425 | ** ** | **6,489** |   | 6,425 |   |
|                                      | ** ** | ** **                       |        |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |
| Total                                     | ** ** | **513,903**                      |        | 513,704                         | ** ** | **513,903** |   | 513,704 | ** ** | **513,903** |   | 513,704 | ** ** | **513,903** |   | 513,704 |   |

 

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| *(a)* | * * | *DP&L  sells power to DPLER (a subsidiary of DPL). These sales are classified as  wholesale on DP&L’s financial statements and retail sales for DPL. The  kWh volumes contain all volumes distributed on the DP&L system which  include the retail sales by DPLER. The sales for resale volumes are omitted  to avoid duplicate reporting.* |
|-------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

Seethe “MARKET RISK” section in Part I of Item 2 of this report.

 

**Item4.  Controls and Procedures**

 

Our ChiefExecutive Officer (CEO) and Chief Financial Officer (CFO) are responsible forestablishing 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 forms;and (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.

 

There was nochange in our internal control over financial reporting during the three monthsended September 30, 2008 that has materially affected, or is reasonablylikely to materially affect, internal control over reporting.

 

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**Part II – Other Information**

 

**Item1**– **Legal Proceedings**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We believe the amounts provided in ourcondensed consolidated financial statements, as prescribed by GAAP, for thesematters 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, and other matters discussed below, and to comply withapplicable laws and regulations will not exceed the amounts reflected in ourcondensed consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of September 30, 2008, cannot be reasonably determined.

 

The information set forthbelow is limited to certain recent developments concerning our legalproceedings and should be read in conjunction with our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, and our Quarterly Reports on Form 10-Qfor the three months ended March 31, 2008 and June 30, 2008.  Information concerning the legal proceedingsdiscussed in the UPDATES/OTHER MATTERS – Environmental Updates section of Part 1,Item 2 of this Quarterly Report on Form 10-Q is incorporated by referenceinto this Item.

 

**StateIncome Tax Audit**

 

As previouslydisclosed, on June 27, 2008, we entered into a $42 million settlementagreement with the Ohio Department of Taxation (ODT) resolving all outstandingaudit issues, for tax years 1998 through 2006, that were discussed in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2007.  In July 2008, we made the $42million settlement payment to ODT.  Thissettlement is further discussed in Note 5 of Notes to Condensed ConsolidatedFinancial Statements.

 

**Sierra Club**

 

In September 2004,the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the United States DistrictCourt for the Southern District of Ohio for alleged violations of the Clean AirAct (CAA) and the station’s operating permit. On August 7, 2008, a consent decree was filed in the United StatesDistrict Court in full settlement of these CAA claims.  Under the terms ofthe consent decree, **DP&L** andthe other owners of the Stuart generating station agreed to (i) certainemission targets related to nitrogen oxides (NOx), sulfur dioxide (SO2),and particulate matter; (ii) make energy efficiency and renewable energycommitments that are conditioned on receiving Public Utilities Commission ofOhio (PUCO) approval for the recovery of costs; (iii) forfeit 5,500 sulfurdioxide allowances; and (iv) provide funding to a third party non-profitorganization to establish a solar water heater rebate program.  **DP&L** andthe other owners of the station also entered into an attorneys’ fee agreementto pay a portion of the Sierra Club’s attorney and expert witness fees.  The parties to the lawsuit filed a jointmotion on October 22, 2008, seeking an order by the United States DistrictCourt approving the consent decree with funding for the third party non-profitorganization set at $300,000.  On October23, 2008, the United States District Court approved the consent decree. We havedetermined that the terms of the consent decree will not have a material impacton our overall results of operations, financial position, or cash flows.

 

**InsuranceRecovery Claim**

 

On May 16,2007, **DPL** filed an insurance claim withEnergy Insurance Mutual (EIM) to recoup legal expenses associated with ourlitigation 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.

 

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**Item1a – Risk Factors**

 

Weconsider the risk factors provided in our most recent Annual Report on Form 10-Kand the risk factors set forth below to be the most significant in yourdecision to invest in our stock.  Ourmost recent Annual Report on Form 10-K may be obtained as discussed on Page 4of this report.  If any of these eventsoccur, our business, financial position or results of operation could bematerially affected.

 

**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 the District of Columbia Circuit issueda decision that vacated the U.S. Environmental Protection Agency’s (USEPA’s)CAIR and its associated Federal Implementation Plan. This decision remandsthese issues back to the USEPA.  TheUSEPA issued CAIR on March 10, 2005 to regulate certain upwind states withrespect to fine particulate matter and ozone. CAIR created interstate trading programs for annual NOx emission allowances and made modifications toan existing trading program for SO2 that were to take effect in 2010.  The court’s decision, in part, invalidatedthe new NOx annual emission allowance trading program andthe modifications to the SO2 emission trading program, and createduncertainty regarding future NOx andSO2 emission reduction requirements and theirtiming.  CAIR remains in effect pending amandate by the court implementing its decision. On October 21, 2008, the court requested that the litigation partiessubmit their views as to an appropriate court mandate.

 

Inthe fourth quarter of 2007, **DP&L** begana program for selling excess emission allowances, including annual NOx emission allowances and SO2 emissionallowances that were the subject of CAIR trading programs.  In subsequent quarters, **DP&L**recognizedgains from the sale of excess emission allowances to third parties.  The court’s CAIR decision has affected thetrading market for excess allowances and impacted **DP&L**’sprogram for selling additional excess allowances.  Although this impact on the sale of excessallowances has not had, nor do we expect it to have, a material effect on ourfinancial position, the overall impact of the court’s decision, and of theactions the USEPA or others will take in response to this decision, on **DPL** and **DP&L** is notfully known at this time and could have an adverse effect on us.

 

**Ohio Senate Bill 221**

 

OnMay 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, wassigned by the Governor and went into effect July 31, 2008.  In compliance with Senate Bill 221, **DP&L** filed its electric security plan on October 10,2008.  The bill and **DP&L**’selectric security plan filing are further discussed in the UPDATES / OTHERMATTERS section above.  While the overallfinancial impact of this new legislation on **DPL**and **DP&L** will not be known for sometime, implementation of the new legislation by **DPL**and **DP&L** may materially impact ourfinancial condition.

 

**Credit Market**

 

Thecurrent global credit crisis may adversely affect our business and financialresults.  During 2007, higher interestrates, falling property 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 nine months ended September 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 thecreation of structured investment vehicles (SIVs), as well as the unclearimpact on large banks of MBS, CDOs, and SIVs, caused banks to reduce theirloans to each other or make them at higher interest rates.  Liquidity and credit concerns were furtherexacerbated in September 2008 with Lehman Brothers’ bankruptcy filing, thesale of Merrill Lynch to Bank of America, the U.S. government conservatorshipof Fannie Mae and Freddie Mac, and the U.S. government loan to AIG.  Because of this, the ability of corporationsto obtain funds through the issuance of debt was negatively impacted.  We issue debt to cover the costs of certainof our operations and expenditures and the inability to issue such debt onreasonable terms, or at all, could negatively affect our business and financialresults.

 

**Fuel and Commodity Prices**

 

Recently,the coal market has experienced significant price volatility.  We are now in a global market for coal inwhich our domestic price is increasingly affected by international supplydisruptions and demand balance.  Coalexports 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 costs for our anticipated electric sales.  For the years ended December 31, 2009and 2010, we have hedged our coal requirements with coal mine operators andfinancial institutions to meet our committed sales.  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, our resultsof operations, financial position, or cash flows could be materially affected.

 

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**Item2 – Unregistered Sales of Equity Securities and Use of Proceeds**

 

None

 

**Item3 – Defaults Upon Senior Securities**

 

None

 

**Item4 – Submission of Matters to a Vote of Security Holders**

 

None

 

**Item5 – Other Information**

 

None

 

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**Item6 – Exhibits**

** **
| **DPL** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                              | ** ** | **Location**                         |
|---------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
| 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:  | October 29, 2008        |                                   | /s/ Paul M. Barbas                                                                                          |   |
|   |                    |                                   | Paul M. Barbas  President and Chief Executive Officer  (principal executive officer)                        |   |
|   |                    |                                   |                                                                                                        |   |
|   |                    |                                   |                                                                                                        |   |
|   | October 29, 2008        |                                   | /s/ John J. Gillen                                                                                          |   |
|   |                    |                                   | John J. Gillen  Senior Vice President, Chief Financial Officer and Treasurer  (principal financial officer) |   |
|   |                    |                                   |                                                                                                        |   |
|   |  October 29,  2008 |                                   | /s/ Frederick J. Boyle                                                                                      |   |
|   |                    |                                   | Frederick J. Boyle                                                                                          |   |
|   |                    |                                   | Vice President—Finance, Chief  Accounting Officer and Controller                                       |   |
|   |                    |                                   | (principal accounting officer)                                                                              |   |

 

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