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** **

 

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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

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

 

**For the fiscal year ended****December 31, 2008**

** **

**OR**

 

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

 

**For the transition periodfrom               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**                                                   |       |                                |

 

Eachof the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange:

 

| **Registrant**                         | ** ** | **Description**                                                        |
|----------------------------------------|------------|------------------------------------------------------------------------|
| **DPL Inc.**                           | ** ** | **Common Stock, $0.01 par value and Preferred Share Purchase  Rights** |
| ** **                             | ** ** | ** **                                                             |
| **The Dayton Power and Light Company** | ** ** | **None**                                                               |

 

Securitiesregistered pursuant to Section 12(g) of the Act:**  None**

 

Indicate by check mark ifeach registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

 

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

 

Indicate by check mark ifeach registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.

 

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

 

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 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof each registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.

 

| DPL Inc.                           |   | o |
|------------------------------------|--------|---|
| The Dayton Power and Light Company |   | o |

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.

 

|                               |   | Large Accelerated  filer | Accelerated filer | Non-Accelerated filer | Smaller reporting  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 |

 

Theaggregate market value of DPL Inc.’s common stock held by non-affiliates of DPLInc. as of June 30, 2008 was approximately $3.0 billion based on a closingsale price of $26.38 on that date as reported on the New York StockExchange.  All of the common stock of TheDayton Power and Light Company is owned by DPL Inc.  As of February 24, 2009, each registranthad the following shares of common stock outstanding:

 

| **Registrant**                          | ** ** | **Description**                                                        | ** ** | **Shares  Outstanding** |
|-----------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------|
| **DPL  Inc.**                           | ** ** | **Common  Stock, $0.01 par value and Preferred Share Purchase Rights** |       | 115,962,529             |
| ** **                              | ** ** | ** **                                                             | ** ** | ** **              |
| **The Dayton  Power and Light Company** | ** ** | **Common  Stock, $0.01 par value**                                     |       | 41,172,173              |

 

Thiscombined Form 10-K 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.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of **DPL**’s definitive proxy statement for its 2009 Annual Meetingof Shareholders are incorporated by reference in Part III of this Form 10-K.

 

 

 

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DPL Inc. and The DaytonPower and Light Company

 

Index to Annual Report on Form 10-K

# FiscalYear Ended December 31, 2008

 
| ** ** | ** ** | ** **                                                                                                          | ** ** | **Page No.** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| ** ** | ** ** | **Part I**                                                                                                     | ** ** | ** **        |
| Item 1     |       | Business                                                                                                            |       | 3                 |
| Item 1A    |       | Risk  Factors                                                                                                       |       | 17                |
| Item 1B    |       | Unresolved Staff  Comments                                                                                          |       | 24                |
| Item 2     |       | Properties                                                                                                          |       | 24                |
| Item 3     |       | Legal Proceedings                                                                                                   |       | 24                |
| Item 4     |       | Submission of  Matters to a Vote of Security Holders                                                                |       | 25                |
|       |       |                                                                                                                |       |              |
| ** ** | ** ** | **Part II**                                                                                                    | ** ** | ** **        |
| Item 5     |       | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities |       | 26                |
| Item 6     |       | Selected Financial  Data                                                                                            |       | 28                |
| Item 7     |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |       | 29                |
| Item 7A    |       | Quantitative and Qualitative Disclosures about Market  Risk                                                         |       | 59                |
| Item 8     |       | Financial  Statements and Supplementary Data                                                                        |       | 60                |
| Item 9     |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               |       | 119               |
| Item  9A   |       | Controls  and Procedures                                                                                            |       | 119               |
| Item  9B   |       | Other  Information                                                                                                  |       | 119               |
|       |       |                                                                                                                |       |              |
| ** ** | ** ** | **Part III**                                                                                                   | ** ** | ** **        |
| Item 10    |       | Directors and Executive Officers of the Registrant                                                                  |       | 120               |
| Item  11   |       | Executive  Compensation                                                                                             |       | 120               |
| Item 12    |       | Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters                     |       | 120               |
| Item 13    |       | Certain Relationships and Related Transactions                                                                      |       | 120               |
| Item 14    |       | Principal Accountant Fees and Services                                                                              |       | 120               |
|       |       |                                                                                                                |       |              |
| ** ** | ** ** | **Part IV**                                                                                                    | ** ** | ** **        |
| Item 15    |       | Exhibits and Financial Statement Schedules                                                                          |       | 121               |
|       |       |                                                                                                                |       |              |
| ** ** | ** ** | **Other**                                                                                                           | ** ** | ** **        |
|       |       | Signatures                                                                                                          |       | 132               |
|       |       | Schedule II  Valuation and Qualifying Accounts                                                                      |       | 134               |
|       |       | Subsidiaries of DPL  Inc. and The Dayton Power and Light Company                                                    |       |              |
|       |       | Consent of Independent  Registered Public Accounting Firm                                                           |       |              |

 

 

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## **PART I**

## ** **

**Item 1 -Business**

 

This report includes the combined filing of **DPL Inc.(DPL)** and **The Dayton Power and LightCompany****(DP&L). DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 93% of **DPL’s**totalconsolidated asset base. Throughout this report the terms we, us, our and oursare used to refer to both **DPL** and **DP&L**, respectively and altogether, unless the contextindicates otherwise. Discussions or areas of this report that apply only to **DPL** or **DP&L** willclearly be noted in the section.

 

**WEBSITE ACCESS TO REPORTS**

 

**DPL**and **DP&L** file current, annualand quarterly reports and other information required by the Securities ExchangeAct of 1934, as amended, with the Securities and Exchange Commission (SEC). Youmay read and copy any document we file at the SEC’s public reference roomlocated at 100 F Street N.E., Washington, D.C. 20549, USA. Please call the SECat (800) SEC-0330 for further information on the public reference rooms. OurSEC filings are also available to the public from the SEC’s website athttp://www.sec.gov.

 

Our public internet site is http://www.dplinc.com. Wemake available, free of charge, through our internet site, our annual reportson Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and Forms 3, 4 and 5 filed on behalf of our directors and executive officersand amendments 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 obtaincopies of these documents, free of charge, by sending a request, in writing, toDPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

**ORGANIZATION**

 

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

 

**DPL’s** principalsubsidiary is **DP&L**. **DP&L** is a public utility incorporatedin 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. Electricity for **DP&L’s** 24 county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 515,000 retail customers. Principal industries served include automotive,food processing, paper, plastic, manufacturing and defense. **DP&L’s** sales reflect the generaleconomic conditions and seasonal weather patterns of the area. **DP&L** sells any excess energy andcapacity into the wholesale market. **DP&L** alsosells electricity to DPL Energy Resources, Inc. (DPLER), an affiliate, tosatisfy the electric requirements of its retail customers.

 

**DPL’s** othersignificant 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), which is our captive insurancecompany that provides insurance to us and our subsidiaries.

 

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

 

**DPL**, **DP&L,**and its subsidiaries employed 1,588 persons as of January 30, 2009,of which 1,365 were full-time employees and 223 were part-time employees. Approximately54% of our employees are under a collective bargaining agreement. During 2008,we negotiated a new three-year collective bargaining agreement with the coveredemployees. See Collective Bargaining Agreement below.

 

**SIGNIFICANTDEVELOPMENTS**

 

**Credit Rating Upgrades**

 

The rating agencies maintained our debt credit ratings but revised theoutlook to positive. The following table outlines the rating and outlook ofeach company and the date each outlook was revised:

 

| ** **                            | ** ** | **DPL** | ** ** | **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 |

 

**Pollution Control Bonds**

 

On November 15, 2007, The Ohio Air Quality Development Authority(OAQDA) issued $90 million of collateralized, variable rate OAQDA RevenueBonds, 2007 Series A due November 1, 2040. In turn, **DP&L** borrowed these funds from the OAQDA. The payment ofprincipal and interest on the bonds when due was insured by an insurance policyissued by Financial Guaranty Insurance Company (FGIC). During the first quarterof 2008, all three credit rating agencies downgraded FGIC. These downgrades, aswell as the downgrades of our major bond insurers, resulted in auction ratesecurity bonds carrying substantially higher interest rates in succeedingauctions and incurring failed auctions. On April 4, 2008, **DP&L** converted the 2007 Series A Bonds from AuctionRate Securities to Variable Rate Demand Notes. At that time, **DP&L** purchased these notes out of the market and placedthem with the Trustee to be held until the capital markets corrected. Thesenotes were redeemed in December 2008 (see below).

 

On December 4, 2008, the OAQDA issued $100 million ofcollateralized, variable rate Revenue Refunding Bonds Series A and B due November 1,2040. In turn, **DP&L** borrowed these funds fromthe OAQDA. The payment of principal and interest on the bonds when due isbacked by a standby letter of credit issued by a syndicated bank group creditfacility. **DP&L** is using $10 million of thesebonds to finance its portion of the costs of acquiring, constructing andinstalling certain solid waste disposal and air quality facilities at theConesville generating station. The remaining $90 million was used to redeem the2007 Series A Bonds. The above transactions are further discussed in Note7 of Notes to Consolidated Financial Statements.

 

**Long-Term Debt Redemption**

 

**DPL** redeemed the $100 million6.25% Senior Notes on their maturity date of May 15, 2008.

 

**Ohio Senate Bill 221**

 

On May 1, 2008, substitute Senate Bill 221 (SB 221), an Ohioelectric energy bill, was signed by the Governor and went into effect July 31,2008. Among other requirements, this new law contains annual targets relatingto advanced energy portfolio standards, renewable energy, demand reduction, andenergy efficiency standards. The bill is further discussed under Ohio RetailRates in Item 1 — COMPETITION AND REGULATION below.

 

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**Income Tax Settlement**

 

On June 27, 2008, we entered into a $42 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 million payment was made to the ODT in July 2008. Dueto this settlement agreement, the balance of our unrecognized state taxliabilities recorded at December 31, 2007, in the amount of $56.3 million,was reversed resulting in a recorded income tax benefit of $8.5 million, net offederal tax impact, in 2008. See Note 8 of Notes to Consolidated FinancialStatements.

 

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

 

On July 11, 2008, the United States Court of Appeals for theDistrict of Columbia Circuit issued a decision that vacated the U.S.Environmental Protection Agency’s (USEPA’s) Clean Air Interstate Rule (CAIR)and its associated Federal Implementation Plan. This decision remanded theseissues back to the USEPA. The USEPA issued CAIR on March 10, 2005 toregulate certain upwind states with respect to fine particulate matter andozone. CAIR created interstate trading programs for annual nitrogen oxide (NOX) emission allowances and mademodifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in2010. The court’s decision, in part, invalidated the new NOx annual emission allowance tradingprogram and the modifications to the SO2 emission tradingprogram and created uncertainty regarding future NOx and SO2 emission reduction requirements and theirtiming. On December 23, 2008, the court reversed part of its decision thatvacated CAIR. Thus, CAIR currently remains in effect, but the USEPA remainssubject to the court’s order to revise the program.

 

**FGD Project Implementation**

 

Installation and testing of flue gas desulfurization (FGD) equipment onall four units at the Stuart station was successfully completed by August 2008.This FGD equipment is currently in service.

 

**Storm Costs**

 

On September 14, 2008, the Midwest region was severely affected byhurricane-force winds which resulted in significant property damage anddisruptions to the supply of electric energy to retail customers. Through December 31,2008, we deferred approximately $13 million of incremental operation andmaintenance costs associated with storm restoration efforts for that storm andother major storms in 2008. On December 31, 2008, **DP&L**filed a request for an accounting order with the Public Utilities Commission ofOhio (PUCO) seeking to defer these incremental costs. On January 14, 2009,the PUCO granted that authority.

 

**Collective Bargaining Agreement**

 

In August 2008, we began negotiations with employees covered underour collective bargaining agreement which expired October 31, 2008. On October 24,2008, we reached an agreement with these employees on a new three-year laboragreement. This agreement was ratified by the covered employees on November 12,2008.

 

**Sales of Coal and Excess Emission Allowances**

 

During 2008, **DP&L** soldcoal and excess emission allowances to various counterparties realizing a totalnet gain of $118.2 million. This gain is recorded as a component of **DP&L’s** fuel costs and reflected in operating income.

 

**Warrants Exercised**

 

On September 18, 2008, Lehman Brothers Inc. exercised 12 million **DPL** warrants under a cashless exercise transaction. Eachwarrant was exercisable for one share of **DPL** commonstock, subject to anti-dilution adjustments (e.g., stock split, stock dividend)at an exercise price of $21.00 per common share. This exercise resulted in theissuance of 2.3 million shares of common stock from **DPL’s**shares held in treasury.

 

**Increase in Dividends on DPL’s CommonStock**

 

On December 10, 2008, **DPL’s** Board of Directors authorized a quarterly dividend rateincrease of approximately 4%, increasing the quarterly dividend per **DPL**common share from $.275 to $.285. If this increase weremaintained, the annualized dividend rate would increase from $1.10 per share to$1.14 per share.

 

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**ELECTRIC SALES AND REVENUES**

 
| ** **                                | ** ** | **DPL Inc.**  | ** **    | **DP&L (a)** | ** ** |
|-------------------------------------------|------------|---------------|---------------|------------------|------------|
| ** **                                | ** ** | **2008**      | ** **    | **2007**         | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Electric sales  (millions of kWh)         |       |          |          |             |       |   |   | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **5,533**     |          | 5,535            |       | 5,218 | ** ** | **5,533** |   | 5,535 |   | 5,218 |   |
| Commercial                                | ** ** | **3,959**     |          | 3,990            |       | 3,835 | ** ** | **3,959** |   | 3,990 |   | 3,835 |   |
| Industrial                                | ** ** | **3,986**     |          | 4,241            |       | 4,286 | ** ** | **3,986** |   | 4,241 |   | 4,286 |   |
| Other retail                              | ** ** | **1,454**     |          | 1,468            |       | 1,428 | ** ** | **1,454** |   | 1,468 |   | 1,428 |   |
| Total Retail                              | ** ** | **14,932**    |          | 15,234           |       | 14,767 | ** ** | **14,932** |   | 15,234 |   | 14,767 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Wholesale                                 | ** ** | **2,240**     |          | 3,364            |       | 3,651 | ** ** | **2,173** |   | 3,364 |   | 3,651 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **17,172**    |          | 18,598           |       | 18,418 | ** ** | **17,105** |   | 18,598 |   | 18,418 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Operating revenues  ($ in thousands) |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **$**         | **544,561**   |             | $          | 532,956 |   | $ | 490,514 | ** ** | **$** | **544,561** |   | $ | 532,956 |   | $ | 490,514 |   |
| Commercial                                | ** ** | **332,010**   |          | 321,051          |       | 300,908 | ** ** | **308,934** |   | 301,455 |   | 278,082 |   |
| Industrial                                | ** ** | **240,041**   |          | 244,260          |       | 240,450 | ** ** | **133,832** |   | 132,359 |   | 130,119 |   |
| Other retail                              | ** ** | **97,592**    |          | 94,568           |       | 88,307 | ** ** | **78,905** |   | 77,184 |   | 88,203 |   |
| Other  miscellaneous revenues             | ** ** | **9,042**     |          | 13,340           |       | 11,174 | ** ** | **9,046** |   | 13,387 |   | 11,215 |   |
| Total retail                              | ** ** | **1,223,246** |          | 1,206,175        |       | 1,131,353 | ** ** | **1,075,278** |   | 1,057,341 |   | 998,133 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Wholesale                                 | ** ** | **149,874**   |          | 180,254          |       | 174,114 | ** ** | **293,500** |   | 331,722 |   | 309,885 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| RTO revenues                              | ** ** | **217,357**   |          | 118,389          |       | 77,231 | ** ** | **204,074** |   | 118,389 |   | 77,231 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Other revenues,  net of fuel costs        | ** ** | **11,080**    |          | 10,911           |       | 10,821 | ** ** | **—** |   | — |   | — |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **$**         | **1,601,557** |             | $          | 1,515,729 |   | $ | 1,393,519 | ** ** | **$** | **1,572,852** |   | $ | 1,507,452 |   | $ | 1,385,249 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Electric  customers at end of period      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Residential                               | ** ** | **456,770**   |          | 456,989          |       | 457,054 | ** ** | **456,770** |   | 456,989 |   | 457,054 |   |
| Commercial                                | ** ** | **50,190**    |          | 49,875           |       | 49,284 | ** ** | **50,190** |   | 49,875 |   | 49,284 |   |
| Industrial                                | ** ** | **1,797**     |          | 1,818            |       | 1,822 | ** ** | **1,797** |   | 1,818 |   | 1,822 |   |
| Other                                     | ** ** | **6,517**     |          | 6,443            |       | 6,349 | ** ** | **6,517** |   | 6,443 |   | 6,349 |   |
|                                      |       | ** **    |          |             |       |   |   | ** ** |   |   |   |   |   |
| Total                                     | ** ** | **515,274**   |          | 515,125          |       | 514,509 | ** ** | **515,274** |   | 515,125 |   | 514,509 |   |

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

 

**ELECTRIC OPERATIONS AND FUEL SUPPLY**

** **

| ** **           | ** ** | **2008 Summer Generating Capacity** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Amounts in MWs)** | ** ** | **Coal Fired**                      | ** ** | **Peaking Units** | ** ** | **Total** | ** ** |
|                 |       |                                |       |   |   |   |   |
| **DPL**              |       | 2,778                               |       | 919 |   | 3,697 |   |
|                 |       |                                |       |   |   |   |   |
| **DP&L**         |       | 2,778                               |       | 435 |   | 3,213 |   |
| * *             | * *   | * *                            | * *   | * * | * * | * * | * * |

 

**DPL’s** present summergenerating capacity, including peaking units, is approximately 3,697 MW. Ofthis capacity, approximately 2,778 MW, or 75%, is derived from coal-fired steamgenerating stations and the balance of approximately 919 MW, or 25%, consistsof combustion turbine and diesel peaking units.

 

**DP&L’s**present summer generating capacity, including peaking units, is approximately3,213 MW. Of this capacity, approximately 2,778 MW, or 86%, is derived fromcoal-fired steam generating stations and the balance of approximately 435 MW,or 14%, consists of combustion turbine and diesel peaking units.

 

Combustion turbineoutput is dependent on ambient conditions and is higher in the winter than inthe summer. Our all-time net peak load was 3,270 MW, occurring August 8,2007.

 

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Approximately 89% of theexisting steam generating capacity is provided by certain generating unitsowned as tenants in common with Duke Energy-Ohio (or its subsidiaries TheCincinnati Gas & Electric Company [CG&E], or Union Heat, Light &Power) and AEP (or its subsidiary Columbus Southern Power [CSP]). As tenants incommon, each company owns a specified undivided share of each of these units,is entitled to its share of capacity and energy output, and has a capital andoperating cost responsibility proportionate to its ownership share. **DP&L’s** remaining steam generatingcapacity (approximately 301 MW) is derived from a generating station ownedsolely by **DP&L**. Additionally, **DP&L,** CG&E and CSP own, as tenantsin common, 884 circuit miles of 345,000-volt transmission lines. **DP&L** has several interconnections withother companies for the purchase, sale and interchange of electricity.

 

In 2008, we generated99.4% of our electric output from coal-fired units and 0.6% from oil andnatural gas-fired units.

 

The following table setsforth **DP&L’s** and DPLE’sgenerating stations and, where indicated, those stations which **DP&L** owns as tenants in common.

 
| ** **                                    | ** ** | ** **     | ** ** | ** **            | ** ** | ** **       | ** ** | **Approximate Summer** | ** ** |
|-----------------------------------------------|------------|----------------|------------|-----------------------|------------|------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **     | ** ** | ** **            | ** ** | ** **       | ** ** | **MW Rating**          | ** ** |
| **Station**                                   | ** ** | **Ownership*** | ** ** | **Operating Company** | ** ** | **Location**     | ** ** | **DPL Portion**        | ** ** | **Total** | ** ** |
| Coal Units                                    |       |           |       |                  |       |             |       |                   |       |   |   |
| Hutchings                                     |       | W              |       | DP&L              |       | Miamisburg, OH   |       | 301                    |       | 301 |   |
| Killen                                        |       | C              |       | DP&L              |       | Wrightsville, OH |       | 402                    |       | 600 |   |
| Stuart                                        |       | C              |       | DP&L              |       | Aberdeen, OH     |       | 820                    |       | 2,340 |   |
| Conesville-Unit  4                            |       | C              |       | CSP                   |       | Conesville, OH   |       | 129                    |       | 780 |   |
| Beckjord-Unit 6                               |       | C              |       | CG&E              |       | New Richmond, OH |       | 207                    |       | 414 |   |
| Miami Fort-Units  7 & 8              |       | C              |       | CG&E              |       | North Bend, OH   |       | 368                    |       | 1,020 |   |
| East Bend-Unit 2                              |       | C              |       | CG&E              |       | Rabbit Hash, KY  |       | 186                    |       | 600 |   |
| Zimmer                                        |       | C              |       | CG&E              |       | Moscow, OH       |       | 365                    |       | 1,300 |   |
|                                          |       |           |       |                  |       |             |       |                   |       |   |   |
| Combustion  Turbines or Diesel                |       |           |       |                  |       |             |       |                   |       |   |   |
| Hutchings                                     |       | W              |       | DP&L              |       | Miamisburg, OH   |       | 23                     |       | 23 |   |
| Yankee Street                                 |       | W              |       | DP&L              |       | Centerville, OH  |       | 107                    |       | 107 |   |
| Monument                                      |       | W              |       | DP&L              |       | Dayton, OH       |       | 12                     |       | 12 |   |
| Tait Diesels                                  |       | W              |       | DP&L              |       | Dayton, OH       |       | 10                     |       | 10 |   |
| Sidney                                        |       | W              |       | DP&L              |       | Sidney, OH       |       | 12                     |       | 12 |   |
| Tait Units 1-3                                |       | W              |       | DP&L              |       | Moraine, OH      |       | 256                    |       | 256 |   |
| Killen                                        |       | C              |       | DP&L              |       | Wrightsville, OH |       | 12                     |       | 18 |   |
| Stuart                                        |       | C              |       | DP&L              |       | Aberdeen, OH     |       | 3                      |       | 10 |   |
| Montpelier Units  1-4                         |       | W              |       | DPLE                  |       | Montpelier, IN   |       | 192                    |       | 192 |   |
| Tait Units 4-7                                |       | W              |       | DPLE                  |       | Moraine, OH      |       | 292                    |       | 292 |   |
| Total  approximate summer generating capacity |       |           |       |                  |       |             |       | 3,697                  |       | 8,287 |   |

----

| *W |  = Wholly-Owned   |
|----|-----------------------------|
| C  |  = Commonly-Owned |

 

Inaddition to the above, **DP&L**alsoowns a 4.9% equity ownership interest in Ohio Valley Electric Corporation(OVEC), an electric generating company. OVEC has two plants in Cheshire, Ohioand Madison, Indiana with a combined generation capacity of approximately 2,265MW. **DP&L’s** share of this generationcapacity is approximately 111 MW.

 

**DPL**has substantially all of the totalexpected coal volume needed to meet its retail and firm wholesale salesrequirements for 2009 under contract. The majority of the contracted coal ispurchased at fixed prices. Some contracts provide for periodic adjustments andsome are priced based on market indices. Substantially all contracts havefeatures that limit price escalations in any given year.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather, thewholesale market price of power, certain provisions in coal contracts relatedto government imposed costs, counterparty performance and credit, scheduledoutages, and generation plant mix. Based on higher volume and price, fuel costsexcluding gains from the sale of emission allowances are forecasted to be 25%to 35% higher in 2009 compared to 2008.

 

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Ouremission allowance consumption was reduced in 2008 due to the installation offlue gas desulfurization equipment (scrubbers) at the Killen and J.M. Stuartelectric generating stations.  Due to theinstallation of this emission control equipment and barring any changes in theregulatory environment in which we operate, we expect to have emissionallowance inventory in excess of our needs, which we plan to sell during 2009and in future periods.  We did notpurchase SO2 allowances or NOX allowances during 2008, nor do we plan topurchase any in 2009.

 

The gross average cost offuel consumed per kilowatt-hour (kWh) was as follows:

** **

| ** **   | ** ** | **Average Cost of Fuel Consumed (¢/kWh)** |
|--------------|------------|------------------------------------------------|
| ** **   | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2006** |
|         |       |                                           |   |   |   |   |
| **DPL**      |       | 2.28                                           |   | 1.97 |   | 2.00 |
|         |       |                                           |   |   |   |   |
| **DP&L** |       | 2.22                                           |   | 1.91 |   | 1.94 |

 

**SEASONALITY**

 

The power generation anddelivery business is seasonal and weather patterns have a material impact onoperating performance.  In the region weserve, demand for electricity is generally greater in the summer monthsassociated with cooling and in the winter months associated with heating ascompared to other times of the year. Historically, our power generation and delivery operations havegenerated less revenue and income when weather conditions are warmer in thewinter and cooler in the summer.

 

**RATE REGULATION AND GOVERNMENTLEGISLATION**

 

**DP&L’s**sales to retail customers are subject to rate regulation by the PUCO.  **DP&L’s**transmission rates and wholesale electric rates to municipal corporations,rural electric co-operatives and other distributors of electric energy aresubject to regulation by the Federal Energy Regulatory Commission (FERC) underthe Federal Power Act.

 

Ohio law establishes theprocess for determining retail rates charged by public utilities.  Regulation of retail rates encompasses thetiming of applications, the effective date of rate increases, the recoverablecosts basis upon which the rates are based and other related matters.  Ohio law also established the Office of theOhio Consumers’ Counsel (OCC), which has the authority to represent residentialconsumers in state and federal judicial and administrative rate proceedings.

 

Ohio legislation extendsthe jurisdiction of the PUCO to the records and accounts of certain publicutility holding company systems, including **DPL**.  The legislation extends the PUCO’ssupervisory powers to a holding company system’s general condition andcapitalization, among other matters, to the extent that they relate to thecosts associated with the provision of public utility service.  Based on existing PUCO and FERCauthorization, regulatory assets and liabilities are recorded on theconsolidated balance sheets.  See Note 3of Notes to Consolidated Financial Statements.

 

**COMPETITIONAND REGULATION**

 

**Ohio Matters**

 

**Ohio Retail Rates**

 

Since January 2001, **DP&L’s** electric customers have been permitted to choosetheir retail electric generation supplier.  **DP&L**continues to have the exclusive right to provide delivery service in its statecertified territory and the obligation to supply retail generation service tocustomers that do not choose an alternative supplier.  The PUCO maintains jurisdiction over **DP&L’s** delivery of electricity, standard service offer,and other retail electric services.

 

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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; and 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.  These rules address topics such as theinformation that must be included in an electric security plan as well as amarket rate option, the significantly excessive earnings test requirements,corporate separation revisions, rules relating to the recovery oftransmission and ancillary service costs, electric service and safety standardsdealing with the statewide line extension policy, and rules relating toadvanced energy portfolio standards, renewable energy, demand reduction andenergy efficiency standards.

 

SB 221 and theimplementation rules contain targets relating to advanced energy portfoliostandards, renewable energy, demand reduction, and energy efficiencystandards.  The standards require that,by the year 2025, 25% of the total number of kilowatt hours of electricity soldby the utility to retail electric consumers must come from alternative energyresources, which include “advanced energy resources” such as distributedgeneration, clean coal, advanced nuclear, energy efficiency, and fuel celltechnology; and “renewable energy resources” such as solar, hydro, wind,geothermal, and biomass. At least half of the 25% must be generated fromrenewable energy resources, including 0.5% from solar energy.  The advanced energy portfolio and energyefficiency standards begin in 2009 with increases in required percentages eachyear.  SB 221 and the implementation rules donot include interim annual targets for energy efficiency and peak demandreductions, but require that energy efficiency programs save 22.3% compared toa baseline energy usage by 2025 and that peak demand reductions reach 7.75% by2018.  If any targets are not met,compliance penalties will apply.

 

**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.

 

In compliance with SB221, **DP&L**filed its electric securityplan at the PUCO on October 10, 2008. This plan contained three parts: 1) a standard offer plan; 2) a customerconservation and energy management plan; and 3) an alternative energyplan.  The standard offer plan statedthat **DP&L**intends to maintain itscurrent rate plan through December 31, 2010, and addressed compliance issuesrelated to the PUCO rules.

 

On February 24,2009, **DP&L** filed a Stipulation andRecommendation (the Stipulation) signed by the Staff of the PUCO, the Office ofthe Ohio Consumers’ Counsel and various intervening parties.  The material terms agreed to under theStipulation include the following:

 

·                  **DP&L’s** current rate plan will be extended through 2012.

·                  **DP&L** will be permitted to implement a fuel and purchasedpower recovery mechanism beginning January 1, 2010 which will track andadjust fuel and purchased power costs on a quarterly basis.

·                  Therate stabilization surcharge remains a non-bypassable provider of last resortcharge at its current rate amount, but may be bypassable by customers served bya government aggregator beginning 2011.

·                  Thelast phase of the environmental investment rider increase will occur in 2010 aspreviously approved by the PUCO and thereafter will remain at that levelthrough 2012.

·                  **DP&L’s** base distribution and generation rates will befrozen through 2012.

·                  **DP&L** may seek recovery of certain cost increases such asstorm damage expenses, regulatory or tax changes, costs associated with newclimate change or carbon regulations, certain costs associated with theoperation of the Hutchings station, costs associated with transmission costrecovery rider (TCRR), and Regional Transmission Organization costs not coveredby the TCRR.

·                  Thesignificantly excessive earnings test will not apply to **DP&L**until 2012.

·                  **DP&L** will be permitted to begin its energy efficiencyand demand response programs immediately with recovery scheduled to begin in2009, with a two year reconciliation.  **DP&L’s** smart grid deployment initiative will be revisedand resubmitted to the PUCO for approval by September 2009 with theanticipation that the plans and recovery will begin January 1, 2010 alsowith a two year reconciliation.

·                  **DP&L’s** proposed alternative energy plans will beapproved and recovery of these costs will begin in 2009 with an annualreconciliation.

·                  Mercantile(large use) customers can obtain exemption from the energy efficiency rider ifself-directed energy and demand programs generate reductions equal to orgreater than **DP&L’s** energy and demandreduction benchmarks.

 

The Stipulation may beapproved, modified or rejected by the PUCO. A final decision from the PUCO regarding the Stipulation is expected bythe end of the second quarter of 2009.

 

As a member of PJM, **DP&L** is subject to charges and costs associated with PJMoperations as approved by the FERC.  FERCOrders issued in 2007 regarding the allocation of costs of large transmissionfacilities within PJM, could result in additional costs being allocated to **DP&L**of approximately $12 million or more annually by2012.  **DP&L**filed a 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 on theappeals.  On November 7, 2008, **DP&L** filed a request at the PUCO for authority to defercosts associated with transmission, capacity, ancillary service and other PJMrelated charges incurred as a member of PJM. **DP&L** sought deferral until suchtime as it files to seek recovery of these costs from retail ratepayers.  On February 19, 2009, the PUCO approved **DP&L’s**request to defer these costs.  **DP&L**anticipates filing a request with the PUCO before the end of April 2009seeking to recover these costs.

 

**Ohio Competitive Considerations and Proceedings**

 

As of December 31,2008, four unaffiliated marketers were registered as Competitive RetailElectric Service (CRES) providers in **DP&L’s**service territory.  While there has beensome customer switching associated with unaffiliated marketers, it representedless than 0.12% of sales in 2008.  DPLER, an affiliated company, is also aregistered CRES provider and accounted for 99.4% of the total kWh supplied byCRES providers within **DP&L’s**service territory in 2008.  In addition, several communities in **DP&L’s** service area have passedordinances allowing the communities to become government aggregators for thepurpose of offering alternative electric generation supplies to theircitizens.  To date, none of thesecommunities have aggregated their generation load.

 

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**FederalMatters**

 

Like other electricutilities and energy marketers, **DP&L**and DPLE may sell or purchase electric products on the wholesale market.  **DP&L**and DPLE compete with other generators, power marketers, privately andmunicipally-owned electric utilities and rural electric cooperatives whenselling electricity.  The ability of **DP&L** and DPLE to sell this electricitywill depend on how **DP&L’s** andDPLE’s price, terms and conditions compare to those of other suppliers.

 

As part of Ohio’selectric deregulation law, all of the state’s investor-owned utilities arerequired to join a Regional Transmission Organization (RTO).  In October 2004, **DP&L**successfully integrated its 1,000 miles of high-voltage transmission into thePJM Interconnection, L.L.C. (PJM) RTO. The role of the RTO is to administer an electric marketplace and ensurereliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power systemserving 51 million people in all or parts of Delaware, Illinois, Indiana,Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania,Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation ofthe region’s transmission grid, administers the world’s largest competitivewholesale electricity market and plans regional transmission expansionimprovements to maintain grid reliability and relieve congestion.

 

As a member ofPJM, the value of **DP&L****’****s** generation capacity is affected by changes in and theclearing results of the PJM capacity market.  The market utilizes aReliability Pricing Model (RPM) that changes the way generation capacity ispriced and planned for by PJM.  PJM held a series of capacity auctions, the results of which havenot had a material impact on our results of operations, financial position orcash flows.  The FERC decisionsestablishing RPM have been appealed by various entities to a Federal appealscourt.  RPM remains in effect pending the outcome ofthe 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 structureshould be modified or replaced.  In arelated but separate action, many of the same group of consumers filed acomplaint, on May 30, 2008, alleging thatbidding approaches and other actions taken by unspecified market participants haveresulted in unjust and unreasonable allocation of costs of $26 billion acrossPJM.  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.  After numerous stakeholder meetings failed toresult in a consensus, PJM filed on December 12, 2008 to modify certainRPM rules and requested FERC toinitiate a formal settlement proceeding. FERC held foursettlement conferences in January 2009; however, on January 15, 2009, the settlementjudge recommended the process be terminated as the parties had reached animpasse.  Certain parties, including PJM,may make partial or contested settlement proposals.  AFERC ruling on PJM’s latest tariff filing proposing changes to the RPM rules remains pending.  **DP&L** is unable to predict anypotential changes in the PJM capacity market that may result from theseproceedings.

 

**DP&L** provides transmissionand wholesale electric service to twelve municipal customers in itsservice territory, which in turn distribute electricity principally withintheir incorporated limits.  **DP&L** also maintains an interconnection agreement withone municipality that has the capability to generate a portion of its ownenergy requirements.   Approximately onepercent of total electricity sales in 2008 represented sales to thesemunicipalities.

 

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InApril 2008, **DPL** was notified that the IRSwould audit its 2005 and 2006 federal income tax returns.  That IRS audit has commenced and, at thistime, **DPL** cannot determine the outcome of theaudit.

 

Wehave been informed that we will be subject to a routine audit beginning in June 2009by the North American Electric Reliability Corporation (NERC).  NERC is the FERC-certified electricreliability organization responsible for developing and enforcing mandatoryreliability standards.

 

**ENVIRONMENTAL CONSIDERATIONS**

 

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

 

·                     TheFederal Clean Air Act (CAA) and state laws and regulations (including StateImplementation Plans) which require compliance, obtaining permits and reportingas to air emissions.

 

·                     Litigationwith federal and certain state governments and certain special interest groupsregarding whether modifications to or maintenance of certain coal-firedgenerating plants require additional permitting or pollution controltechnology, and/or whether emissions from coal-fired generating plants cause orcontribute to global climate changes.

 

·                     Rules issuedby the United States Environmental Protection Agency (USEPA) and OhioEnvironmental Protection Agency (Ohio EPA) that require substantial reductionsin SO2,particulates, mercury and NOX emissions.  DPL is installing (and hasinstalled) emission control technology and is taking other measures to complywith required reductions.

 

·                     TheFederal Clean Water Act (FCWA), which prohibits the discharge of pollutantsinto waters of the United States except pursuant to appropriate permits. In July 2004,the USEPA adopted a new Clean Water Act rule to reduce the number of fishand other aquatic organisms affected by cooling water intakes at power plants.

 

·                     Solidand hazardous waste laws and regulations, which govern the management anddisposal of certain waste. The majority of solid waste created from thecombustion of coal and fossil fuels is fly ash and other coal combustionby-products, which the EPA has determined are not hazardous waste subject tothe Resource Conservation and Recovery Act (RCRA).

 

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, we have investigatory and remedialactivities underway at these facilities to comply, or to determine compliance,with such regulations.  We record liabilities for probable estimated lossin accordance with Statement of Financial Accounting Standards No. 5 (SFAS5) “Accounting for Contingencies,” as discussed in Note 1 of Notes toConsolidated Financial Statements. **  DPL,** through its wholly-ownedcaptive insurance subsidiary MVIC, has an actuarially calculated reserve forenvironmental matters.  We evaluate thepotential liability related to probable losses quarterly and mayrevise our estimates.  Such revisions in the estimates of thepotential liabilities could have a material effect on our results ofoperations, financial position or cash flows.

 

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In addition to therequirements related to emissions of SO2, particulates, mercury, and NOX noted above, there is a growing concern nationallyand internationally about global climate change and the contribution ofemissions 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 carbon dioxide emissions from motor vehicles under theCAA.  Increased pressure for carbon dioxide emissions reduction alsois coming from investor organizations and the international community. Environmental advocacy groups are also focusing considerable attention oncarbon dioxide emissions from power generation facilities and their potentialrole in climate change.  Although severalbills have been introduced in Congress that would compel CO2 emission reductions, no bills have passed todate.  Future changes in environmentalregulations governing these pollutants could make some of our electricgenerating units uneconomical to maintain or operate.  In addition, any legal obligation wouldrequire extensive mitigation efforts and, in the case of CO2 legislation, would raise uncertainty about thefuture viability of fossil fuels, particularly coal, as an energy source fornew and existing electric generation facilities.  If legislation or regulations are passed atthe federal or state levels imposing mandatory reductions of carbon dioxide andother greenhouse gases on generation facilities, the cost to**DPL** and**DP&L** of such reductions could be material.

 

**EnvironmentalRegulation and Litigation Related to Air Quality**

 

***RegulationProceedings — Air***

 

In 1990, the federal government amended the CAA to further regulate airpollution.  Under the law, the USEPA setslimits on how much of a pollutant can be in the air anywhere in the UnitedStates.  The CAA allows individual statesto have stronger pollution controls, but states are not allowed to have weakerpollution controls than those set for the whole country. The CAA has amaterial effect on our operations and such effects are detailed below withrespect to certain programs under the CAA.

 

On October 27, 2003,the USEPA published final rules regarding the equipment replacementprovision (ERP) of the routine maintenance, repair and replacement (RMRR)exclusion of the CAA.  Subsequently, on December 24, 2003, the UnitedStates Court of Appeals for the D.C. Circuit stayed the effective date of the rule pendingits decision on the merits of the lawsuits filed by numerous states andenvironmental organizations challenging the final rules.  As a result of the stay, the Ohio EPA delayedits previously announced intent to adopt the RMRR rule.  On October 20,2005, USEPA proposed to revise the emissions test for existing electricgenerating units.  At this time, we are unable to determine the impact ofthe ERP appeal or the outcome of the proposed emissions test.

 

In a regulationproceeding relating to the same issue decided by the U.S. Supreme Court in theDuke Energy case discussed below, the USEPA issued a proposed rule in October 2005concerning the test for measuring whether modifications to electric generatingunits should trigger application of New Source Review (NSR) standards under theCAA.  The proposed rule seekscomments on two different hourly emissions test options as well as the USEPA’scurrent method of measuring previous actual emission levels to projected actualemission levels after the modification. A third option that tests emissions increase based upon emissions perunit of energy output is also available for comment.  We cannot predict the outcome of thisrulemaking or its impact on current environmental litigation.

 

On December 17,2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designedto reduce and permanently cap SO2 and NOX emissions from electric utilities.  The proposed IAQR focused on states,including Ohio, whose power plant emissions are believed to be significantlycontributing to fine particle and ozone pollution in other downwind states inthe eastern United States.  On June 10,2004, the USEPA issued a supplemental proposal to the IAQR, now renamed theClean Air Interstate Rule (CAIR). The final rules were signed on March 10, 2005 and werepublished on May 12, 2005.  CAIRcreated an interstate trading program for annual NOX emission allowances and made modifications toan existing trading program for SO2.  On August 24, 2005, the USEPA proposedadditional revisions to the CAIR.  On July 11,2008, the U.S. Court of Appeals for the District of Columbia Circuit issued adecision to vacate the USEPA’s CAIR and its associated Federal ImplementationPlan and remanded to the USEPA with instructions to issue new regulations thatconformed with the procedural and substantive requirements of the Clean AirAct.  The Court’s decision, in part,invalidated the new NOX annual emission allowance trading program andthe modifications to the SO2 emission trading program established by the March 10,2005 rules, and created uncertainty regarding future NOX and SO2 emissionreduction requirements and their timing. The USEPA and a group representing utilities filed a request for arehearing en banc on September 24, 2008. On December 23, 2008, the U.S. Court of Appeals issued an order onreconsideration that permits CAIR to remain in effect until the USEPA issuesnew regulations that would conform to the Clean Air Act requirements and theCourt’s July 11, 2008 decision.

 

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We cannot predict thetiming or the outcome of any new regulations relating to CAIR.  CAIR has and will continue to have a materialeffect on our operations.  In 2007, theOhio EPA revised their State Implementation Plan (SIP) to incorporate a CAIRprogram consistent with the IAQR.  TheOhio EPA had been awaiting approval from the USEPA when the U.S. Court ofAppeals issued its July 11, 2008 decision. As a result of the December 23, 2008 order, the Ohio EPA continuesto expect to receive that approval.

 

Inthe fourth quarter of 2007, **DP&L** begana program for selling excess emission allowances, including annual NOx emission allowances andSO2 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 decisionaffected the trading market for excess allowances and impacted **DP&L’s** program for selling additional excess allowancesin 2008.  The long-term impact of thecourt’s decision, and of the actions the USEPA or others will take in responseto this decision, on **DPL** and **DP&L**is not fully known at this time and could have anadverse effect on us.  In January 2009,we resumed selling excess allowances due to the revival of the trading market.

 

The regulations aspromulgated tended to promote decisions to install Flue Gas Desulfurization(FGD) equipment and continuous operations of the currently installed SelectiveCatalytic Reduction (SCR) equipment.  **DP&L** has installed FGD and SCRequipment on the single unit at the Killen generating station and on all fourunits at the Stuart generating station.

 

On January 30, 2004,the USEPA published its proposal to restrict mercury and other air toxins fromcoal-fired and oil-fired utility plants. The USEPA “de-listed” mercury as a hazardous air pollutant fromcoal-fired and oil-fired utility plants and, instead, proposed a cap-and-tradeapproach to regulate the total amount of mercury emissions allowed from suchsources.  The final Clean Air Mercury Rule (CAMR)was signed March 15, 2005 and was published on May 18, 2005.  On March 29, 2005, nine states suedUSEPA, opposing the cap-and-trade regulatory approach taken by USEPA.  In 2007, the Ohio EPA adopted rules implementingthe CAMR program.  On February 8,2008, the Court of Appeals struck down the USEPA regulations, finding that theUSEPA had not complied with statutory requirements applicable to “de-listing” ahazardous air pollutant and that a cap-and-trade approach was not authorized bylaw for “listed” hazardous air pollutants. A request for rehearing before the entire Court of Appeals was deniedand a petition for a writ of certiorari was filed with the U.S. Supreme Courton September 17, 2008.  If thepetition is not accepted by the Supreme Court, or if the Supreme Court grantscertiorari and upholds the D.C. Circuit Court’s decision, USEPA will have tomove forward to set Maximum Available Control Technology (MACT) standards forcoal- and oil-fired electric generating units. We anticipate that it will take a few years for the USEPA to gather newdata to promulgate updated MACT standards and for the regulations to becomeeffective.  At this time, **DP&L** is unable to determine the impact of thepromulgation of new MACT standards on its financial position or results ofoperations.

 

If the U.S. Court ofAppeals’ ruling is not reversed, we cannot project the final costs we may incurto comply with any resulting mercury restriction regulations.

 

On July 15, 2003,the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozonenon-attainment boundaries for the metropolitan areas within Ohio.  On April 15,2004, the USEPA issued its list of ozone non-attainment designations. Since these initial designations, the Ohio EPA has recommended that nine areasdesignated non-attainment be designated as attainment.  Currently USEPA has redesignated eight of thoseareas as attainment for the eight-hour ozone national ambient air qualitystandards, including counties where **DP&L**ownsand/or operates a number of facilities. In redesignating these counties as attainment, the Ohio EPA submittedand USEPA approved amendments to the SIP that include maintenance plans forthese areas.  In June 2007, the OhioEPA submitted a plan to USEPA for attaining the eight-hour ozone standard forthe Cincinnati-Hamilton area in which **DP&L**owns anumber of facilities.  **DP&L**cannot determine the outcome of this redesignationeffort at this time.

 

On January 5, 2005,the USEPA published its final non-attainment designations for the nationalambient air quality standard for Fine Particulate Matter 2.5 (PM 2.5). These designations included counties and partial counties in which **DP&L** operates and/or owns generating facilities. On March 4, 2005, **DP&L** andother Ohio electric utilities and electric generators filed a petition forreview in the D.C. Circuit Court of Appeals, challenging the final rule creatingthese designations.  On November 30, 2005, the court ordered USEPA todecide on all petitions for reconsideration by January 20, 2006.  On January 20, 2006, USEPA denied thepetitions for reconsideration. Petitioners submitted their principal briefs in February 2008,their reply briefs in August 2008, and their final briefs in September 2008.  Oral argument had been scheduled but, on December 19,2008, the D.C. Circuit on its own motion indicated it will reschedule oralargument at a later date.  **DP&L** cannot determine the outcome of the petition forreview or the effect such Ohio EPA regulations will have on its operations.

 

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On May 5, 2004, theUSEPA issued its proposed regional haze rule, which addresses how states shoulddetermine the Best Available Retrofit Technology (BART) for sources coveredunder the regional haze rule.  Final rules were published July 6,2005, providing states with several options for determining whether sources inthe state should be subject to BART.  In the final rule, USEPA made thedetermination that CAIR achieves greater progress than BART and may be used bystates as a BART substitute.  Numerous units owned and operated by us willbe impacted by BART.  We cannot determine the extent of the impact untilOhio determines how BART will be implemented.

 

***SierraClub Litigation***

 

In September 2004,the Sierra Club filed a lawsuit against **DP&L**andthe other owners of the Stuart generating station in the U.S. District Courtfor the Southern District of Ohio for alleged violations of the Clean Air Act(CAA) and the station’s operating permit. On August 7, 2008, a consent decree was filed in the U.S. DistrictCourt in full settlement of these CAA claims.  Under the terms of theconsent decree, **DP&L** and the other owners ofthe Stuart generating station agreed to: (i) certain emission targetsrelated to NOx,SO2 and particulate matter; (ii) make energyefficiency and renewable energy commitments that are conditioned on receivingPUCO 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 joint motion on October 22, 2008,seeking an order by the U.S. District Court approving the consent decree withfunding for the third party non-profit organization set at $300,000.  On October 23, 2008, the U.S. DistrictCourt approved the consent decree.  Wehave determined that the terms of the consent decree will not have a materialimpact on our overall results of operations, financial position, or cash flows.

 

***LitigationInvolving Co-Owned Plants***

 

In March 2000, asamended in June 2004, the U.S. Department of Justice filed a complaint inan Indiana federal court against Cinergy Corp. (now part of Duke Energy) andtwo Cinergy subsidiaries for alleged violations of the CAA at variousgeneration units operated by PSI Energy, Inc. and CG&E, includinggeneration units co-owned by **DP&L**(Beckjord Unit 6 and Miami Fort Unit 7). Prior to trial, plaintiffs chose not to pursue allegations that had beenmade with respect to Miami Fort 7.  On May 22,2008, the jury rendered a verdict in favor of Cinergy with respect to theallegations made involving projects at Beckjord Unit 6.  The jury found for the plaintiffs withrespect to units at one of Duke Energy’s wholly-owned facilities.  In mid-December 2008, the judge ordereda retrial after hearing arguments regarding the potential prejudicial effect ofDuke’s failure to disclose that certain of its witnesses were paid for theirtime and expertise.  No date has beenestablished for retrying the case and **DP&L** isunable to predict the outcome or timing of any retrial.

 

In November 2004,various residents of the Village of Moscow, Ohio sued CG&E, as the operatorof Zimmer generating station (co-owned by CG&E, **DP&L** and CSP), for alleged violations of the CAA and airpollution nuisances.  CG&E, on behalfof all co-owners, is leading the defense of this matter.

 

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

 

On March 13, 2008,Duke Energy Ohio Inc., the operator of the Zimmer generating station, receiveda Notice of Violation (NOV) and a Finding of Violation from the USEPA allegingviolations of the CAA, the Ohio State Implementation Program (SIP) and permitsfor the Station in areas including SO2, opacity and increased heat input.  **DP&L** is aco-owner of the Zimmer generating station and could be affected by the eventualresolution of this matter.  Duke EnergyOhio Inc. is expected to act on behalf of itself and the co-owners with respectto this matter.  At this time, **DP&L** is unable to predict the outcome of this matter.

 

In June 2000, theUSEPA issued a NOV to the **DP&L**-operatedStuart generating station (co-owned by **DP&L**,CG&E, and CSP) for alleged violations of the CAA.  The NOV contained allegations consistent withNOVs and complaints that the USEPA had recently brought against numerous othercoal-fired utilities in the Midwest.  TheNOV indicated the USEPA may: (1) issue an order requiring compliance withthe requirements of the Ohio SIP; or (2) bring a civil action seekinginjunctive relief and civil penalties of up to $27,500 per day for eachviolation.  To date, neither action hasbeen taken.

 

In November 1999,the USEPA filed civil complaints and NOVs against operators and owners ofcertain generation facilities for alleged violations of the CAA.  Generation units operated by CG&E(Beckjord Unit 6) and CSP (Conesville Unit 4) and co-owned by **DP&L** were referenced in these actions.  Numerous northeast states have filedcomplaints or have indicated that they will be joining the USEPA’s actionagainst CG&E and CSP.  **DP&L** was not identified in the NOVs,civil complaints or state actions.

 

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In December 2007,the Ohio EPA issued a NOV to the **DP&L**-operatedKillen generating station (co-owned by **DP&L** andCG&E) for alleged violations of the CAA. The NOVs alleged deficiencies in the continuous monitoring ofopacity.  A compliance plan has beensubmitted to the Ohio EPA.  To date, nofurther actions have been taken by the Ohio EPA.

 

***OtherIssues Involving Co-Owned Plants***

 

In 2006, **DP&L** detected a malfunction with its emission monitoringsystem at the **DP&L**-operated Killengenerating station (co-owned by **DP&L** andCG&E) and ultimately determined its SO2 and NOx emissions datawere under reported.  **DP&L** has petitioned the USEPA to accept an alternativemethodology for calculating actual emissions for 2005 and the first quarter2006.  **DP&L**hassufficient allowances in its general account to cover the understatement and isworking with the USEPA to resolve the matter. Management does not believe the ultimate resolution of this matter willhave a material impact on results of operations, financial position or cashflows.

 

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

 

In 2007, the Ohio EPA andthe USEPA issued NOVs to **DP&L** foralleged violations of the CAA at the O.H. Hutchings station.  The NOVs alleged deficiencies relate to stackopacity and particulate emissions. Discussions are under way with the USEPA, the U.S. Department of Justiceand Ohio EPA.  **DP&L**has provided data to those agencies regarding its maintenance expenses andoperating results.  On December 15,2008, **DP&L** received a request from theUSEPA for additional documentation with respect to those issues and other CleanAir Act issues including issues relating to capital expenses and any changes incapacity or output of the units at the O.H. Hutchings station.  **DP&L** iscomplying with that request.  **DP&L**is unable to determine the timing, costs, or methodby which the issues may be resolved.

 

***EnvironmentalRegulation and Litigation 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 last summer and oral arguments were held in December 2008.

 

On May 4, 2004, theOhio EPA issued a final National Pollutant Discharge Elimination System permit(the Permit) for J.M. Stuart Station that continued our authority to dischargewater from the station into the Ohio River. During the three-year term of the Permit, we conducted a thermal discharge study to evaluate the technicalfeasibility and economic reasonableness of water cooling methods other thancooling towers.  In December 2006,we submitted an application for the renewal of the Permit that was due toexpire on June 30, 2007.  In July 2007we received a draft permit proposing to continue our authority to dischargewater from the station into the Ohio River. On February 5, 2008 we received a letter from Ohio EPA indicatingthat they intended to impose a compliance schedule as part of the final Permit,that requires us to implement one of two diffuser options for the discharge ofwater from the station into the Ohio River as identified in the thermaldischarge study.   On March 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, **DP&L**sent a letter to Ohio EPA stating that we would be willing to restrict publicaccess to the thermal 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, which was received in draft form on November 12, 2008,subject to comment and the review of the USEPA. In December 2008, the USEPA requested that the Ohio EPA provideadditional information regarding the draft permit and the timing for issuanceof a final permit is uncertain.

 

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***EnvironmentalRegulation and Litigation Related to Land Use and Solid Waste Disposal***

 

**DP&L**has been identified, either by a government agency or by a private partyseeking contribution to site clean-up costs, as a Potentially Responsible Party(PRP) at two sites pursuant to state and federal laws.

 

In September 2002, **DP&L** and other parties received aspecial notice that the USEPA considers us to be PRPs for the clean-up ofhazardous substances at the South Dayton Dump landfill site.  In August 2005, **DP&L** and other parties received ageneral notice regarding the performance of a Remedial Investigation andFeasibility Study (RI/FS) under a Superfund Alternative Approach.  In October 2005, **DP&L** received a special notice letterinviting it to enter into negotiations with USEPA to conduct the RI/FS.  Information available to **DP&L** does not demonstrate that itcontributed hazardous substances to the site.  Should USEPA pursue a civilaction, **DP&L** will challenge it.

 

In December 2003, **DP&L**and other parties received a special notice thatthe USEPA considers us to be PRPs for the clean-up of hazardous substances atthe Tremont City landfill site. Information available to **DP&L**doesnot demonstrate that it contributed hazardous substances to the site.

 

In November 2007, aPRP group contacted **DP&L**seeking our financial participation in a settlement that the group had reachedwith the federal government with respect to the clean-up of an industrial siteonce owned by Carolina Transformer, Inc. **DP&L**’s business records clearlyshow we did not conduct business with Carolina Transformer that would requireour participation in any clean-up of the site. **DP&L**has declined to participate inthe clean-up of this site.

 

In August 2006, OhioEPA issued draft rules for interested party comment related to thedisposal of industrial waste.  **DP&L,**through the Ohio Electric Utility Institute,submitted comments on the draft rules.  **DP&L** cannot predict the impact of the draft rules onfuture operations.

 

***CapitalExpenditures for Environmental Matters***

 

Test operations of theflue gas desulfurization (FGD) equipment on all four units at the Stuartgenerating station were completed during 2008. The equipment is currently in service.

 

**DPL’s** construction additions were approximately$228 million, $347 million and $352 million in 2008, 2007 and 2006,respectively, and are expected to approximate $150 million for 2009.  **DP&L’s** construction additions wereapproximately $225 million, $344 million and $349 million in 2008, 2007 and2006, respectively.  Planned construction additions of **DP&L** for 2009 are expected toapproximate $147 million and relate to **DP&L’s**environmental compliance program, power plant equipment, and its transmissionand distribution system.  All environmental additions made during thepast three years pertain to **DP&L**and approximate $90 million, $206 million and $246 million in 2008, 2007 and2006, respectively.

 

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**Item 1A - Risk Factors**

 

This annual report andother documents that we file with the SEC and other regulatory agencies, aswell as other oral or written statements we may make from time to time, containinformation based on management’s beliefs and include forward-lookingstatements (within the meaning of the Private Securities Litigation Reform Actof 1995) that involve a number of known and unknown risks, uncertainties andassumptions. These forward-looking statements are not guarantees of futureperformance and there are a number of factors including, but not limited to,those listed below, which could cause actual outcomes and results to differmaterially from the results contemplated by such forward-looking statements. Wedo not undertake any obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. These forward-looking statements are identified by termsand phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,”“should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similarexpressions.

 

Future operating resultsare subject to fluctuations based on a variety of factors, including but notlimited to: unusual weather conditions; catastrophic weather-related damage;unscheduled generation outages; unusual maintenance or repairs; changes in fueland purchased power costs, emissions allowance costs, or availabilityconstraints; environmental compliance; and electric transmission systemconstraints.

 

The following is alisting of risk factors that **DPL** and **DP&L** consider to be the most significant to yourdecision to invest in our stock.  If anyof these events occur, our business, results of operations, financial positionor cash flows could be materially affected.

 

**Senate Bill 221**

 

We operate in a rapidlychanging industry with evolving industry standards and regulations.  In recent years a number of federal and statedevelopments aimed at promoting competition triggered industryrestructuring.  Regulatory factors suchas changes in the policies and procedures that set rates; changes in tax laws,tax rates and environmental laws and regulations; changes in **DP&L’s** ability to recover expendituresfor environmental compliance, fuel and purchased power costs and investmentsmade under traditional regulation through rates; and changes to the frequencyand timing of rate increases could affect our results of operations, financialcondition or cash flows.  Additionally,financial or regulatory accounting principles or policies imposed by governingbodies can increase our operational, monitoring and information technologycosts affecting our results of operations and financial condition.

 

Before 2001, Ohioelectric utilities provided electric generation, transmission and distributionservices as a single product to retail customers at prices set by thePUCO.  In 1999, Ohio enacted legislationthat partially deregulated utility service, effective January 1, 2001,making retail generation service a competitive service.  Customers may choose to take generationservice from CRES providers that register with the PUCO but are otherwiseunregulated.  In connection with thisderegulation of the electric industry in Ohio, electric utilities have had torestructure their service and their rates to accommodate competition.

 

Manyof the requirements of the Ohio deregulation law were premised on theassumption that the wholesale generation market and, in turn, the retailgeneration market, would fully develop by the end of 2005, and that the pricefor generation for even those customers who choose to continue to purchase theservice from the regulated utility would be set purely by the market.  That did not occur.  As a result, the PUCO and the utilities,including **DP&L,** put ratestabilization plans in place to provide standard offer service to customers attariffed rates.  **DP&L’s**plan was the only one to continue through 2010.

 

OnMay 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, wassigned by the Governor and became effective July 31, 2008.  This new law states that all Ohiodistribution utilities must file either an electric security plan or a marketrate option to be in effect January 1, 2009.  An electric security plan may allow foradjustments to the standard offer for costs associated with environmentalcompliance; fuel and purchased power; construction of new or investment inspecified generating facilities; the provision of standby and default service,operating, maintenance, or other costs including taxes.  As part of its electric security plan, theutility is permitted to file an infrastructure improvement plan that willspecify the initiatives the utility will take to rebuild, upgrade, or replaceits electric distribution system, including cost recovery mechanisms. Both themarket rate option and the electric security plan option involve a “substantiallyexcessive earnings” test based on the earnings of other companies with similarbusiness and financial risks.

 

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Thenew law also contains annual targets relating to advanced energy portfoliostandards, renewable energy, and energy efficiency standards.  The standards require that, by 2025, 12.5% ofthe generation used to supply standard offer generation service by the utilitymust come from advanced energy resources, which may include distributedgeneration, cogeneration, clean coal technology, nuclear technology or energyefficiency.  By 2025, another 12.5% ofthe generation used to supply standard offer generation service by the utilitymust come from renewable energy resources, of which 0.5% must come from solarenergy resources.  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 required percentages eachyear.  If any targets are not met,compliance penalties will apply.

 

In compliance withsubstitute Senate Bill 221, **DP&L** filedits electric security plan on October 10, 2008.  On February 24, 2009, **DP&L** filed a Stipulation and Recommendation (theStipulation) signed by the Staff of the PUCO, the Office of the Ohio Consumers’Counsel and various intervening parties. The PUCO has the authority to approve, modify or reject the Stipulation. The Stipulation is further discussedunder Ohio Retail Rates in Item 1 — COMPETITION AND REGULATION.  While the overall impact of Senate Bill 221 isnot known, implementation of the bill and compliance with its requirementscould have a material impact on us.  Theoutcome of this proceeding should be known by the end of the second quarter of2009.

 

**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)Clean Air Interstate Rule (CAIR) and its associated Federal ImplementationPlan. This decision remanded these issues back to the USEPA.  The USEPA issued CAIR on March 10, 2005to regulate certain upwind states with respect to fine particulate matter andozone.  CAIR created interstate tradingprograms for annual 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 annualemission allowance trading program and the modifications to the SO2 emission trading program and created uncertaintyregarding future NOx and SO2 emissionreduction requirements and their timing. On December 23, 2008, the court reversed part of its decision thatvacated CAIR.  Thus, CAIR currentlyremains in effect, but the USEPA remains subject to the court’s order to revisethe program.

 

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’s**program for selling additional excess allowances in 2008.  The long-term 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.  In January 2009, we resumed sellingexcess allowances due to the revival of the trading market.

 

**Credit Market**

 

Thecurrent global credit crisis may adversely affect our business and financialresults.  Since mid-2007, andparticularly during the second half of 2008, the financial services industry andthe securities markets generally were materially and adversely affected bysignificant declines in the values of nearly all asset classes and by a seriouslack of liquidity.  This was initiallytriggered by declines in the values of subprime mortgages, but spread to allmortgage and real estate asset classes, to leveraged bank loans and to nearlyall asset classes, including equities. Liquidity and credit concerns were further exacerbated in September 2008with Lehman Brothers’ bankruptcy filing, the sale of Merrill Lynch to Bank ofAmerica, the U.S. government conservatorship of Fannie Mae and Freddie Mac, andthe U.S. government loan to AIG.  Becauseof this, the ability of corporations to obtain funds through the issuance ofdebt was negatively impacted. Disruptions in the credit markets make it harder and more expensive toobtain funding for our business.  Weissue debt to cover the costs of certain of our operations and expenditures andthe inability to issue such debt on reasonable terms, or at all, couldnegatively affect our business and financial results.  If our available funding is limited or we areforced to fund our operations at a higher cost, these conditions may require usto curtail our business activities and increase our cost of funding, both ofwhich could reduce our profitability.

 

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**Market performance and otherchanges may decrease the value of benefit plan assets, which could requiresignificant additional funding.**

 

The performance of the capital markets affects thevalues of the assets that are held in trust to satisfy future obligations under**DPL**’s and **DP&L**’spension and postretirement benefit plans. These assets are subject to marketfluctuations and will yield uncertain returns, which may fall below ourprojected return rates. A decline in the market value of the pension andpostretirement benefit plan assets, as was experienced in 2008, will increasethe funding requirements under our pension and postretirement benefit plans ifthe actual asset returns do not recover these declines in value in theforeseeable future. Future pension funding requirements, and the timing offunding payments, may also be subject to changes in legislation. The PensionProtection Act, enacted in August 2006, requires underfunded pension plansto improve their funding ratios within prescribed intervals based on the levelof their underfunding. As a result, our required contributions to these plansmay increase in the future. In addition, our pension and postretirement benefitplan liabilities are sensitive to changes in interest rates. As interest ratesdecrease, the liabilities increase, potentially increasing benefit expense andfunding requirements. Further, changes in demographics, including increasednumbers of retirements or changes in life expectancy assumptions, may alsoincrease the funding requirements of the obligations related to the pension andother postretirement benefit plans. If market conditions continue to beunfavorable, our results of operations, financial position or cash flows couldbe adversely impacted.

 

**Fuel and Commodity 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 ending December 31, 2009 and 2010, we have hedged our coalrequirements with coal mine operators and financial institutions to meet ourcommitted sales.  However, we may not beable to hedge the entire exposure of our operations from commodity pricevolatility.  To the extent our suppliersdo not meet their contractual commitments, we cannot secure adequate coalsupplies in a timely or cost-effective manner or we are not hedged againstprice volatility, our results of operations, financial position or cash flowscould be materially affected.  As part ofits electric security plan filing, **DP&L**requested regulatory authority to defer fuel and fuel related costs that exceedthe amount that is in current rates.  On February 24,2009, **DP&L** filed a Stipulation andRecommendation (the Stipulation) signed by the Staff of the PUCO, the Office ofthe Ohio Consumers’ Counsel and various intervening parties.  The Stipulation includes the implementationof a fuel and purchased power recovery mechanism beginning January 1, 2010which will track and adjust fuel costs on a quarterly basis.  The PUCO has the authority to approve, modifyor reject the Stipulation.  TheStipulation is further discussed under Ohio Retail Rates in Item 1 — COMPETITIONAND REGULATION.  A final decision fromthe PUCO regarding the Stipulation is expected by the end of the second quarterof 2009.

 

**Customer Switching**

 

Changesin our customer base, including government aggregation, could lead to theentrance of competitors in our marketplace, affecting our results ofoperations, financial condition or cash flows. Although retail generation service has been a competitive service since January 1,2001, the competitive generation market has not developed in **DP&L’s** service territory to anysignificant degree.  The following arefactors that could result in increased switching by customers to CRES providersin the future:

 

·                  **DP&L’s**StandardService Offer

 

Customersthat take service from a CRES provider are able to bypass the EnvironmentalInvestment Rider (EIR).  Because thischarge increases each year through 2010, the price that a CRES provider canoffer to save customers money changes each year.  Depending on the development of the wholesalemarket and the level of wholesale prices, CRES providers could become moreactive in **DP&L’s** service territory.

 

·                  CRESSupplier Initiatives

 

Customerscan elect to take generation service from a CRES provider offering services tocustomers in **DP&L’s**service territory.  As of December 31, 2008, five CRESproviders have been certified by the PUCO to provide generation service to **DP&L**customers. One of those five, DPL Energy Resources, Inc. (DPLER), is awholly-owned affiliate of **DPL.**  DPLER supplied 99.4% of the total kWhconsumed by customers served by CRES providers in **DP&L’s** service territory in 2008.  Depending on the development of the wholesalemarket and the level of wholesale prices, CRES providers could become moreactive in **DP&L’s** serviceterritory and may begin to offer prices lower than **DP&L’s**standard offer.  This could result inmore switching by **DP&L’s** customersand a further loss of revenues by **DP&L**.

 

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·                  GovernmentalAggregation Programs

 

**DP&L** could also experiencecustomer switching through “governmental aggregation.”  Under this program, municipalities maycontract with a CRES provider to provide generation service to the customerslocated within the municipal boundaries. Several communities in **DP&L’s**service territory have passed ordinances allowing them to become governmentaggregators.  Although an aggregationprogram has not yet been implemented, that too could change if CRES providersoffer prices below **DP&L’s**standard offer.

 

**Risks Associated with Our Pre-determined Rates**

 

**DP&L** has provided service atrates governed by the PUCO-approved transition, market development and ratestabilization plans.  The protectionafforded by retail fuel clause recovery mechanisms was eliminated effective January 1,2001 by the implementation of customer choice in Ohio.  Likewise, through the RSS Stipulation, **DP&L** extended its commitment tomaintain pre-determined rates for generation through December 31, 2010,and in exchange is permitted to charge two new rate riders to offset increasesin fuel and environmental costs. Beginning January 1, 2006, a RSS was implemented that recoveredapproximately $65 million additional revenue in 2006, net of customerdiscounts.  The EIR could result inapproximately $35 million additional revenue each year, net of customerdiscounts and assuming insignificant levels of customer switching.  The PUCO ruled this rider will be bypassableby all customers who take service from alternative generation suppliers.  Accordingly, the rates **DP&L** is allowed to charge may or maynot match its expenses at any given time. Therefore, during this period (or possibly earlier by order of thePUCO), while **DP&L** will besubject to prevailing market prices for electricity, it would not necessarilybe able to charge rates that produce timely or full recovery of itsexpenses.  **DP&L** has historically maintained its rates at consistentlevels since 1994 when the final phase of **DP&L’s**last traditional rate case was implemented. However, as **DP&L**operates under its PUCO-approved RSS Stipulation, there can be no assurancethat **DP&L** will be able totimely or fully recover unanticipated levels of expenses, including but notlimited to those relating to fuel, coal and purchased power, compliance withenvironmental regulation, reliability initiatives and capital expenditures forthe maintenance or repair of its plants or other properties.

 

**Regional Transmission Organizational Risks**

 

OnOctober 1, 2004, in compliance with Ohio law, **DP&L** turned over control of its transmission functions andfully integrated into PJM.  The price atwhich **DPL** and **DP&L** can sell its generation capacityand energy is now more dependent upon the overall operation of the PJMmarket.  While **DP&L**can continue to make bi-lateral transactions to sellits generation through a willing-buyer and willing-seller relationship, anytransactions that are not pre-arranged are subject to market conditions atPJM.  The rules governing thevarious regional power markets also change from time to time which could affect**DP&L’s**costs andrevenues.  **DP&L**incurs fees and costs to participate in the RTO.  We may be limited with respect to the priceat which power may be sold from certain generating units and we may be requiredto expand our transmission system according to decisions made by the RTO ratherthan our internal planning process. While RTO transmission rates were initially designed to be revenueneutral, various proposals and proceedings currently taking place at FERC maycause transmission rates to change from time to time.  In addition, developing rules associatedwith the allocation and methodology of assigning costs associated with improvedtransmission reliability, reduced transmission congestion and firm transmissionrights may have a financial impact on **DP&L**.  Likewise, in December 2006, FERCapproved PJM’s Reliability Pricing Model (RPM). RPM became effective in 2007 and provides forward and locational pricingfor generation capacity.  The financialimpact of RPM on **DP&L** willdepend on a variety of factors, including the market behavior of variousparticipants.  At this time, the RPMauction results are expected to have no material financial impact to **DPL**. Because the RTO market rules are continuing to evolve, we cannotfully assess the impact that these power markets or other ongoing RTOdevelopments may have on **DP&L. **On February 19, 2009,the PUCO approved **DP&L’s**request to defer costs associated with transmission, capacity, ancillaryservice and other PJM related charges incurred as a member of PJM.  **DP&L**anticipates filing a request with the PUCO before the end of April 2009seeking to recover these costs.  Also, on February 24, 2009, **DP&L** filed a Stipulation and Recommendation (theStipulation) signed by the Staff of the PUCO, the Office of the Ohio Consumers’Counsel and various intervening parties. The Stipulation states that **DP&L** mayseek recovery of RTO costs which are not covered by other recoverymechanisms.  The PUCO has the authorityto approve, modify or reject the Stipulation.  The Stipulation is further discussed underOhio Retail Rates in Item 1 — COMPETITION AND REGULATION.  A final decision from the PUCO regarding theStipulation is expected by the end of the second quarter of 2009.  If in the future we are unable to defer orrecover these costs, it could have a material adverse effect on us.

 

Asa member of PJM, **DP&L** and DPLE are subject tocertain additional risks including those associated with the allocation amongPJM members of losses caused by unreimbursed defaults of other participants inPJM markets and those associated with complaint cases filed against PJM thatmay seek refunds of revenues previously earned by PJM members including **DP&L** and DPLE.

 

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**PJM Infrastructure Risks**

 

Annually,PJM performs a review of the capital additions required to provide reliableelectric transmission services throughout its territory.  PJM traditionally allocated the costs ofconstructing these facilities to those entities that benefited directly fromthe additions.  On April 19, 2007,the FERC issued an order that modified the traditional method of allocatingcosts associated with new high voltage planned transmission facilities.  FERC ordered that the cost of newhigh-voltage facilities be socialized across the PJM region.  The costs of the new facilities at lowervoltages will continue to be assigned to the load centers that benefit from thenew facilities.  In a companion orderalso issued on April 19, 2007, FERC did not change the existing allocationof costs associated with existing transmission facilities, upholding theexisting PJM rate design.  The overallimpact of FERC’s orders cannot be definitively assessed at this time becausenot all new planned construction is likely to happen.  The additional costs allocated to **DP&L** for new large transmission approved projects wereimmaterial in 2008 and are not expected to be material in 2009, but could riseto approximately $12 million or more annually by 2012.  As a result, in 2008 **DP&L**sought and obtained PUCO authority to defer costs associated with these newhigh-voltage transmission projects for future recovery through retailrates.  If in the future we are unable todefer or recover these costs, it could have a material adverse effect on us.

 

**Relianceon Third Parties**

 

We rely on many suppliersfor the purchase and delivery of inventory, including coal and equipmentcomponents, to operate our energy production, transmission and distributionfunctions.  Unanticipated changes in ourpurchasing processes, delays and supplier availability may affect our businessand operating results.  In addition, werely on others to provide professional services, such as, but not limited to,actuarial calculations, internal audit services, payroll processing and variousconsulting services.

 

Historically, some of ourcoal suppliers have not performed their contracts as promised and have failedto timely deliver all coal as specified under their contracts.  Such failure could significantly reduce **DP&L’s** inventory of coal and may cause **DP&L** to purchase higher priced coal onthe spot market.  When the failure is fora short period of time, **DP&L**can absorb the irregularity due to existing inventory levels.  If we are required to purchase a substantialamount of coal on the spot market for a significant period of time, it maymaterially impact our cost of operations.

 

**DP&L** is a co-owner in certain generationfacilities where it is a non-operating partner. **DP&L** does not procure the fuel forthese facilities, but is responsible for its proportionate share of the cost offuel procured at these facilities. Partner operated facilities do not always have realized coal costs thatare equal to our co-owners’ projections, and we are responsible for ourproportionate share of any increase in coal costs.

 

**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 businessand operations.  We are installing (andhave installed) emission control technology and are taking other measures tocomply with required reductions.

 

In addition to therequirements related to emissions of SO2, NOx and mercury notedabove, there is a growing concern nationally and internationally about globalclimate change and the contribution of emissions of greenhouse gasses,including most significantly, CO2.  This concern has led to increased interest inlegislation at the federal level and actions at the state level, as well aslitigation relating to greenhouse gas emissions, including a recent U.S.Supreme Court decision holding that the USEPA has the authority to regulate CO2 emissions from motor vehicles under the CleanAir Act (CAA).  Increased pressure forcarbon dioxide emissions reduction is also coming from investor organizationsand the international community.  Thereare also indications that the new government administration formed in 2009 islikely to pursue aggressive policies to limit greenhouse gas emissions and thatlegislation is likely to be passed in the future.  If legislation or regulations are passed atthe federal or state levels imposing mandatory reductions of CO2 and other greenhouse gasses on generationfacilities, the cost of achieving such reduction could be material to us.

 

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**Environmental Compliance**

 

Our facilities (bothwholly-owned and co-owned with others) are subject to continuing federal andstate environmental laws and regulations. We own a non-controlling, minority interest in several generatingstations operated by CG&E or its affiliate, Union Heat, Light &Power, and CSP.  These parties will takesteps to ensure that these stations remain in compliance with applicableenvironmental laws and regulations.  As anon-controlling owner in these generating stations, we will be responsible forour pro rata share of these expenditures based upon our ownership interest.

 

During 2008, a majorspill occurred at an ash pond owned by the Tennessee Valley Authority (TVA) asa result of a dike failure and generated a significant amount of national newscoverage.  **DP&L**has ash ponds at the Killen and J.M. Stuart stations which it operates, andalso at other generating stations operated by others but in which **DP&L** has an ownership interest.  We frequently inspect our ash ponds and donot anticipate any failures like that which occurred at TVA.  It is widely expected that the federalgovernment will consider imposing additional monitoring, testing, or constructionstandards with respect to ash ponds.  **DP&L** is unable to assess the timing or impact of anysuch governmental response that may occur or whether it would be limited to thetype of ash pond operated by TVA or applied more broadly.

 

**Flue Gas Desulfurization Project**

 

We have constructed andplaced into service flue gas desulfurization (FGD) facilities at our Killen andJ. M. Stuart electric generating stations. The operation of this FGD equipment is required for the achievement ofcertain emission targets.  We are alsoco-owners of electric generating stations operated by other investor-ownedutilities, who are in various stages of constructing FGD facilities at thesegenerating stations.  In the event thatwe experience significant FGD equipment operational failure or significantconstruction delays at those electric generating stations where we areco-owners but not the operators, we may not meet certain emission targets thatcould result in a substantial increase in our operating costs to thesefacilities beginning in 2009.

 

**OurStock Price May Fluctuate**

 

The market price of **DPL’s** common stock has fluctuated over a wide range.  Over the past three years, the market priceof our common stock has fluctuated with a low of $19.16 and a high of$31.91.  The global markets in recentyears have experienced significant price and volume variations that have oftenbeen unrelated to our operating performance. Over the previous year, the global markets have increasingly beencharacterized by substantially increased volatility and short-selling and an overallloss of investor confidence, initially in financial institutions but, morerecently, in companies in a number of other industries and in the broadermarkets.  The market price of our commonstock may continue to significantly fluctuate in the future and may be affectedadversely by factors such as actual or anticipated change in our operatingresults, acquisition activity, changes in financial estimates by securitiesanalysts, general market conditions, rumors and other factors, which factorsmay increase price volatility and be exacerbated by continued disruption in theglobal markets at large.

 

**Economic Conditions**

 

Economic pressures, aswell as changing market conditions and other factors related to physical energyand financial trading activities, which include price, credit, liquidity,volatility, capacity, transmission and interest rates can have a significanteffect on our operations and the operations of our retail, industrial andcommercial customers.  The direction andrelative strength of the global economy has recently been increasinglyuncertain due to softness in the residential real estate and mortgage markets,volatility in fuel and other energy costs, difficulties in the financialservices sector and credit markets, and other factors.  Many of these factors have disproportionatelyimpacted Ohio, which is the only state in which **DPL**and **DP&L** sell electricity.

 

**DPL** and **DP&L’s** results of operations may be negatively affectedby sustained downturns or a sluggish economy, all of which are beyond ourcontrol.  Sustained downturns, recessionor a sluggish economy generally affect the markets in which **DP&L** operates and negatively influences **DP&L’s** energy operations.  A falling, slow or sluggish economy couldreduce the demand for energy in areas in which we are doing business.  Our commercial and industrial customers useour energy in the production of their products. During economic downturns, these customers may see a decrease in demandfor their products, which in turn may lead to a decrease in the amount ofenergy they require for production.

 

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**Regulatory Uncertainties andLitigation**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  Additionally, we are subject to diverse andcomplex laws and regulations, including those relating to corporate governance,public disclosure and reporting, and taxation, which are rapidly changing andsubject to additional changes in the future. As further described in Item 3 - “Legal Proceedings,” we are alsocurrently involved in various pieces of litigation in which the outcome isuncertain.  Compliance with these rapidchanges may substantially increase costs to our organization and could affectour future operating results.

 

**WarrantExercise**

 

**DPL’s** warrant holders could exercise theirwarrants to purchase 19.6 million shares of common stock at their discretionuntil March 12, 2012.  As a result, **DPL** could be required to issue up to 19.6million common shares in exchange for the receipt of the exercise price of$21.00 per share or pursuant to a cashless exercise process.  The exercise of all warrants would have adilutive effect on us and would increase the number of common sharesoutstanding and increase our common share of dividend costs, thus affecting anyexisting guidance on earnings per share and our cash flows.

 

**Internal Controls**

 

Our internal controls,accounting policies and practices, and internal information systems aredesigned to enable us to capture and process transactions in a timely andaccurate manner in compliance with generally accepted accounting principles(GAAP) in the United States of America, laws and regulations, taxationrequirements and federal securities laws and regulations.  We implemented corporate governance, internalcontrol and accounting rules issued in connection with the Sarbanes-OxleyAct of 2002 (the “Act”).  Our internalcontrols and policies have been and continue to be closely monitored bymanagement and our Board of Directors to ensure continued compliance with Section 404of the Act.  While we believe thesecontrols, policies, practices and systems are adequate to verify dataintegrity, unanticipated and unauthorized actions of employees, temporarylapses in internal controls due to shortfalls in oversight or resourceconstraints could lead to improprieties and undetected errors that could impactour results of operations, financial condition or cash flows.

 

**CollectiveBargaining Agreements**

 

Approximately 54% of ouremployees are under a collective bargaining agreement which is in effect until October 31,2011.  If collective bargainingagreements expire before new agreements are reached, we would attempt topersuade our employees to continue working while negotiations continue.  We believe that we maintain a satisfactoryrelationship with our employees; however, it is possible that labor disruptionsaffecting some or all of our operations could occur during the period of thebargaining agreement or at the expiration of collective bargaining agreementsbefore new agreements are negotiated.  Lengthystrikes by our employees would have an adverse effect on our operations andfinancial condition.

 

**CyberSecurity and Terrorism**

 

Man-madeproblems such as computer viruses or terrorism may disrupt our operations andharm our operating results. We operate in a highly regulated industry thatrequires the continued operation of sophisticated information technologysystems and network infrastructure. Despite our implementation of securitymeasures, all of our technology systems are vulnerable to disability orfailures due to hacking, viruses, acts of war or terrorism, and other causes.If our technology systems were to fail and we were unable to recover in atimely way, we would be unable to fulfill critical business functions, whichcould have a material adverse effect on our business, operating results, andfinancial condition. In addition, our generation plants, fuel storagefacilities, transmission and distribution facilities may be targets ofterrorist activities that could disrupt our ability to produce or distributesome portion of our energy products. Any such disruption could result in amaterial decrease in revenues and significant additional costs to repair andinsure our assets, which could have a material adverse effect on our business,operating results, and financial condition. The continued threat of terrorismand heightened security and military action in response to this threat, or anyfuture acts of terrorism, may cause further disruptions to the economies of theUnited States and other countries and create further uncertainties or otherwisematerially harm our business, operating results, and financial condition.

 

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**Item 1B - Unresolved Staff Comments**

 

None

 

**Item 2 - Properties**

 

Informationrelating to our properties is contained in Item 1 — ELECTRIC OPERATIONS ANDFUEL SUPPLY and Note 4 of Notes to Consolidated Financial Statements.

 

Substantially allproperty and plants of **DP&L**are subject to the lien of the mortgage securing **DP&L’s** First and Refunding Mortgage, dated as of October 1,1935 with the Bank of New York, as Trustee (Mortgage).

 

**Item 3 - Legal Proceedings**

 

In the normal course ofbusiness, we are subject to various lawsuits, actions, proceedings, claims andother matters asserted under laws and regulations.  We are also from time to time involved inother reviews, investigations and proceedings by governmental and regulatoryagencies regarding our business, certain of which may result in adversejudgments, settlements, fines, penalties, injunctions or other relief.  We believe the amounts provided in ourconsolidated financial statements, as prescribed by GAAP, for these matters 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 legal proceedings,claims and other matters (including those matters noted below), and to complywith applicable laws and regulations will not exceed the amounts reflected inour consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amountsprovided as of December 31, 2008, cannot be reasonably determined.

 

**Insurance Recovery Claim**

 

On May 16,2007, **DPL** filed a claim with Energy InsuranceMutual (EIM) to recoup legal expenses associated with our litigation againstformer executives.  That claim ispending.

 

**StateIncome Tax Audit Reviews**

 

On February 13,2006, we received correspondence from the Ohio Department of Taxation (ODT)notifying us that ODT has completed their examination and review of our OhioCorporation Franchise Tax Returns for tax years 2002 through 2004 and that thefinal proposed audit adjustments result in a balance due of $90.8 millionbefore interest and penalties.  On June 27, 2008, we entered into a$42.0 million settlement agreement with the ODT resolving all outstanding auditissues and appeals, including uncertain tax positions for tax years 1998through 2006.  The $42.0 million was paidto the ODT in July 2008.

 

**SierraClub**

 

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, the co-owners of the Stuart generating station agreed to: (i) certainemission targets related to NOx, SO2 and particulate matter; (ii) make energyefficiency and renewable energy commitments that are conditioned on receivingPublic Utilities Commission of Ohio approval for the recovery of costs; (iii) forfeit5,500 sulfur dioxide allowances; and (iv) provide funding to a third partynon-profit organization to establish a solar water heater rebate program. **DP&L**and the other owners of thestation also entered into an attorney fee agreement to pay a portion of theSierra Club’s attorney and expert witness fees. On October 23, 2008, the United States District Court approved theconsent decree with funding for the third party non-profit organization set at$300,000.  We have determined that theterms of the consent decree will not have a material impact on our overallresults of operations, financial position or cash flows.

 

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**Governmentaland Regulatory Inquiries**

** **

On March 10, 2004, **DPL’s** and **DP&L’s**Corporate Controller, sent a memorandum (the Memorandum) to the Chairman of theAudit Committee of our Board of Directors. The Memorandum expressed the Corporate Controller’s “concerns,perspectives and viewpoints” regarding financial reporting and governanceissues within **DPL** and **DP&L**.  In response the Board initiated an internalinvestigation whose findings and recommendations led to corrective action takenregarding internal controls, process issues and the tone at the top.

 

On May 28, 2004, theU.S. Attorney’s Office for the Southern District of Ohio, assisted by theFederal Bureau of Investigation, notified **DPL**and **DP&L** that it had initiatedan inquiry involving matters connected to our internal investigation.  This inquiry remains pending.

 

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum.  This investigation remains pending.

 

Additional informationrelating to legal proceedings involving **DPL** and **DP&L** is contained in Item 1 -  ENVIRONMENTAL CONSIDERATIONS, Item 1 —COMPETITION AND REGULATION, and Item 8 — Note 18 of Notes to ConsolidatedFinancial Statements and is incorporated by reference into this Item.

 

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

 

NONE

 

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**PART II**

** **

**Item 5 - Market for Registrant’sCommon Equity, Related Stockholder Matters, and Issuer Purchases of EquitySecurities**

 

As of February 24,2009, there were 21,534 holders of record of **DPL**common equity, excluding individual participants in security position listings.The following table presents the high and low per share sales prices for **DPL**common stock as reported by the NewYork Stock Exchange for each quarter of 2008 and 2007:

 

| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  | ** ** | $        | 30.18      |     | $          | 24.58 |   | $ | 31.44 |   | $ | 27.56 |   |
| Second Quarter | ** ** | $        | 28.70      |     | $          | 26.10 |   | $ | 31.91 |   | $ | 28.08 |   |
| Third Quarter  | ** ** | $        | 26.76      |     | $          | 23.00 |   | $ | 29.36 |   | $ | 26.04 |   |
| Fourth Quarter | ** ** | $        | 24.59      |     | $          | 19.16 |   | $ | 30.83 |   | $ | 26.05 |   |

 

**DP&L’s** common stock is held solely by **DPL**and, as a result, is not listed fortrading on any stock exchange.

 

As long as **DP&L** preferred stock is outstanding, **DP&L’s** Amended Articles ofIncorporation contain provisions restricting the payment of cash dividends onany of its common stock if, after giving effect to such dividend, the aggregateof all such dividends distributed subsequent to December 31, 1946 exceedsthe net income of **DP&L**available for dividends on its Common Stock subsequent to December 31,1946, plus $1.2 million.  As of December 31,2008, all earnings reinvested in the business of **DP&L** were available for **DP&L**common stock dividends.  We expect all2008 earnings reinvested in the business of **DP&L**to be available for **DP&L**common stock dividends, payable to **DPL.**

 

On December 10,2008, **DPL’s** Board of Directorsauthorized a quarterly dividend rate increase of approximately 4%, increasingthe quarterly dividend per **DPL**commonshare from $.275 to $.285.  If thisincrease were maintained, the annualized dividend rate would increase from$1.10 per share to $1.14 per share.

 

Additional informationconcerning dividends paid on **DPL**common stock is set forth under Selected Quarterly Information in Item 8 —Financial Statements and Supplementary Data.

 

Information regarding **DPL’s**equity compensation plans as of December 31, 2008is disclosed in Item 12 — Security Ownership of Certain Beneficial Ownersand Management and Related Stockholder Matters, which incorporates suchinformation by reference from **DPL’s** proxystatement for the 2009 Annual Meeting of Shareholders.

 

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The following graphcompares the cumulative 5-year total return to shareholders on DPL Inc.’scommon stock relative to the cumulative total returns of the Dow Jones USIndustrial Average index, the S&P Utilities index, and the S&P ElectricUtilities index. An investment of $1,000 (with reinvestment of all dividends)is assumed to have been made in the company’s common stock and in each index onDecember 31, 2003 and its relative performance is tracked through December 31,2008.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

Among DPL Inc.,The Dow Jones US Industrial Average Index,

The S&PElectric Utilities Index And The S&P Utilities Index

 

 

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*   $1000 invested on 12/31/03 in stock orindex-including reinvestment of dividends.

 Fiscal yearending December 31.

 

Copyright © 2009, Standard & Poor’s, adivision of The McGraw-Hill Companies, Inc. All rights reserved.

www.researchdatagroup.com/S&P.htm

 

| **In U.S. Dollars**              | ** ** | **12/03**  | ** ** | **12/04**  | ** ** | **12/05**  | ** ** | **12/06**  | ** ** | **12/07**  | ** ** | **12/08**  | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| DPL Inc.                         |       | 1,000      |       | 1,255      |       | 1, 348     |       | 1,495      |       | 1,653      |       | 1,331      |       |
| Dow Jones US  Industrial Average |       | 1,000      |       | 1,053      |       | 1,071      |       | 1,275      |       | 1,389      |       | 945        |       |
| S&P Electric  Utilities      |       | 1,000      |       | 1,266      |       | 1,489      |       | 1,835      |       | 2,259      |       | 1,675      |       |
| S&P  Utilities               |       | 1,000      |       | 1,243      |       | 1,452      |       | 1,757      |       | 2,097      |       | 1,490      |       |

 

*The stockprice performance included in this graph is not necessarily indicative offuture stock price performance.*

 

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** **

**Item 6 - Selected FinancialData**

 
| ** **                                                        | ** ** | **For years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| **($ in millions except per share amounts or as indicated)** | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| **DPL Inc.**                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic earnings  (loss) per share of common stock:                 |       |                                  |       |   |   |   |   |   |   |   |   |
| Continuing  operations (c)                                        |       | $                                     | 2.22       |   | $ | 1.97 |   | $ | 1.12 |   | $ | 1.03 |   | $ | 1.01 |   |
| Discontinued  operations                                          |       | $                                     | —     |   | $ | 0.09 |   | $ | 0.12 |   | $ | 0.44 |   | $ | 0.80 |   |
| Cumulative effect  of accounting change (a)                       |       | $                                     | —     |   | $ | — |   | $ | — |   | $ | (0.03 | ) | $ | — |   |
| Total basic  earnings per common share                            |       | $                                     | 2.22       |   | $ | 2.06 |   | $ | 1.24 |   | $ | 1.44 |   | $ | 1.81 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share of common stock:               |       |                                  |       |   |   |   |   |   |   |   |   |
| Continuing  operations (c)                                        |       | $                                     | 2.12       |   | $ | 1.80 |   | $ | 1.03 |   | $ | 0.97 |   | $ | 1.00 |   |
| Discontinued  operations                                          |       | $                                     | —     |   | $ | 0.08 |   | $ | 0.12 |   | $ | 0.41 |   | $ | 0.78 |   |
| Cumulative effect  of accounting change (a)                       |       | $                                     | —     |   | $ | — |   | $ | — |   | $ | (0.03 | ) | $ | — |   |
| Total dilutive  earnings per common share                         |       | $                                     | 2.12       |   | $ | 1.88 |   | $ | 1.15 |   | $ | 1.35 |   | $ | 1.78 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Dividends  declared per share                                     |       | $                                     | 1.10       |   | $ | 1.04 |   | $ | 1.00 |   | $ | 0.96 |   | $ | 0.96 |   |
| Dividend payout  ratio                                            |       | 49.5                                  | %          | 50.5 | % | 80.7 | % | 66.7 | % | 53.0 | % |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Total Electric  sales (millions of kWh)                           |       | 17,172                                |       | 18,598 |   | 18,418 |   | 17,906 |   | 18,465 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Results of  Operations:                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                          |       | $                                     | 1,601.6    |   | $ | 1,515.7 |   | $ | 1,393.5 |   | $ | 1,284.9 |   | $ | 1,199.9 |   |
| Earnings from  continuing operations, net of tax (c)              |       | $                                     | 244.5      |   | $ | 211.8 |   | $ | 125.6 |   | $ | 124.7 |   | $ | 121.5 |   |
| Earnings (loss)  from discontinued operations, net of tax         |       | $                                     | —     |   | $ | 10.0 |   | $ | 14.0 |   | $ | 52.9 |   | $ | 95.8 |   |
| Cumulative effect  of accounting change, net of tax               |       | $                                     | —     |   | $ | — |   | $ | — |   | $ | (3.2 | ) | $ | — |   |
| Net Income                                                        |       | $                                     | 244.5      |   | $ | 221.8 |   | $ | 139.6 |   | $ | 174.4 |   | $ | 217.3 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Financial  Position items at December 31, :                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Total Assets                                                      |       | $                                     | 3,675.1    |   | $ | 3,566.6 |   | $ | 3,612.2 |   | $ | 3,791.7 |   | $ | 4,165.5 |   |
| Long-term Debt  (b)                                               |       | $                                     | 1,376.1    |   | $ | 1,541.5 |   | $ | 1,551.8 |   | $ | 1,677.1 |   | $ | 2,117.3 |   |
| Total construction  additions                                     |       | $                                     | 227.8      |   | $ | 346.7 |   | $ | 351.6 |   | $ | 179.7 |   | $ | 98.0 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Senior unsecured  debt ratings at December 31, :             |       |                                  |       |   |   |   |   |   |   |   |   |
| Fitch Ratings                                                     |       | BBB+                                  |       | BBB+ |   | BBB |   | BBB- |   | BB |   |
| Moody’s Investors  Service                                   |       | Baa2                                  |       | Baa2 |   | Baa3 |   | Ba1 |   | Ba3 |   |
| Standard &  Poor’s Corporation                      |       | BBB-                                  |       | BBB- |   | BB |   | BB- |   | B+ |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Number of  Shareholders - Common Stock                            |       | 21,628                                |       | 22,771 |   | 24,434 |   | 26,601 |   | 28,079 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| **The Dayton Power and Light Company**                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Total Electric  sales (millions of kWh)                           |       | 17,105                                |       | 18,598 |   | 18,418 |   | 17,906 |   | 18,465 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Results of  Operations:                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                          |       | $                                     | 1,572.9    |   | $ | 1,507.4 |   | $ | 1,385.2 |   | $ | 1,276.9 |   | $ | 1,192.2 |   |
| Earnings on  Common Stock (c)                                     |       | $                                     | 284.9      |   | $ | 270.7 |   | $ | 241.6 |   | $ | 210.9 |   | $ | 208.1 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Financial  Position items at December 31, :                  |       |                                  |       |   |   |   |   |   |   |   |   |
| Total Assets                                                      |       | $                                     | 3,435.8    |   | $ | 3,276.7 |   | $ | 3,090.3 |   | $ | 2,738.6 |   | $ | 2,641.4 |   |
| Long-term Debt  (b)                                               |       | $                                     | 884.0      |   | $ | 874.6 |   | $ | 785.2 |   | $ | 685.9 |   | $ | 686.6 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Senior secured  debt ratings at December 31,:                |       |                                  |       |   |   |   |   |   |   |   |   |
| Fitch Ratings                                                     |       | A+                                    |       | A+ |   | A |   | A- |   | BBB |   |
| Moody’s Investors  Service                                   |       | A2                                    |       | A2 |   | A3 |   | Baa1 |   | Baa3 |   |
| Standard &  Poor’s Corporation                      |       | A-                                    |       | BBB+ |   | BBB |   | BBB- |   | BBB- |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |   |   |
| Number of  Shareholders - Preferred Stock                         |       | 256                                   |       | 281 |   | 290 |   | 329 |   | 357 |   |

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*(a)**      **In 2005, we recorded a cumulativeeffect of an accounting change related to an additional obligation in responseto FASB Interpretation Number (FIN) 47, “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143.”*

*(b)**      **Excludes current maturities oflong-term debt.*

*(c)**       **In the fourth quarter of 2006, **DPL** entered into agreements to sell two of its peakingfacilities resulting in a $44.2 million ($71 million pre-tax) impairmentcharge.  The sale was finalized in April 2007.  During 2006, **DPL**recorded a $37.3 million ($61.2 million pre-tax) charge for early redemption ofdebt.  **DP&L**recorded a $2.5 million ($4.1 million pre-tax) charge for early redemption ofdebt in 2006.  In May 2007, **DPL** settled the litigation with the former executivesresulting in a $19.7 million ($31 million pre-tax) gain.  In April 2007, **DPL**alsorecouped legal costs  associated with thelitigation with the former executives from one of its insurers resulting in a$9.2 million ($14.5 million pre-tax) gain. In 2008, **DPL** sold coal and excess emissionallowances to various counterparties, realizing net gains of $58.2 million($83.4 million pre-tax) and $24.3 million ($34.8 million pre-tax),respectively.  Also, in June 2008, **DPL** entered into a $42 million tax settlement with OhioDepartment of Taxation resulting in a recorded income tax benefit of $8.5million.*

 

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** **

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

 

This report includes thecombined filing of **DPL Inc. (DPL)**and **The Dayton Power and Light Company****(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 93% 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.

 

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 and resultsmay vary materially from those projected due to various factors beyond ourcontrol, 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 and other commodity prices; volatility and changes inmarkets for electricity and other energy-related commodities; performance ofour suppliers; increased competition and deregulation in the electric utilityindustry; increased competition in the retail generation market; changes ininterest rates; state, federal and foreign legislative and regulatoryinitiatives that affect cost and investment recovery, emission levels, ratestructures or tax laws; changes in federal and/or state environmental laws andregulations to which **DPL** and itssubsidiaries are subject; the development and operation of RegionalTransmission Organizations (RTOs), including PJM Interconnection, L.L.C. (PJM)to which **DPL’s** operating subsidiary (**DP&L**) has given control of its transmission functions;changes in our purchasing processes, pricing, delays, contractor and supplierperformance and availability; significant delays associated with largeconstruction projects; growth in our service territory and changes in demandand demographic patterns; changes in accounting rules and the effect ofaccounting pronouncements issued periodically by accounting standard-settingbodies; financial market conditions; the outcomes of litigation and regulatoryinvestigations, proceedings or inquiries; general economic conditions; and therisks and other factors discussed in this report and other **DPL**and **DP&L**filings with the Securitiesand Exchange Commission.

 

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 financials and relatedfootnotes included in Item 8 — Financial Statements and Supplementary Data.

 

**BUSINESS OVERVIEW**

 

**DPL** is aregional electric energy and utility company and through its principalsubsidiary, **DP&L,** is primarily engaged inthe generation, transmission and distribution of electricity in West CentralOhio. **DPL**and **DP&L**strive to achieve disciplined growth in energy margins while limitingvolatility in both cash flows and earnings and to achieve stable, long-termgrowth through efficient operations and strong customer and regulatoryrelations. More specifically, **DPL**and**DP&L’s**strategy is to match energy supply with load orcustomer demand, maximizing profits while effectively managing exposure tomovements in energy and fuel prices and utilizing the transmission anddistribution assets that transfer electricity at the most efficient cost whilemaintaining the highest level of customer service and reliability.

 

We operate and managegeneration assets and are exposed to a number of risks. These risks include butare not limited to electricity wholesale price risk, fuel supply and price riskand power plant performance.  We attemptto manage these risks through various means. For instance, we operate aportfolio of wholly-owned and jointly-owned generation assets that isdiversified as to coal source, cost structure and operating characteristics. Weare focused on the operating efficiency of these power plants and maintainingtheir availability.

 

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We****operateand manage****transmission and distribution assetsin a rate-regulated environment. Accordingly, this subjects us to regulatoryrisk in terms of the costs that we may recover and the investment returns thatwe may collect in customer rates. We are focused on delivering electricity andmaintaining high standards of customer service and reliability in acost-effective manner.

 

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:

 

**CREDIT MARKETS**

 

The current global credit crisis may adverselyaffect our business and financial results. Since mid-2007, and particularly during the second half of 2008, thefinancial services industry and the securities markets generally werematerially and adversely affected by significant declines in the values ofnearly all asset classes and by a serious lack of liquidity.  This was initially triggered by declines inthe values of subprime mortgages, but spread to all mortgage and real estateasset classes, to leveraged bank loans and to nearly all asset classes,including equities.  Liquidity and creditconcerns were further exacerbated in September 2008 with Lehman Brothers’bankruptcy filing, the sale of Merrill Lynch to Bank of America, the U.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.  Disruptions in thecredit markets make it harder and more expensive to obtain funding for ourbusiness.  We issue debt to cover thecosts of certain of our operations and expenditures and the inability to issuesuch debt on reasonable terms, or at all, could negatively affect our businessand financial results.  If our availablefunding is limited or we are forced to fund our operations at a higher cost,these conditions may require us to curtail our business activities and increaseour cost of funding, both of which could reduce our profitability.

 

**REGULATORY ENVIRONMENT**

 

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

 

On July 11, 2008,the United States Court of Appeals for 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 decisionremanded these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwindstates with respect to fine particulate matter and ozone.  CAIR created interstate trading programs forannual nitrogen oxide (NOx) emission allowances and made modifications to anexisting trading program for sulfur dioxide (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 and SO2 emissionreduction requirements and their timing. On December 23, 2008, the court reversed part of its decision thatvacated CAIR.  Thus, CAIR currentlyremains in effect, but the USEPA remains subject to the court’s order to revisethe program.

 

In the fourth quarter of2007, **DP&L** began a program for sellingexcess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were thesubject of CAIR trading programs.  Insubsequent quarters, **DP&L**recognized gains from the sale of excess emission allowances to thirdparties.  The court’s CAIR decision hasaffected the trading market for excess allowances and impacted **DP&L’s** program for selling additional excessallowances.  The overall impact of thecourt’s decision, and of the actions the USEPA or others will take in responseto this decision, on **DPL** and **DP&L** is not fully known at this time and could have anadverse effect on us.  In January 2009,we resumed selling excess allowances due to the revival of the trading market.

 

·                  **Senate Bill 221 and ESP filing**

 

On May 1, 2008,substitute Senate Bill 221, an Ohio electric energy bill, was signed by theGovernor and went into effect July 31, 2008.  In compliance with SB 221, **DP&L** filed its electric security plan at the PUCO on October 10,2008.  This plan contained three parts:1) a standard offer plan; 2) a customer conservation and energy managementplan; and 3) an alternative energy plan. The standard offer plan stated that **DP&L**intends to maintain its current rate plan through December 31, 2010, andaddressed compliance issues related to the PUCO rules.  On February 24, 2009, **DP&L** filed a Stipulation and Recommendation (theStipulation) signed by the Staff of the PUCO, the Office of the Ohio Consumers’Counsel and various intervening parties. The PUCO has the authority to approve, modify or reject the Stipulation.  The Stipulation is further discussed underOhio Retail Rates in Item 1 — COMPETITION AND REGULATION.  A final decision from the PUCO regarding theStipulation is expected by the end of the second quarter of 2009.

 

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·                  **Greenhouse Gases**

 

The rules issued bythe United States Environmental Protection Agency (USEPA) and OhioEnvironmental Protection Agency ( Ohio EPA) that require substantial reductionsin SO2,mercury and NOX emissions may impact our business and operations. We are installing (and have installed) emission control technology and aretaking other measures to comply with required reductions.

 

In addition to therequirements related to emissions of SO2, NOX and mercury notedabove, there is a growing concern nationally and internationally about globalclimate change and the contribution of emissions of greenhouse gases, includingmost significantly, carbon dioxide (CO2).  Thisconcern has led to increased interest in legislation at the federal level andactions at the state level as well as litigation relating to greenhouse gasemissions, including a recent U.S. Supreme Court decision holding that theUSEPA has the authority to regulate CO2 emissions from motor vehicles under the CleanAir Act (CAA).  Increased pressure for carbon dioxide emissionsreduction is also coming from investor organizations and the internationalcommunity.  If legislation or regulations are passed at the federal orstate levels imposing mandatory reductions of CO2 and other greenhouse gases on generationfacilities, the cost to**DPL** and**DP&L** of such reductions could bematerial.

 

·      **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 December 31, 2008, we deferred approximately $13 million ofincremental operation and maintenance costs associated with storm restorationefforts related to this storm and other major storms in 2008.  On December 31, 2008, **DP&L** filed a request for an accounting order with thePUCO seeking to defer these incremental costs. On January 14, 2009 the PUCO granted that authority.

 

·                  **Transmission, Ancillary Service and Capacity Costs**

 

As a member of PJMInterconnection, L.L.C. (PJM), **DP&L** issubject to charges associated with PJM operations as approved by the FederalEnergy Regulatory Commission (FERC).  On November 7,2008, **DP&L** filed a request at the PUCOfor authority to defer costs associated with transmission, capacity, ancillaryservice and other PJM related charges incurred as a member of PJM.  **DP&L** soughtdeferral until such time as it files to seek recovery of these costs fromretail ratepayers.  On February 19,2009, the PUCO approved **DP&L’s**request to defer these costs.  **DP&L** anticipates filing a request with the PUCO beforethe end of April 2009 seeking to recover these costs.

 

**FUEL AND RELATED COSTS**

 

·                  **Fuel and Commodity 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 demand balance.  Coal exports from the U.S. have increasedsignificantly in recent years.  Inaddition, domestic issues like government-imposed direct costs and permittingissues are affecting mining costs and supply availability.  Our approach is to hedge the fuel costs forour anticipated electric sales.  For theyears ending 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 itselectric security plan filing, **DP&L**requested regulatory authority to defer fuel and fuel related costs that exceedthe amount that is in current rates.  On February 24,2009, **DP&L** filed a Stipulation andRecommendation (the Stipulation) signed by the Staff of the PUCO, the Office ofthe Ohio Consumers’ Counsel and various intervening parties.  The Stipulation is further discussed underOhio Retail Rates in Item 1 — COMPETITION AND REGULATION.  The Stipulation includes the implementationof a fuel and purchased power recovery mechanism beginning January 1, 2010which will track and adjust fuel costs on a quarterly basis.  The PUCO has the authority to approve, modifyor reject the Stipulation.  A finaldecision from the PUCO regarding the Stipulation is expected by the end of the secondquarter of 2009.

 

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·                  **Sales of Coal and Excess Emission Allowances**

 

During 2008, **DP&L** sold coal and excess emission allowances to variouscounterparties realizing total net gains of $83.4 million and $34.8 million,respectively.  These gains are recordedas a component of **DP&L’s** fuelcosts and reflected in operating income. Coal sales are impacted by a range of factors but can be largelyattributed to the following: variation in power demand, the market price ofpower compared to the cost to produce power; as well as optimizationopportunities in the coal market.  Salesof excess emission allowances are impacted, among other factors, by: generaleconomic conditions; fluctuations in market demand and pricing; availability ofexcess inventory available for sale; and changes to the regulatory environmentin which we operate.  The combined impactof these factors on our ability to sell coal and emission allowances in 2009and beyond is not fully known at this time and could materially impact theamount of gains that will be recognized in the future.

 

**FINANCIAL OVERVIEW**

 

As more fullydiscussed in later sections of this MD&A, the following were thesignificant themes and events for 2008:

 

·                  Forthe year ended December 31, 2008, **DPL’s**basic anddiluted earnings per share (EPS) of $2.22 and $2.12, respectively, increasedover the basic and dilutive EPS for the same period in 2007 by $0.16 and $0.24,respectively.

 

·                  Revenuesfor **DPL** and **DP&L**increased by 6% and 4%, respectively, over 2007 primarily due to increased RTOcapacity and other RTO revenues, and increased retail prices, partially offsetby decreased retail and wholesale sales volume.

 

·                  Fuelcosts for both **DPL** and **DP&L**,excluding the gains from the sale of emission allowances discussed below,decreased by 16% over 2007 mainly due to decreased generation output and gainsfrom the sale of coal (see below).

 

·                  Duringthe year ended December 31, 2008, **DP&L** soldexcess emission allowances to various counterparties realizing total net gainsof $34.8 million compared to net gains of $1.2 million realized in 2007.

 

·                  During2008, **DP&L** also realized total net gainsof $83.4 million from coal sales to various counterparties related to both **DP&L** and partner-operated generating facilities.  In 2007, the net gains realized from similarsales amounted to $0.6 million.

 

Net gains realized fromboth emission allowance and coal sales are recorded as a component of fuelcosts and reflected in operating income.

 

·                  Purchasedpower costs for **DPL** and **DP&L**increasedby 31% and 27%, respectively, over 2007 mainly due to increased RTO capacityand other RTO charges, partially offset by reduced purchased power volumes.

 

·                  **DPL** redeemed the $100 million 6.25% Senior Notes on their May 15,2008 maturity date.

 

·                  OnJune 27, 2008, **DPL** enteredinto a $42.0 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 $42.0 million payment was made to the ODT in July 2008.  Due to this settlement agreement, the balanceof the unrecognized state tax liabilities recorded at March 31, 2008, inthe amount of $56.3 million, was reversed, resulting in a recorded income taxbenefit in 2008 of $8.5 million, net of federal tax impact.

 

·                  OnSeptember 18, 2008, Lehman Brothers Inc. exercised 12 million **DPL** warrants under a cashless exercise transaction.  Each warrant was 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.  This exercise resulted in the issuance of 2.3million shares of **DPL** commonstock from **DPL’s** shares held in treasury.

 

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·                  OnNovember 15, 2007, The Ohio Air Quality Development Authority (OAQDA)issued $90 million of collateralized, variable rate OAQDA Revenue Bonds, 2007 Series Adue November 1, 2040.  In turn, **DP&L** borrowed these funds from the OAQDA.  The payment of principal and interest on thebonds when due was insured by an insurance policy issued by Financial GuarantyInsurance Company (FGIC).  During thefirst quarter of 2008, all three credit rating agencies downgraded FGIC.  These downgrades, as well as the downgradesof our major bond insurers, resulted in auction rate security bonds carryingsubstantially higher interest rates in succeeding auctions and incurring failedauctions.  On April 4, 2008, **DP&L** converted the 2007 Series A Bonds from AuctionRate Securities to Variable Rate Demand Notes. At that time, **DP&L**purchased these notes out of the market and placed them with the Trustee to beheld until the capital markets corrected. These notes were redeemed in December 2008 as discussed in thefollowing paragraph.

 

On December 4, 2008,the OAQDA issued $100 million of collateralized, variable rate RevenueRefunding Bonds Series A and B due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit issued by a syndicated bank group credit facility.  **DP&L** isusing $10 million of these bonds to finance its portion of the costs ofacquiring, constructing and installing certain solid waste disposal and air qualityfacilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds.  The abovetransactions are further discussed in Note 7 of Notes to Consolidated FinancialStatements.

 

·                  OnDecember 10, 2008, **DPL’s**Board of Directors authorized a quarterly dividend rate increase ofapproximately 4%, increasing the quarterly dividend per **DPL**commonshare from $.275 to $.285.  If thisincrease were maintained, the annualized dividend rate would increase from$1.10 per share to $1.14 per share.

 

·                  Thefour FGD units were completed, tested and are fully operational at the Stuartstation.  The increased operating costsand depreciation in 2008 are mainly associated with these units.

 

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**RESULTS OF OPERATIONS — DPL Inc.**

 

**DPL’s**results of operations include the results of itssubsidiaries, including the consolidated results of its principal subsidiary **DP&L** and all of **DP&L’s**consolidated subsidiaries.  **DP&L**provides approximately 98% of the total revenues of**DPL. **Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.  A separate specificdiscussion of the results of operations for **DP&L**is presented elsewhere in this report.

 

**IncomeStatement Highlights — DPL**

** **

| **$ in millions**                    | ** ** | **2008**   | ** **  | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
|                                      |       |       |        |       |       |       |       |
| **Revenues:**                             | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Retail                                    | ** ** | **$**      | **1,223.3** |       | $          | 1,206.2    |       | $ | 1,131.4 |   |
| Wholesale                                 | ** ** | **149.9**  |        | 180.3      |       | 174.1      |       |
| RTO revenues                              | ** ** | **110.4**  |        | 87.4       |       | 77.2       |       |
| RTO capacity  revenues                    | ** ** | **106.9**  |        | 30.9       |       | —     |       |
| Other revenues                            | ** ** | **11.1**   |        | 10.9       |       | 10.8       |       |
| Total revenues                            | ** ** | **$**      | **1,601.6** |       | $          | 1,515.7    |       | $ | 1,393.5 |   |
|                                      |       |       |        |       |       |       |       |
| **Cost of  revenues:**                    | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Fuel costs                                | ** ** | **$**      | **361.2**   |       | $          | 330.0      |       | $ | 349.1 |   |
| Gains from sale  of coal                  | ** ** | **(83.4**  | **)**       | (0.6       | )          | —     |       |
| Gains from sale  of emission allowances   | ** ** | **(34.8**  | **)**       | (1.2       | )          | —     |       |
| Net fuel                                  | ** ** | **243.0**  |        | 328.2      |       | 349.1      |       |
|                                      |       |       |        |       |       |       |       |
| Purchased power                           | ** ** | **148.7**  |        | 156.9      |       | 109.6      |       |
| RTO charges                               | ** ** | **127.8**  |        | 101.9      |       | 49.4       |       |
| RTO capacity  charges                     | ** ** | **100.9**  |        | 28.4       |       | —     |       |
| Total purchased  power                    | ** ** | **377.4**  |        | 287.2      |       | 159.0      |       |
|                                      |       |       |        |       |       |       |       |
| Total cost of  revenues                   | ** ** | **$**      | **620.4**   |       | $          | 615.4      |       | $ | 508.1 |   |
|                                      |       |       |        |       |       |       |       |
| **Gross  margins (a)**                    | ** ** | **$**      | **981.2**   |       | $          | 900.3      |       | $ | 885.4 |   |
|                                      |       |       |        |       |       |       |       |
| Gross margin as  a percentage of revenues |       | **61.3**   | **%**       | 59.4       | %          | 63.5       | %          |
|                                      |       |       |        |       |       |       |       |
| **Operating  income**                     | ** ** | **$**      | **435.5**   |       | $          | 370.1      |       | $ | 281.0 |   |
|                                      |       |       |        |       |       |       |       |
| **Basic  earnings per share:**            | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Continuing  operations                    | ** ** | **$**      | **2.22**    |       | $          | 1.97       |       | $ | 1.12 |   |
| Discontinued  operations                  | ** ** | **—** |        | 0.09       |       | 0.12       |       |
| Total basic                               | ** ** | **$**      | **2.22**    |       | $          | 2.06       |       | $ | 1.24 |   |
|                                      |       |       |        |       |       |       |       |
| **Diluted  earnings per share:**          | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Continuing  operations                    | ** ** | **$**      | **2.12**    |       | $          | 1.80       |       | $ | 1.03 |   |
| Discontinued  operations                  | ** ** | **—** |        | 0.08       |       | 0.12       |       |
| Total diluted                             | ** ** | **$**      | **2.12**    |       | $          | 1.88       |       | $ | 1.15 |   |

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*(a)**             **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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**DPL Inc. — Revenues**

 

Retail customers, especially residential andcommercial customers, consume more electricity on warmer and colder days.Therefore,**DPL’s** retail salesvolume is impacted by the number of heating and cooling degree days occurringduring a year.  Since**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 wholesale market prices;**DPL’s** retail demand; retail demandelsewhere throughout the entire wholesale market area; and**DPL** and non-**DPL** plants’ availability to sell into thewholesale market and weather conditions across the multi-state region.**DPL’s** plan is to make wholesale sales whenmarket prices allow for the economic operation of its generation facilities notbeing utilized to meet its retail demand.

 

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

 

| **$ in millions**           | ** ** | **2008 vs. 2007** | ** ** | **2007 vs. 2006** | ** ** |
|----------------------------------|------------|-------------------|------------|-------------------|------------|
|                             |       |              |       |              |       |
| **Retail**                       | ** ** | ** **        | ** ** | ** **        | ** ** |
| Rate                             | ** ** | **$**             | **45.1**   |              | $          | 38.4 |   |
| Volume                           | ** ** | **(23.7**         | **)**      | 34.1              |       |
| Other  miscellaneous             | ** ** | **(4.3**          | **)**      | 2.3               |       |
| **Total  retail change**         | ** ** | **$**             | **17.1**   |              | $          | 74.8 |   |
|                             |       |              |       |              |       |
| **Wholesale**                    | ** ** | ** **        | ** ** | ** **        | ** ** |
| Rate                             | ** ** | **$**             | **29.8**   |              | $          | 19.8 |   |
| Volume                           | ** ** | **(60.2**         | **)**      | (13.6             | )          |
| **Total  wholesale change**      | ** ** | **$**             | **(30.4**  | **)**             | $          | 6.2 |   |
|                             |       |              |       |              |       |
| **RTO  capacity and other**      | ** ** | ** **        | ** ** | ** **        | ** ** |
| RTO capacity and  other revenues | ** ** | **$**             | **99.2**   |              | $          | 41.2 |   |
| ** **                       | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Total  revenues change**       | ** ** | **$**             | **85.9**   |              | $          | 122.2 |   |

 

For the year ended December 31,2008, revenues increased $85.9 million, or 6%, over the same period in theprior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales and an increase in RTO capacity and otherRTO revenues, partially offset by lower retail and wholesale sales volume.

 

·                  Thenet increase in retail revenues results primarily from a 4% increase in averageretail rates due largely to the second phase of an environmental investmentrider, partially offset by a 2% decrease in sales volume.

 

·                  Thedecrease in retail sales volume is primarily a result of milder weather whichcaused cooling degree days to decrease 26% and a 6% decrease in volume of salesto industrial customers.  The lower salesto industrial customers is largely a direct result of the downturn in theeconomy which has severely affected the automotive and other related industriesin the region resulting in plant closures and reduced production.  These decreases were partially offset by anincrease in heating degree days of 9%.

 

·                  Thenet decrease in wholesale revenues is primarily a result of a 33% decrease insales volume due largely to unplanned outages, partially offset by a 25%increase in wholesale average rates.

 

·                  RTOcapacity and other RTO revenues, consisting primarily of compensation for useof **DP&L’s** transmission assets,regulation services, reactive supply and operating reserves, and capacitypayments under the RPM construct, increased $99.2 million over the same periodof the prior year.  This increase primarilyresulted from additional income realized from the PJM capacity auction andother RTO revenues.

 

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For the year ended December 31,2007, revenues increased $122.2 million, or 9%, over the same period in theprior year.  This increase was primarilythe result of higher average rates for retail and wholesale sales, higherretail sales volume and an increase in RTO capacity and other RTO revenues,partially offset by lower wholesale sales volume.

 

·                  Thenet increase in retail revenues results primarily from a 3% increase in weatherdriven sales volume as total degree days increased 9%, and a 3% increase inaverage retail rates primarily relating to the environmental investment andstorm recovery riders.

 

·                  Thenet increase in wholesale revenues is primarily a result of a 12% increase inwholesale average rates, partially offset by an 8% decrease in sales volume.

 

·                  RTOcapacity and other RTO revenues, consisting primarily of compensation for useof **DP&L’s** transmission assets,regulation services, reactive supply and operating reserves and capacitypayments under the RPM construct, increased $41.2 million over the same periodin 2006. This increase primarily resulted from additional income realized fromthe PJM capacity auction, the PJM transmission losses and congestion credits,and from other RTO revenues.

 

## **DPLInc. — Cost of Revenues**

## ** **

For the year ended December 31,2008:

 

·                  Fuelcosts, which include coal (net of sales), gas, oil, and emission allowancesales and costs, decreased $85.2 million, or 26%, compared to the same periodin 2007, primarily due to increases in net gains of $33.6 million from the saleof **DP&L’s** excess emission allowancesand $82.8 million realized from the sale of **DP&L’s**coal combined with a decrease in the usage of fuel due mainly to a 6% decreasein generation output largely attributable to unplanned outages.  These decreases were partially offset byincreased fuel prices.  The successfulinstallation of FGD equipment at Miami Fort, Killen and Stuart stations hasallowed us the ability to burn coal with a wide range of sulfur content and,accordingly, we purchase and sell coal as we seek to achieve optimum levels ofproduction efficiency.  Gains or lossesfrom sales of coal and emission allowances are recorded as components of fuelcosts.

 

·                  Purchasedpower costs increased $90.2 million, or 31%, compared to the same period in2007.  The increase in purchased powerprimarily results from a $15.3 million increase relating to higher averagemarket rates and a $98.4 million increase in RTO capacity and other RTOcharges, partially offset by a $23.5 million decrease relating to lower volumesof 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.

 

For the year ended December 31,2007:

 

·                  Fuelcosts decreased by $20.9 million, or 6%, in 2007 compared to the same period in2006 primarily due to a decrease in the usage of fuel due mainly to a 4%decrease in generation output resulting from scheduled and unscheduled plantoutages, as well as a 2% decrease in average fuel prices.

 

·                  Purchasedpower costs increased $128.2 million in 2007 compared to the same period in2006.  The increase in purchased powerprimarily resulted from a $57.6 million increase related to higher purchasedpower volume and a $80.9 million increase in RTO capacity and other RTOcharges, partially offset by a $10.4 million decrease related to lower averagemarket rates.  We purchase power tosatisfy retail sales volume when generating facilities are not available due toplanned and unplanned outages, or when market prices are below the marginalcosts associated with our generating facilities.

 

## **DPLInc. — Gross Margins**

## ** **

During 2008, gross marginof $981.2 million increased $80.9 million, or 9%, from $900.3 million in2007.  As a percentage of total revenues,gross margin increased to 61% in 2008 compared to 59% in 2007.

 

During 2007, gross marginof $900.3 million increased $14.9 million, or 2%, from $885.4 million in2006.  As a percentage of total revenues,gross margin decreased to 59% in 2007 as compared to 64% in 2006.

 

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

 

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**DPL Inc.- Operation and Maintenance**

** **
| **$ in millions**                                        | ** ** | **2008 vs. 2007** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| Legal costs                                                   |       | $                 | (17.6      | ) |
| Deferred  compensation (primarily mark-to-market adjustments) |       | (8.1              | )          |
| Employee stock  ownership plan (ESOP) expenses                |       | (7.1              | )          |
| Pension                                                       |       | (2.4              | )          |
| Insurance  settlement                                         |       | 14.5              |       |
| Generating  facilities operating expenses                     |       | 11.1              |       |
| Gain on sale of  corporate aircraft                           |       | 6.0               |       |
| Turbine  maintenance costs                                    |       | 4.1               |       |
| Boiler  maintenance costs                                     |       | 1.0               |       |
| Other, net                                                    |       | (1.8              | )          |
| **Total  operation and maintenance expense**                  |       | $                 | (0.3       | ) |

 

During the year ended December 31, 2008,operation and maintenance expense decreased $0.3 million, or less than 1%, ascompared to 2007.  This variance wasprimarily due to:

 

·                  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,

 

·                  a decrease in employee compensation expenseassociated with the ESOP due mainly to the additional shares that were releasedfrom the ESOP in 2007, and

 

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

 

These decreaseswere partially offset by:

 

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

 

·                  an increase in operatingexpenses largely due to the operation of flue gas desulfurization (FGD) andSelective Catalytic Reduction (SCR) equipment, and related gypsum disposal,

 

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

 

·                  an increase in turbinemaintenance costs incurred due to an unplanned outage at a jointly-ownedproduction unit.

 

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| **$ in millions**                          | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| Boiler  maintenance costs                       |       | $                 | 17.7       |   |
| Generating  facilities operating expenses       |       | 9.4               |       |
| Employee stock  ownership plan (ESOP) expenses  |       | 4.4               |       |
| Turbine  maintenance costs                      |       | 3.5               |       |
| Overhead line  and substation maintenance costs |       | 3.0               |       |
| Insurance  settlement                           |       | (14.5             | )          |
| Gain on sale of  corporate aircraft             |       | (6.0              | )          |
| Legal costs                                     |       | (4.2              | )          |
| Employee  benefits including pension            |       | (0.4              | )          |
| Other, net                                      |       | (5.5              | )          |
| **Total  operation and maintenance expense**    |       | $                 | 7.4        |   |

 

During the year ended December 31,2007, operation and maintenance expense increased $7.4 million, or 3%, ascompared to 2006.  This variance wasprimarily due to:

 

·                  anincrease in boiler maintenance costs largely attributable to timing ofscheduled outages,

 

·                  anincrease in operating expenses largely due to the operation of the FGD and SCRequipment, and related gypsum disposal,

 

·                  anincrease in employee compensation expense associated with the ESOP due mainlyto additional shares being released from the ESOP, and

 

·                  increasesin turbine maintenance costs as well as overhead line and substationmaintenance costs.

 

These increaseswere partially offset by:

 

·                  aninsurance settlement reimbursing us for legal fees relating to the litigationwith the three former executives,

 

·                  again on the sale of the corporate aircraft,

 

·                  adecrease in legal costs primarily resulting from the settlement of thelitigation with the former executives, and

 

·                  adecrease in employee benefits costs resulting from a $5.2 million reduction inpension expense, partially offset by a $4.8 million increase in employeebenefits.

 

**DPL Inc. — Depreciation and Amortization**

 

During 2008,depreciation and amortization expense increased $2.9 million as compared to2007.  This increase was primarily aresult of higher plant balances due largely to installation of the FGDequipment, partially offset by the impact of lower depreciation rates forgeneration property which were put into effect on August 1, 2007.

 

During 2007,depreciation and amortization expense decreased $17.0 million as compared to2006, primarily due to:

 

·                  the absence ofdepreciation for the peaking units sold in April 2007 which reduced theexpense by $10.0 million, and

 

·                  the impact of lowerdepreciation rates for generation property which were put into effect on August 1,2007, reducing the expense by $9.5 million.

 

This decrease waspartially offset by a $2.4 million increase to the expense related to increasedplant balances primarily resulting from the installation of pollution controlequipment.

 

**DPLInc. — General Taxes**

 

During 2008,general taxes increased $13.7 million as compared to 2007, primarily as aresult of higher property taxes due mainly to capital improvements which haveled to higher assessed property values, combined with increased tax rates.

 

There were nosignificant fluctuations in the general taxes in 2007 as compared to 2006.

 

**DPL Inc.****— Amortization of Regulatory Assets**

 

Therewere no significant fluctuations in the amortization of regulatory assets in2008 as compared to 2007.

 

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During 2007, amortization of regulatoryassets increased $3.2 million as compared to 2006, primarily reflecting theamortization of incremental 2004/2005 severe storm costs that began on August 1,2006.

 

## **DPLInc.**—Investment Income

## ** **

During 2008, investmentincome decreased $7.7 million as compared to 2007.  This decrease was primarily the result of:

 

·                  $3.2million of gains realized in 2007 from the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation whichwere used for the settlement payment to the three former executives, and

 

·                  lowercash and short-term investment balances combined with overall lower marketyields on investments in 2008 compared to 2007.

 

During 2007, investmentincome decreased $6.5 million as compared to 2006.  This decrease was primarily the result oflower interest income relating to lower cash and short-term investment balancesin 2007 compared to 2006. This decrease was partially offset by $3.2 million inrealized gains from the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives.

 

**DPL Inc. —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 2007, **DPL** realized a net pre-tax gain in continuing operations ofapproximately $31.0 million.  See Note 15of Notes to Consolidated Financial Statements.

 

**DPL Inc.****— Interest Expense**

 

During2008, interest expense increased $9.7 million, or 12%, as compared to 2007primarily as a result of:

 

·                  $12.9 million of lower capitalized interest dueto the completion of the FGD projects at Miami Fort, Killen, and Stuartstations,

 

·                  the write-off of unamortized debt issuance costsamounting to $1.6 million relating to pollution control bonds following theirrepurchase from the bondholders on April 4, 2008  (See Note 7 of Notes to Consolidated FinancialStatements) and

 

·                  $0.9 million of additional interest expenseassociated with **DP&L’s** $90 million variablerate pollution control bonds issued November 15, 2007 and repurchased onApril 4, 2008.

 

Theseincreases were partially offset by a $7.0 million interest expense reductiondue to the redemption of the $225 million 8.25% Senior Notes in March 2007and the $100 million 6.25% Senior Notes in May 2008.

 

During2007, interest expense decreased $21.2 million, or 21%, as compared to the sameperiod in 2006 primarily as a result of:

 

·                  $15.5 million less interest associated with theredemption of **DPL** debt ($225 million, 8.25%Senior Notes) and

 

·                  $9.1 million of greater capitalized interestprimarily related to increased pollution control capital expenditures.

 

Thesedecreases were partially offset by an additional $3.4 million of interestexpense associated with **DP&L’s** $100million, 4.8% Series pollution control bonds issued September 13,2006.

 

**DPL Inc.****— Other Income (Deductions)**

 

During 2008, otherdeductions of $1.0 million changed from other income of $2.9 million recordedin 2007.  The change from other income toother deductions primarily resulted from the recognition in 2007 of a $2.1million deferred credit related to a litigation settlement (which was not partof the executive litigation settlement).

 

During 2007, other incomeof $2.9 million increased $4.1 million from other deductions of $1.2 millionrecorded for the same period of the prior year. The increase primarily resultedfrom the recognition of a $2.1 million deferred credit related to a litigationsettlement (which was not part of the executive litigation settlement).

 

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## **DPLInc.**—Income Tax Expense

## ** **

During 2008, income taxesdecreased $19.6 million, or 16%, as compared to 2007, primarily due to adecrease in the effective tax rate reflecting:

 

·                  thephase-out of the Ohio Franchise Tax (see below), and

 

·                  thesettlement of the Ohio Franchise Tax issue which resulted in a recorded benefitof $8.5 million in 2008.

 

During 2007, income taxesfrom continuing operations increased $52.7 million, or 76%, as compared to 2006primarily due to:

 

·                  anincrease in pre-tax book income,

 

·                  adecrease in the effective tax rate primarily resulting from the phase-out ofthe Ohio Franchise Tax (see below), and

 

·                  adjustmentsrecorded in 2006 to true-up book tax expense to the tax return.

 

On June 30, 2005,Governor Taft signed House Bill 66 into law which significantly changed the taxstructure in Ohio.  The major provisions of the bill included phasing-outthe Ohio Franchise Tax, phasing-out the Ohio Personal Property Tax fornon-utility taxpayers and phasing-in a Commercial Activities Tax.  The OhioFranchise Tax phase-out is complete as of December 31, 2008.

 

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

 

**Income Statement Highlights —DP&L**

** **
| **$ in millions**                     | ** ** | **2008**   | ** **  | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
|                                       |       |       |        |       |       |       |       |
| **Revenues:**                              | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Retail                                     | ** ** | **$**      | **1,075.3** |       | $          | 1,057.4    |       | $ | 998.1 |   |
| Wholesale                                  | ** ** | **293.5**  |        | 331.7      |       | 309.9      |       |
| RTO revenues                               | ** ** | **108.3**  |        | 87.4       |       | 77.2       |       |
| RTO capacity  revenues                     | ** ** | **95.8**   |        | 30.9       |       | —     |       |
| Total revenues                             | ** ** | **$**      | **1,572.9** |       | $          | 1,507.4    |       | $ | 1,385.2 |   |
|                                       |       |       |        |       |       |       |       |
| **Cost of  revenues:**                     | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Fuel costs                                 | ** ** | **$**      | **349.6**   |       | $          | 317.2      |       | $ | 335.2 |   |
| Gains from sale  of coal                   | ** ** | **(83.4**  | **)**       | (0.6       | )          | —     |       |
| Gains from sale  of emission allowances    | ** ** | **(34.8**  | **)**       | (1.2       | )          | —     |       |
| Net fuel                                   | ** ** | **231.4**  |        | 315.4      |       | 335.2      |       |
|                                       |       |       |        |       |       |       |       |
| Purchased power                            | ** ** | **152.4**  |        | 170.0      |       | 122.5      |       |
| RTO charges                                | ** ** | **126.6**  |        | 101.9      |       | 49.4       |       |
| Capacity charges                           | ** ** | **100.9**  |        | 28.4       |       | —     |       |
| Total purchased  power                     | ** ** | **379.9**  |        | 300.3      |       | 171.9      |       |
|                                       |       |       |        |       |       |       |       |
| Total cost of  revenues                    | ** ** | **$**      | **611.3**   |       | $          | 615.7      |       | $ | 507.1 |   |
|                                       |       |       |        |       |       |       |       |
| **Gross  margins**(a)                      | ** ** | **$**      | **961.6**   |       | $          | 891.7      |       | $ | 878.1 |   |
|                                       |       |       |        |       |       |       |       |
| Gross margins as  a percentage of revenues | ** ** | **61.1**   | **%**       | 59.2       | %          | 63.4       | %          |
|                                       |       |       |        |       |       |       |       |
| **Operating  Income**                      | ** ** | **$**      | **436.6**   |       | $          | 375.1      |       | $ | 402.5 |   |

----

*(a)**      **Forpurposes of discussing operating results, we present and discuss gross margins.This format is useful to investors because it allows analysis and comparabilityof operating trends and includes the same information that is used bymanagement to make decisions regarding 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**DP&L** plans to utilize its internal generating capacity to supplyits retail customers’ needs first, increases in retail demand will decrease thevolume of internal generation available to be sold in the wholesale market andvice 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 includewholesale market prices;**DP&L’s**retail demand, retail demand elsewhere throughout the entire wholesale marketarea;**DP&L** and non-**DP&L** plants’ availability to sell intothe wholesale market and weather conditions across the multi-state region.**  DP&L’s**plan is to make wholesale sales when market prices allow for the economicoperation of its generation facilities that are not being utilized to meet itsretail demand.

 

Thefollowing table provides a summary of changes in revenues from prior periods:

 
| **$ in millions**           | ** ** | **2008 vs. 2007** | ** ** | **2007 vs. 2006** | ** ** |
|----------------------------------|------------|-------------------|------------|-------------------|------------|
|                             |       |              |       |              |       |
| **Retail**                       | ** ** | ** **        | ** ** | ** **        | ** ** |
| Rate                             | ** ** | **$**             | **43.0**   |              | $          | 25.8 |   |
| Volume                           | ** ** | **(20.8**         | **)**      | 31.2              |       |
| Other  miscellaneous             | ** ** | **(4.3**          | **)**      | 2.3               |       |
| **Total  retail change**         | ** ** | **$**             | **17.9**   |              | $          | 59.3 |   |
|                             |       |              |       |              |       |
| **Wholesale**                    | ** ** | ** **        | ** ** | ** **        | ** ** |
| Rate                             | ** ** | **$**             | **79.2**   |              | $          | 46.2 |   |
| Volume                           | ** ** | **(117.4**        | **)**      | (24.4             | )          |
| **Total  wholesale change**      | ** ** | **$**             | **(38.2**  | **)**             | $          | 21.8 |   |
|                             |       |              |       |              |       |
| **RTO  capacity and other**      | ** ** | ** **        | ** ** | ** **        | ** ** |
| RTO capacity and  other revenues | ** ** | **$**             | **85.8**   |              | $          | 41.1 |   |
| ** **                       | ** ** | ** **        | ** ** | ** **        | ** ** |
| **Total  revenues change**       | ** ** | **$**             | **65.5**   |              | $          | 122.2 |   |

 

For the year ended December 31,2008, revenues increased $65.5 million, or 4%, over the same period in theprior year.  This increase was primarily the result of higher averagerates for retail and wholesale sales, and an increase in RTO capacity and otherRTO revenues, partially offset by lower retail and wholesale sales volume.

 

·                  The net increase in retail revenuesresults primarily from a 4% increase in average retail rates due largely to thesecond phase of an environmental investment rider, partially offset by a 2%decrease in sales volume.

 

·                  The decrease in retail sales volume isprimarily a result of milder weather which caused cooling degree days todecrease 26% and a 6% decrease in volume of sales to industrial customers.  The lower sales to industrial customers islargely a direct result of the downturn in the economy which has severelyaffected the automotive and other related industries in the region resulting inplant closures and reduced production. These decreases were partially offset by an increase in heating degreedays of 9%.

 

·                  The net decrease in wholesale revenues isprimarily a result of a 35% decrease in sales volume due largely to unplannedoutages, partially offset by a 37% increase in wholesale average rates.

 

·                  RTO capacity and other RTO revenues,consisting primarily of compensation for use of **DP&L’s**transmission assets, regulation services, reactive supply and operatingreserves, and capacity payments under the RPM construct, increased $85.8million 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 year ended December 31,2007, revenues increased $122.2 million, or 9%, over the same period in theprior year.  This increase was primarilythe result of higher average rates for retail and wholesale sales, higherretail sales volume and an increase in RTO capacity and other RTOrevenues. These increases were partially offset by lower wholesale salesvolume.

 

·                  The net increase in retail revenuesresults primarily from a 3% increase in weather driven sales volume as totaldegree days increased 9%, and a 3% increase in the average retail ratesprimarily relating to the environmental investment and storm recovery riders.

 

·                  The net increase in wholesale revenues isprimarily a result of a 15% increase in wholesale average rates, partiallyoffset by an 8% decrease in sales volume.

 

·                  RTO capacity and other RTO revenues,consisting primarily of compensation for use of **DP&L’s** transmission assets, regulation services, reactivesupply and operating reserves and capacity payments under the RPM construct,increased $41.1 million over the same period in 2006. This increase primarilyresulted from additional income realized from the PJM capacity auction, the PJMtransmission losses and congestion credits and from other RTO revenues.

 

## **DP&L — Cost of Revenues**

 

For the year ended December 31,2008:

 

·                  Fuel costs, which include coal (net ofsales), gas, oil, and emission allowance sales and costs, decreased $84.0million, or 27%, compared to the same period in 2007, primarily due toincreases in net gains of $33.6 million from the sale of **DP&L’s**excess emission allowances and $82.8 million realized from the sale of **DP&L’s** coal combined with a decrease in the usage offuel due mainly to a 6% decrease in generation output largely attributable tounplanned outages.  These decreases werepartially 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 andemission allowances are recorded as components of fuel costs.

 

·                  Purchased power costs increased $79.6million, or 27%, compared to the same period in 2007.  The increase in purchased power primarilyresults from a $11.8 million increase relating to higher average market ratesand a $97.2 million increase in RTO capacity and other RTO charges, partiallyoffset by a $29.3 million decrease relating to lower volumes of purchased power.  Wepurchase power to satisfy retail sales volume when generating facilities arenot available due to planned and unplanned outages, or when market prices arebelow the marginal costs associated with our generating facilities.

 

For the year ended December 31,2007:

 

·                  Fuel costs decreased by $19.8 million, or6%, in 2007 compared to the same period in 2006 primarily due to a decrease inthe usage of fuel due mainly to a 4% decrease in generation output resultingfrom scheduled and unscheduled plant outages, as well as a 2% decrease inaverage fuel prices.

 

·                  Purchased power costs increased $128.4million in 2007 compared to the same period in 2006.  The increase in purchased power primarilyresulted from a $59.5 million increase related to higher purchased power volumeand a $80.9 million increase in RTO capacity and other RTO charges, partiallyoffset by a $12.1 million decrease related to lower average market rates.  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.

 

## **DP&L**— Gross Margins

 

During 2008, gross marginof $961.6 million increased $69.9 million, or 8%, from $891.7 million in2007.  As a percentage of total revenues,gross margin increased to 61% in 2008 as compared to 59% in 2007.

 

During 2007, gross marginof $891.7 million increased $13.6 million, or 2%, from $878.1 million in2006.  As a percentage of total revenues,gross margin decreased to 59% in 2007 compared to 63% in 2006.

 

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

 

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**DP&L— Operation and Maintenance**

** **
| **$ in millions**                                        | ** ** | **2008 vs. 2007** | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|
| Employee stock  ownership plan (ESOP) expense                 |       | $                 | (7.0       | ) |
| Deferred  compensation (primarily mark-to-market adjustments) |       | (5.8              | )          |
| Legal costs                                                   |       | (3.9              | )          |
| Pension                                                       |       | (2.4              | )          |
| Generating  facilities operating expenses                     |       | 11.1              |       |
| Turbine  maintenance costs                                    |       | 4.1               |       |
| Boiler  maintenance costs                                     |       | 1.0               |       |
| Other, net                                                    |       | (5.1              | )          |
| **Total  operation and maintenance expense**                  |       | $                 | (8.0       | ) |

 

During the year ended December 31, 2008, operationand maintenance expense decreased $8.0 million as compared to 2007.  This variance was primarily due to:

 

·                  a decrease in employee compensationexpense associated with the ESOP due mainly to the additional shares that werereleased from the ESOP in 2007,

 

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

 

·                  a decrease in legal fees, and

 

·                  lower pension costs primarily due to theplan funding 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 related gypsum disposal, and

 

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

 
| **$ in millions**                          | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| Boiler  maintenance costs                       |       | $                 | 17.7       |   |
| Generating  facilities operating expenses       |       | 9.4               |       |
| Employee stock  ownership plan (ESOP) expense   |       | 4.4               |       |
| Turbine  maintenance costs                      |       | 3.5               |       |
| Overhead line  and substation maintenance costs |       | 3.0               |       |
| Employee  benefits including pension            |       | (0.3              | )          |
| Other, net                                      |       | 1.6               |       |
| **Total  operation and maintenance expense**    |       | $                 | 39.3       |   |

 

During the year ended December 31,2007, operation and maintenance expense increased $39.3 million, or 17%, ascompared to 2006.  This variance wasprimarily due to:

 

·                  an increase in boiler maintenance costslargely attributable to timing of scheduled outages,

 

·                  an increase in operating expenses largelydue to the operation of the FGD and SCR equipment, and related gypsum disposal,

 

·                  an increase in employee compensationexpense associated with the ESOP due mainly to additional shares being releasedfrom the ESOP, and

 

·                  increases in turbine maintenance costs aswell as overhead line and substation maintenance costs.

 

These increaseswere partially offset by a $0.3 million decrease in employee benefits costsresulting from a $5.1 million reduction in pension expense, partially offset bya $4.8 million increase in employee benefits.

 

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**DP&L — Depreciation andAmortization**

 

During 2008,depreciation and amortization expense increased $3.3 million as compared to2007.  This increase was primarily aresult of higher plant balances due largely to the installation of FGDequipment, partially offset by the impact of lower depreciation rates forgeneration property which were put into effect on August 1, 2007.

 

During 2007,depreciation and amortization expense decreased $5.5 million as compared to2006, primarily reflecting the impact of lowerdepreciation rates for generation property which were put into effect on August 1,2007, reducing the expense by $9.5 million. This decrease was partially offsetby an increase to the expense related to increased plant balances primarilyresulting from the installation of pollution control equipment.

 

**DP&L— General Taxes**

 

During 2008,general taxes increased $13.9 million as compared to 2007, primarily as aresult of higher property taxes due mainly to capital improvements which haveled to higher assessed property values, combined with increased tax rates.

 

There were nosignificant fluctuations in the general taxes in 2007 as compared to 2006.

 

**DP&L — Amortization of Regulatory Assets**

 

Therewere no significant fluctuations in the amortization of regulatory assets in2008 as compared to 2007.

 

During 2007, amortization of regulatory assets increased $3.2million as compared to 2006, primarily reflecting the amortization ofincremental 2004/2005 severe storm costs that began on August 1, 2006.

 

**DP&L — Investment Income**

 

During 2008, investmentincome decreased $16.7 million as compared to 2007.  This decrease was primarily the result of:

 

·                  $14.8 million of gains realized in 2007on the transfer of **DPL** commonstock to the **DP&L** Retirement Income PlanTrust (Pension) and

 

·                  $3.2 million of gains realized in 2007from the sale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation which were used for the settlementpayment to the three former executives.

 

During 2007, investmentincome increased $17.0 million as compared to 2006.  This increase was primarily the result of:

 

·                  a realized gain of $14.8 million on thetransfer of **DPL**common stock to the **DP&L** Retirement Income Plan Trust (Pension) and

 

·                  $3.2 million in realized gains from thesale of financial assets held in **DP&L’s**Master Trust Plan for deferred compensation used for the settlement payment tothe three former executives.

 

**DP&L — Net Gain on Settlementof Executive Litigation**

 

On May 21, 2007, wesettled the litigation with the three former executives.  In exchange for our payment of $25 million,the three former executives relinquished and dismissed all of their claimsincluding those related to deferred compensation, RSUs, MVE incentives, stockoptions and legal fees.  As a result ofthis settlement, during the second quarter ended June 30, 2007, **DP&L**realized a net pre-tax gain incontinuing operations of $35.3 million. See Note 15 of Notes to Consolidated Financial Statements.

 

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**DP&L —****Interest Expense**

 

During 2008, interestexpense increased $14.2 million as compared to the same period in 2007primarily from:

 

·                  $12.9 million of lower capitalized interest due to thecompletion of the FGD projects at Miami Fort, Killen, and Stuart stations,

 

·                  The write-off of unamortized debt issuance costsamounting to $1.6 million relating to pollution control bonds following theirrepurchase from the bondholders on April 4, 2008 (See Note 7 of Notes toConsolidated Financial Statements), and

 

·                  $0.9 million of additional interest expense associatedwith **DP&L’s**$90 million variable ratepollution control bonds issued November 15, 2007 and repurchased on April4, 2008.

 

During2007, interest expense decreased $1.1 million, or 5%, as compared to 2006primarily as a result of $9.1 million of greater capitalized interest primarilyrelated to increased pollution control capital expenditures.  This decrease was partially offset by

 

·                  $3.4 million of additionalinterest expense associated with **DP&L’s** $100million, 4.8% Series pollution control bonds issued September 13,2006 and

 

·                  $2.8 million in additional interest on a short-termloan from **DPL.**

 

**DP&L —****Other Income (Deductions)**

 

During 2008, otherdeductions of $1.1 million changed from other income of $2.9 million recordedin 2007.  The change from other income toother deductions primarily resulted from the recognition in 2007 of a $2.1million deferred credit related to a litigation settlement (which was not partof the executive litigation settlement).

 

During 2007, other incomeof $2.9 million increased $4.1 million from other deductions of $1.2 millionrecorded for the same period of the prior year. The increase primarily resultedfrom the recognition of a $2.1 million deferred credit related to a litigationsettlement (which was not part of the executive litigation settlement).

 

## **DP&L—**IncomeTax Expense

 

During 2008, income taxesdecreased $22.9 million, or 16%, as compared to 2007, primarily due to adecrease in the effective tax rate reflecting:

 

·                  the phase-out of the Ohio Franchise Tax(see below), and

 

·                  the settlement of the Ohio Franchise Taxissue which resulted in a recorded benefit of $8.5 million in 2008.

 

During 2007, income taxesfrom continuing operations increased $0.9 million compared to 2006 due to:

 

·                  an increase in pre-tax book income,

 

·                  a decrease in the effective tax rateprimarily reflecting the phase-out of the Ohio Franchise Tax (see below) and

 

·                  adjustments recorded in 2006 to true-upbook tax expense to the tax return.

 

On June 30, 2005,Governor Taft signed House Bill 66 into law which significantly changed the taxstructure in Ohio.  The major provisions of the bill included phasing-outthe Ohio Franchise Tax, phasing-out the Ohio Personal Property Tax for non-utilitytaxpayers and phasing-in a Commercial Activities Tax.  The Ohio FranchiseTax phase-out is complete as of December 31, 2008.

 

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**FINANCIAL CONDITION, LIQUIDITY ANDCAPITAL REQUIREMENTS**

 

**DPL’s**financial condition, liquidity and capital requirements,includes the consolidated results of its principal subsidiary **DP&L**and all of **DP&L’s**consolidated subsidiaries.  All materialintercompany accounts and transactions have been eliminated in consolidation.

 

On July 27, 2005, **DPL’s** Board authorized the repurchase of up to $400 millionof common stock from time to time in the open market or through privatetransactions.  **DPL**completed this share repurchase program through a series of open marketpurchases on August 21, 2006.  Thisresulted in 14.9 million shares being repurchased at an average price of $26.91per share and at a total cost of $400 million. These shares are currently held as treasury shares at **DPL**.  No shares wererepurchased during 2007 or 2008.

 

**DPL’s Cash Position**

 

**DPL’s**cash and cash equivalents totaled $62.5 million at December 31, 2008,compared to $134.9 million at December 31, 2007, a decrease of $72.4million.  The decrease in cash and cashequivalents was primarily attributed to $243.6 million in capital expenditures,$190.0 million used to retire long-term debt and pollution control bonds, and$120.5 million in dividends paid on common stock, partially offset by $363.2million in cash generated from operating activities, $98.4 million in netproceeds from the issuance of pollution control bonds, and net withdrawals of$22.5 million from restricted funds to pay for pollution control capitalexpenditures.  At December 31, 2008,**DPL**had $14.5 million restricted fundsheld in trust that will be used to fund pollution control capital expenditures.

 

**DP&L’s Cash Position**

 

**DP&L’s**cash and cash equivalents totaled $20.8 million at December 31, 2008,compared to $13.2 million at December 31, 2007, an increase of $7.6million.  The increase in cash and cashequivalents was primarily attributed to $394.6 million in cash generated fromoperating activities and net withdrawals of $22.5 million from restricted fundsto pay for pollution control capital expenditures, partially offset by $242.0million in capital expenditures and $155.0 million in dividends paid on commonstock to the parent.  At December 31,2008, **DP&L**had $14.5 million restrictedfunds held in trust that will be used to fund pollution control capitalexpenditures.

 

**Operating Activities**

 

For the years ended December 31,2008, 2007 and 2006, cash flows from operations were as follows:

 

**Net Cash provided by Operating Activities**

 

| **$ in millions** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
|                   |       |       |       |       |       |       |       |
| **DPL**                | ** ** | **$**      | **363.2**  |       | $          | 318.1      |       | $ | 286.8 |   |
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DP&L**           | ** ** | **$**      | **394.6**  |       | $          | 353.0      |       | $ | 343.8 |   |

 

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, commercialand industrial classes coupled with the rate relief approved by the PUCO for2006 through 2010 provides us with a reasonably predictable gross cash flowfrom operations.

 

**DPL’sCash provided by Operating Activities**

 

The net cash provided byoperating activities for 2008 was primarily the result of cash received fromutility customers and from the sales of coal and excess emission allowances,partially offset by the $42 million payment made to the Ohio Department ofTaxation (ODT) upon settlement of outstanding tax issues.  For 2007 and 2006, net cash provided byoperating activities was primarily the result of cash received from utility customers.  These cash receipts were partially offset bycash used for fuel, purchased power, operating expenditures, interest andtaxes.  The year-to-year fluctuations inworking capital result from the sale of coal and excess emission allowances in2008 and from the timing of payments made and cash receipts from our utilitycustomers.

 

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**DP&L’sCash provided by Operating Activities**

 

The net cash provided byoperating activities for 2008 was primarily the result of cash received fromutility customers and from the sales of coal and excess emission allowances,partially offset by the $42 million payment made to the ODT upon settlement ofoutstanding tax issues.  For 2007 and2006, net cash provided by operating activities was primarily the result ofcash received from utility customers.  Thesecash receipts were partially offset by cash used for fuel, purchased power,operating expenditures, interest and taxes. The year-to-year fluctuations in working capital result from the sale ofcoal and excess emission allowances in 2008 and from the timing of paymentsmade and cash receipts from our utility customers.

 

**Investing Activities**

 

For the years ended December 31,2008, 2007 and 2006, cash flows used for investing activities were as follows:

 

**NetCash used for Investing Activities**

 

| **$ in millions** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
|                   |       |       |       |       |       |       |       |
| **DPL**                | ** ** | **$**      | **(248.5** | **)**      | $          | (187.8     | )          | $ | (207.6 | ) |
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DP&L**           | ** ** | **$**      | **(242.0** | **)**      | $          | (343.2     | )          | $ | (332.9 | ) |

 

**DPL’sCash used for Investing Activities**

 

Net cash flows used forinvesting activities in 2008 were primarily related to capitalexpenditures.  Net cash flows used forinvesting activities in 2007 were for capital expenditures, partially offset bythe sale of peakers and aircraft.  Netcash flows used for investing activities in 2006 were related to capitalexpenditures and the purchases of short-term investments and securities,partially offset by the sale of short-term investments and securities.

 

**DP&L’sCash used for Investing Activities**

 

Net cash flows used forinvesting activities for 2008, 2007 and 2006 were due to capital expenditures.

 

**Financing Activities**

 

For the years ended December 31,2008, 2007 and 2006, cash flows used for financing activities were as follows:

 

**Net Cash used for Financing Activities**

 

| **$ in millions** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|
|                   |       |       |       |       |       |       |       |
| **DPL**                | ** ** | **$**      | **(187.1** | **)**      | $          | (257.6     | )          | $ | (412.8 | ) |
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **DP&L**           | ** ** | **$**      | **(145.0** | **)**      | $          | (42.7      | )          | $ | (11.0 | ) |

 

**DPL’sCash used for Financing Activities**

 

Net cash flows used forfinancing activities in 2008 were primarily the result of cash used to redeemthe $100.0 million 6.25% Senior Notes on May 15, 2008 and the $90.0million OAQDA Revenue Bonds, 2007 Series A on December 4, 2008.  Also, $120.5 million was used to paydividends to common stockholders.  Theseuses of cash were partially offset by net proceeds of $98.4 million related tothe issuance of $100 million variable rate Revenue Refunding Bonds Series Aand B, on December 4, 2008, as well as net withdrawals of $22.5 millionfrom the trust set up as a result of issuing pollution control bonds.  Net cash flows used for financing activitiesin 2007 were primarily the result of cash used to redeem the $225.0 million8.25% Senior Notes on March 1, 2007, and to pay dividends to commonstockholders of $111.7 million.  Theseuses of cash were partially offset by $63.2 million of withdrawals from thetrust set up as a result of issuing pollution control bonds.  Net cash flows used for financing activitiesin 2006 were the result of cash used to repurchase $400.0 million of commonstock and pay dividends to common stockholders of $112.4 million.  These uses of cash were partially offset by$89.9 million of withdrawals from the trust set up as a result of issuingpollution control bonds.

 

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On December 10,2008, **DPL’s**Board of Directors raised thequarterly dividend on **DPL’s** commonstock to $0.285 per share effective with the next dividend declarationdate.  This increase, if maintained,results in a current annualized dividend rate of $1.14 per **DPL**common share.

 

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**DP&L’sCash used for Financing Activities**

 

Net cash flows used forfinancing activities in 2008 were primarily the result of cash used to redeemthe $90.0 million OAQDA Revenue Bonds, 2007 Series A on December 4,2008, to pay common stock dividends of $155.0 million to our parent **DPL**, and to repay a short-term loan to **DPL**of $20.0 million.  These uses of cashwere partially offset by net proceeds of $98.4 million related to the issuanceof $100 million variable rate Revenue Refunding Bonds Series A and B on December 4,2008, as well as net withdrawals of $22.5 million from the trust set up as aresult of issuing pollution control bonds. Net cash flows used for financing activities for 2007 were primarily theresult of cash used to pay common stock dividends to **DPL**of $125.0 million, partially offset by $63.2 million of withdrawals from thetrust set up as a result of issuing pollution control bonds and net cashreceived from the issuance of short-term debt. Net cash flows used for financing activities for 2006 were primarily theresult of cash used to pay common stock dividends to **DPL**of $100.0 million, partially offset by $89.9 million of withdrawals from thetrust set up as a result of issuing pollution control bonds.

 

**Future Liquidity Requirements**

 

In addition to itsworking capital requirements for 2009, **DPL** is projectingto spend approximately $150 million on capital expenditures relating primarilyto its transmission and distribution system, plant and equipment and itsenvironmental compliance program.  Also, **DPL’s** $175 million 8.00% Senior Notes become due in March 2009.  We expect to fund these liquidityrequirements using a combination of projected cash from operations, cash onhand and short-term borrowings.  Inreviewing our future liquidity requirements, we considered the following:

 

·                  **DPL** has a $220 million unsecured revolving credit facilityexpiring in November 2011 and this facility may be increased by anadditional $50 million at any time at the option of **DPL**.  We had no outstanding borrowings under thiscredit facility at December 31, 2008. Three banks participate in this facility.

 

·                  Ourfuture capital expenditures are expected to decrease relative to prior yearsand are projected to approximate a total of $475 million for the three-yearperiod 2009, 2010 and 2011.

 

·                  Cashflows generated from operations are expected to remain strong in theforeseeable future.  Our ability togenerate positive cash flows is dependent on general economic conditions,competitive pressures, and other business and risk factors described in Item 1Aof this Form 10-K.  We have not seenany material increase in our provision for bad debts or in our customer disconnectionsfor non-payment of electric services.

 

Despite the unprecedentedturmoil in the credit markets during recent months, we believe that ourexisting sources of liquidity will be sufficient to meet our future cashobligations and those of our subsidiaries. A discussion of each of our critical liquidity commitments is outlinedbelow.

 

**Capital Requirements**

 

**CONSTRUCTION ADDITIONS**

 
| ** **             | ** ** | **Actual** | ** ** | **Projected** | ** ** |
|------------------------|------------|------------|------------|---------------|------------|
| **$ in millions** | ** ** | **2008**   | ** ** | **2007**      | ** ** | **2006** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|                   |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DPL  Inc.**          | ** ** | **$**      | **228**    |          | $          | 347 |   | $ | 352 |   | $ | 150 |   | $ | 150 |   | $ | 175 |   |
|                   |       |       |       |          |       |   |   |   |   |   |   |   |   |
| **DP&L**           | ** ** | **$**      | **225**    |          | $          | 344 |   | $ | 349 |   | $ | 147 |   | $ | 148 |   | $ | 173 |   |

 

**DPL’s**construction additions were $228 million, $347 million and $352 million in2008, 2007 and 2006, respectively, and are expected to approximate $150 millionin 2009.  Planned construction additionsfor 2009 relate to **DP&L’s**environmental compliance program, power plant equipment and its transmissionand distribution system.

 

**DP&L’s**construction additions were $225 million, $344 million and $349 million in2008, 2007 and 2006, respectively, and are expected to approximate $147 millionin 2009.  Planned construction additionsfor 2009 relate to **DP&L’s**environmental compliance program, power plant equipment and its transmissionand distribution system.

 

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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 $475 million in capital projects for the period 2009 through 2011.  Our ability to complete capital projects andthe reliability of future service will be affected by our financial condition,the availability of internal funds and the reasonable cost of externalfunds.  We expect to finance our constructionadditions with a combination of cash on hand, short-term financing, long-termdebt and cash flows from operations.

 

**Debt and Debt Covenants**

 

OnMarch 25, 2004, **DPL** completed a$175 million private placement of unsecured 8.00% Series Senior Notes due March 2009.  The purchasers were granted registrationrights in connection with the private placement under an Exchange andRegistration Rights Agreement.  Pursuantto this agreement, **DPL** wasobligated to file an exchange offer registration statement by July 22,2004, have the registration statement declared effective by September 20,2004 and consummate the exchange offer by October 20, 2004.  **DPL** failed: (1) tohave a registration statement declared effective; and (2) to complete theexchange offer according to this timeline. As a result, **DPL** had beenaccruing additional interest at a rate of 0.5% per year for each of these twoviolations, up to an additional interest rate not to exceed in the aggregate1.0% per year.  As each violation wascured, the additional interest rate decreased by 0.5% per annum.  **DPL’s** exchangeoffer registration statement for these securities was declared effective by theU.S. Securities and Exchange Commission on June 27, 2006.  As a result, on June 27, 2006, **DPL** ceased accruing 0.5% of the additional interest.  On July 31, 2006, **DPL**ceased accruing the other 0.5% of additional interest when the exchange ofregistered notes for the unregistered notes was completed.

 

Duringthe first quarter 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to issue, over the next three years, upto $200 million of qualified tax-exempt financing from the ODOD’s 2005 volumecap carryforward.  The financing was tobe used to partially fund the flue gas desulfurization capital projects.  The PUCO approved **DP&L’s**application for this additional financing on July 26, 2006.

 

On November 15,2007, The Ohio Air Quality Development Authority (OAQDA) issued $90 million ofcollateralized, variable rate OAQDA Revenue Bonds, 2007 Series A due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by Financial Guaranty Insurance Company (FGIC).  During the first quarter of 2008, all threecredit rating agencies downgraded FGIC. These downgrades, as well as the downgrades of our major bond insurers,resulted in auction rate security bonds carrying substantially higher interestrates in succeeding auctions and incurring failed auctions.  On April 4, 2008, **DP&L**converted the 2007 Series A Bonds from Auction Rate Securities to VariableRate Demand Notes.  At that time, **DP&L** purchased these notes out of the market and placedthem with the Trustee to be held until the capital markets corrected.  These notes were redeemed in December 2008as discussed in the following paragraph.

 

On December 4, 2008,the OAQDA issued $100 million of collateralized, variable rate RevenueRefunding Bonds Series A and B due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit issued by a syndicated bank group credit facility.  **DP&L** isusing $10 million of these bonds to finance its portion of the costs ofacquiring, constructing and installing certain solid waste disposal and airquality facilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds.  The abovetransactions are further discussed in Note 7 of Notes to Consolidated FinancialStatements.

 

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OnNovember 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement replacing its$100 million facility.  This agreementhad a five-year term that expires on November 21, 2011 and that 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 with a ratioof 0.39 to 1.00.  **DP&L**hadno outstanding borrowings under this credit facility at December 31, 2008.  Fees associated with this credit facility areapproximately $0.2 million per year. Changes in credit ratings, however, may affect fees and the applicableinterest.  This revolving creditagreement also contains a $50 million letter of credit sub-limit.  **DP&L** hascertain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of December 31, 2008, **DP&L** had no outstanding letters of credit against thefacility.

 

Duringthe second quarter ended June 30, 2007, **DPL**provided a short-term loan to **DP&L**in theamount of $105 million.  **DP&L** paid down $15 million of this loan during the thirdquarter ended September 30, 2007, an additional $70 million during thefourth quarter ended December 31, 2007, and the final $20 million duringthe first quarter ended March 31, 2008. This short-term loan does not affect our debt covenants.  There are no other inter-company debtcollateralizations or debt guarantees between **DPL**,**DP&L** and their subsidiaries.  None of the debt obligations of **DPL** or **DP&L** areguaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

 

**Credit Ratings**

 

Currently,**DPL’s** senior unsecured and **DP&L**’s senior secured debt credit ratings are asfollows:

 
| ** **                             | ** ** | **DPL** | ** ** | **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**

 

**DPL Inc. - Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with itswholly-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.”

 

At December 31,2008, **DPL** had $35.3 million ofguarantees to third parties for future financial or performance assurance undersuch agreements, on behalf of DPLE.  Theguarantee arrangements entered into by**DPL** with thesethird parties cover all present and future obligations of DPLE to suchbeneficiaries and are terminable at any time by **DPL**upon written notice to the beneficiaries. The carrying amount of obligationsfor commercial transactions covered by these guarantees and recorded in ourconsolidated balance sheets was $1.6 million at December 31, 2008 and$0.5 million at December 31, 2007.

 

In twoseparate transactions in November and December 2006, **DPL** also agreed to be a guarantor of the obligations of DPLEregarding the sale in April 2007 of the Darby Electric Peaking Station to AmericanElectric Power and the sale of the Greenville Electric Peaking Station toBuckeye Electric Power, Inc.  Inboth cases, **DPL** agreed to guarantee theobligations of DPLE over a multiple year period as follows:

 
| **$ in millions** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 23.0       |     | $          | 15.3     |       | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |
| Greenville             |       | $        | 11.1       |     | $          | 7.4      |       | $ | 3.7 |   |

 

In 2008, neither **DPL** nor **DP&L**incurred any losses related to the guarantees of DPLE’s obligations and  we believe it is unlikely that either **DPL** or **DP&L**would be required to perform or incur any losses in the future associated withany of the above guarantees of DPLE’s obligations.

 

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**DP&L — Equity Ownership Interest**

 

**DP&L** owns a 4.9% equity ownershipinterest in an electric generation company. As of December 31, 2008, **DP&L**could be responsible for the repayment of 4.9%, or $51.2 million, of a $1,045million debt obligation that matures in 2026. This would only happen if this electric generation company defaulted onits debt payments.

 

Otherthan the guarantees discussed above, **DPL**and **DP&L** do not have any otheroff-balance sheet arrangements that have or are reasonably likely to have acurrent or future material effect on results of operations, financialcondition, or cash flows.

 

**Contractual Obligations andCommercial Commitments**

** **

We enter into variouscontractual obligations and other commercial commitments that may affect theliquidity of our operations.  At December31, 2008, these include:

** **
| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|
| **$ in millions**               | ** ** | **Total**  | ** ** | **2009**         | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **Thereafter** | ** ** |
| **DPL  Inc.**                        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,551.8    |             | $          | 175.0 |   | $ | 297.4 |   | $ | 470.0 |   | $ | 609.4 |   |
| Interest  payments                   |       | 937.1      |       | 79.7             |       | 145.7 |   | 105.6 |   | 606.1 |   |
| Pension and  postretirement payments |       | 244.9      |       | 22.8             |       | 46.7 |   | 48.6 |   | 126.8 |   |
| Capital leases                       |       | 1.3        |       | 0.7              |       | 0.6 |   | — |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                  |       | 1,675.1    |       | 514.2            |       | 539.8 |   | 168.4 |   | 452.7 |   |
| Limestone  contracts                 |       | 52.2       |       | 4.7              |       | 10.8 |   | 11.5 |   | 25.2 |   |
| Reserve for  uncertain tax positions |       | 1.9        |       | —           |       | 1.9 |   | — |   | — |   |
| Other  contractual obligations       |       | 97.3       |       | 40.5             |       | 46.9 |   | 8.5 |   | 1.4 |   |
| Total  contractual obligations       |       | $          | 4,562.4    |             | $          | 838.0 |   | $ | 1,090.1 |   | $ | 812.7 |   | $ | 1,821.6 |   |

 
| **DP&L**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                 |       |       |       |       |       |       |       |       |       |       |       |
| Long-term debt                       |       | $          | 884.4      |       | $          | —     |       | $          | —     |       | $          | 470.0 |   | $ | 414.4 |   |
| Interest  payments                   |       | 519.9      |       | 40.0       |       | 79.9       |       | 73.9       |       | 326.1      |       |
| Pension and  postretirement payments |       | 244.9      |       | 22.8       |       | 46.7       |       | 48.6       |       | 126.8      |       |
| Capital leases                       |       | 1.3        |       | 0.7        |       | 0.6        |       | —     |       | —     |       |
| Operating leases                     |       | 0.8        |       | 0.4        |       | 0.3        |       | 0.1        |       | —     |       |
| Coal contracts  (a)                  |       | 1,675.1    |       | 514.2      |       | 539.8      |       | 168.4      |       | 452.7      |       |
| Limestone  contracts                 |       | 52.2       |       | 4.7        |       | 10.8       |       | 11.5       |       | 25.2       |       |
| Reserve for  uncertain tax positions |       | 1.9        |       | —     |       | 1.9        |       | —     |       | —     |       |
| Other  contractual obligations       |       | 99.5       |       | 41.6       |       | 48.0       |       | 8.5        |       | 1.4        |       |
| Total  contractual obligations       |       | $          | 3,480.0    |       | $          | 624.4      |       | $          | 728.0      |       | $          | 781.0 |   | $ | 1,346.6 |   |

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(a)   Total at **DP&L**-operatedunits

 

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Long-termdebt:

 

**DPL’s** long-term debt as of December 31, 2008, consists of **DP&L’s** first mortgage bonds, tax-exemptpollution control bonds and **DPL**unsecured senior notes.  These long-termdebt figures include current maturities and unamortized debt discounts.  During 2008, the OAQDA issued $100 million oftax-exempt pollution control bonds which mature in 2040.  In turn, **DP&L**borrowed the proceeds of the bonds and issued $100 million of its FirstMortgage Bonds to secure its payment obligations.

 

**DP&L’s** long-term debt as of December 31, 2008, consistsof first mortgage bonds and tax-exempt pollution control bonds.  These long-term debt figures include currentmaturities and unamortized debt discounts. During 2008, the OAQDA issued $100 million of tax-exempt pollutioncontrol bonds which mature in 2040.  Inturn, **DP&L** borrowed the proceeds of thebonds and issued $100 million of its First Mortgage Bonds to secure its paymentobligations.

 

SeeNote 7 of Notes to Consolidated Financial Statements.

 

Interestpayments:

 

Interestpayments associated with the long-term debt described above.

 

Pensionand postretirement payments:

 

As of December 31,2008, **DPL**, through its principal subsidiary, **DP&L,** had estimated future benefitpayments as outlined in Note 9 of Notes to Consolidated FinancialStatements.  These estimated futurebenefit payments are projected through 2018.

 

Capitalleases:

 

As of December 31,2008, **DPL**, through its principal subsidiary, **DP&L,** had one capital lease thatexpires in September 2010.

 

Operatingleases:

 

As of December 31,2008, **DPL**, through its principal subsidiary, **DP&L,** had several operating leases withvarious terms and expiration dates.

 

Coalcontracts:

 

**DPL**, through its principal subsidiary, **DP&L,** has entered into variouslong-term coal contracts to supply the coal requirements for the generatingplants it operates.  Contract prices aresubject to periodic adjustment and have features that limit price escalation inany given year.

 

Limestonecontracts:

 

**DPL**, through its principal subsidiary, **DP&L,** has entered into variouslimestone contracts to supply limestone for its generating facilities.

 

Reservefor uncertain tax positions:

 

On January 1,2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (FIN 48).  As of December 31,2008, our total reserve for uncertain tax positions is $1.9 million.  See Note 1 of Notes to Consolidated FinancialStatements.

 

Othercontractual obligations:

 

As of December 31,2008, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

At December 31,2008, the commercial commitments that may affect the liquidity of ouroperations include:

 

Creditfacilities:

 

In November 2006,**DP&L** replaced its previous$100 million revolving credit agreement with a $220 million five year facilitythat expires on November 21, 2011. At December 31, 2008, there were no borrowings outstanding underthis credit agreement.  **DP&L** has the ability to increase the size of thefacility by an additional $50 million at any time.

 

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**MARKET RISK**

 

Duringthe conduct of our business, we are subject to certain market risks including,but not limited to, changes in commodity prices for electricity, coal,environmental emissions and gas, and fluctuations in interest rates.  Commodity pricing exposure includes theimpacts of weather, market demand, increased competition and other economicconditions.  For purposes of potentialrisk analysis, we use sensitivity analysis to quantify potential impacts ofmarket rate changes on the results of operations. The sensitivity analysisrepresents hypothetical changes in market values that may or may not occur inthe 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.

 

**Commodity Pricing Risk**

 

Recently, the coal markethas experienced unprecedented price volatility. We are now in a market for coal that clears on international, ratherthan solely domestic supply and consumption. Our domestic price is increasingly affected by international supplydisruptions and demand balance.  Exportsfrom the U.S. have increased in recent years and domestic issues likegovernment-imposed direct costs and permitting issues are affecting miningcosts and supply availability.  We haveresponded to increases in the price of coal by entering into contracts to hedgeour exposure to fuel requirements and other energy-related commodities.  We may not be able to hedge the entireexposure of our operations from commodity price volatility.  To the extent we are not able to hedgeagainst price volatility, our results of operations, financial position or cashflows could be materially affected.

 

Approximately16% of **DPL’s** and 25% of **DP&L’s** 2008 electric revenues were fromsales of excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs ofexisting retail customers are sold in the wholesale market when we can identifyopportunities with positive margins. As of December 31, 2008, a hypothetical increaseor decrease of 10% in **DPL’s** annualwholesale revenues could result in approximately an $11 million increase ordecrease to net income, assuming no increases in fuel and purchased powercosts.  As of December 31, 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 andemission allowances) and purchased power costs as a percent of total operatingcosts in 2008 and 2007 were 33% and 42%, respectively.   **DP&L’s**fuel (including coal, gas, oil and emission allowances) and purchased powercosts as a percent of total operating costs in 2008 and 2007 were 34% and 43%,respectively.  We have substantially allof the total expected coal volume needed to meet our retail and firm wholesalesales requirements for 2009 under contract. The majority of our contracted coal is purchased at fixed prices.  Some contracts provide for periodic adjustmentand some are priced based on market indices. Substantially all contracts have features that limit price escalationsin any given year.  Our consumption of SO2 allowances should decline in 2009 due to emissioncontrol upgrades.  We do not expect topurchase SO2 allowances for 2009.  The exact consumption of SO2 allowances will depend on market prices for power,availability of our generation units, the timing of emission control equipmentupgrade completion and the actual sulfur content of the coal burned.  **DP&L** doesnot plan to purchase NOX allowances for 2009.  Fuel costs are impacted by changes in volumeand price and are driven by a number of variables including weather,reliability of coal deliveries, scheduled outages and generation plantmix.  Based on higher volume and price,fuel costs excluding gains from the sale of emission allowances are forecastedto be 25% to 35% higher in 2009 compared to 2008.

 

Purchased power costsdepend, in part, upon the timing and extent of planned and unplanned outages ofour generating capacity.  We willpurchase power on a discretionary basis when wholesale market conditionsprovide opportunities to obtain power at a cost below our internal productioncosts. As of December 31, 2008, a hypothetical increase or decrease of 10%in **DPL’s** annual fuel and purchasedpower costs could result in approximately a $30 million increase or decrease tonet income.  As of December 31,2008, a hypothetical increase or decrease of 10% in **DP&L’s** annual fuel and purchased power costs could resultin approximately a $29 million increase or decrease to net income.

 

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**InterestRate Risk**

 

As a result of ournormal investing and borrowing activities, our financial results are exposed tofluctuations in interest rates, which we manage through our regular financingactivities.  We maintain both cash on depositand investments in cash equivalents that may be affected by adverse interestrate fluctuations.  **DPL**has fixed-rate long-term debt and **DP&L** hasboth fixed and variable-rate long-term debt. **DP&L’s** variable-rate debt iscomprised of publicly held pollution control bonds.  The variable-rate bonds bear interest basedon a prevailing rate that is reset weekly based on a comparable marketindex.  Market indexes can be affected bymarket demand, supply, market interest rates and other economic conditions.

 

On November 15,2007, The Ohio Air Quality Development Authority (OAQDA) issued $90 million ofcollateralized, variable rate OAQDA Revenue Bonds, 2007 Series A due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by Financial Guaranty Insurance Company (FGIC).  During the first quarter of 2008, all threecredit rating agencies downgraded FGIC. These downgrades, as well as the downgrades of our major bond insurers,resulted in auction rate security bonds carrying substantially higher interestrates in succeeding auctions and incurring failed auctions.  On April 4, 2008, **DP&L**converted the 2007 Series A Bonds from Auction Rate Securities to VariableRate Demand Notes.  At that time, **DP&L** purchased these notes out of the market and placedthem with the Trustee to be held until the capital markets corrected.  These notes were redeemed in December 2008(see below).

 

On December 4,2008, the OAQDA issued $100 million of collateralized, variable rate RevenueRefunding Bonds Series A and B due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit issued by a syndicated bank group credit facility.  **DP&L** isusing $10 million of these bonds to finance its portion of the costs ofacquiring, constructing and installing certain solid waste disposal and airquality facilities at the Conesville generating station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds.  The abovetransactions are further discussed in Note 7 of Notes to Consolidated FinancialStatements.

 

The carrying value of **DPL’s** debt was $1,551.8 million at December 31, 2008,consisting of **DP&L’s** firstmortgage bonds, **DP&L’s**tax-exempt pollution control bonds, ** DPL’s** unsecured notes and **DP&L’s** capital lease.  The fair value of this debt was $1,470.5million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The following table provides informationabout **DPL’s** debt obligations thatare sensitive to interest rate changes:

 

**Principal Payments and Interest Rate Detail byContractual Maturity Date**

 

**DPL Inc**
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Carrying value at** | ** ** | **Fair value at**     | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions** | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** | **2008**              | ** ** | **2008**              | ** ** |
| **Long-term  debt**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **            | ** ** | ** **            | ** ** |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Variable-rate debt     |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | —         |       | $                     | —     |                  | $          | 100.0 |   | $ | 100.0 |   | $ | 100.0 |   |
| Average interest  rate |       | N/A        |       | N/A        |       | N/A        |       | N/A        |       | N/A        |       | 0.8            | %          | 0.8                   | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Fixed-rate debt        |       | $          | 175.7      |       | $          | 0.6        |       | $          | 297.4      |       | $          | —         |       | $                     | 470.0      |                  | $          | 508.1 |   | $ | 1,451.8 |   | $ | 1,370.5 |   |
| Average interest  rate |       | 8.0        | %          | 2.0        | %          | 6.9        | %          | N/A        |       | 5.1        | %          | 6.1            | %          | 6.2                   | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Total                  |       |       |       |       |       |       |       |       |       |       |       |           |       | $                     | 1,551.8    |                  | $          | 1,470.5 |   |

 

The carrying value of **DP&L’s**debt was $884.7 million at December 31, 2008, consisting of first mortgagebonds, tax-exempt pollution control bonds and a capital lease.  The fair value of this debt was $815.7million, based on current market prices or discounted cash flows using currentrates for similar issues with similar terms and remaining maturities.  The following table provides informationabout **DP&L’s** debt obligationsthat are sensitive to interest rate changes:

 

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**Principal Payments and Interest Rate Detail by ContractualMaturity Date**

 

**DP&L**
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Carrying value at** | ** ** | **Fair value at**     | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **$ in millions** | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** | **2008**              | ** ** | **2008**              | ** ** |
| **Long-term  debt**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **            | ** ** | ** **            | ** ** |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Variable-rate  debt    |       | $          | —     |       | $          | —     |       | $          | —     |       | $          | —         |       | $                     | —     |                  | $          | 100.0 |   | $ | 100.0 |   | $ | 100.0 |   |
| Average interest  rate |       | N/A        |       | N/A        |       | N/A        |       | N/A        |       | N/A        |       | 0.8            | %          | 0.8                   | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Fixed-rate debt        |       | $          | 0.7        |       | $          | 0.6        |       | $          | —     |       | $          | —         |       | $                     | 470.0      |                  | $          | 313.4 |   | $ | 784.7 |   | $ | 715.7 |   |
| Average interest  rate |       | 2.0        | %          | 2.0        | %          | N/A        |       | N/A        |       | 5.1        | %          | 4.8            | %          | 5.0                   | %          |                  |       |
|                   |       |       |       |       |       |       |       |       |       |       |       |           |       |                  |       |                  |       |
| Total                  |       |       |       |       |       |       |       |       |       |       |       |           |       | $                     | 884.7      |                  | $          | 815.7 |   |

 

Debt maturities occurringin 2009 are discussed under FINANCIAL CONDITION, LIQUIDITY AND CAPITALREQUIREMENTS.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

**DPL’s** and **DP&L’s**consolidated financial statements are prepared in accordance with US 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; revenuerecognition including unbilled revenues; income taxes; valuation of regulatoryassets and liabilities; the valuation of asset retirement obligations; thevaluation of insurance and claims costs; the valuation of assets andliabilities related to employee benefits; and the valuation of contingent and otherobligations.

 

**Impairmentsand Assets Held for Sale:**  In accordance with Statement ofFinancial Accounting Standards No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS 144), long-lived assets to be held andused are reviewed for impairment whenever events or circumstances indicate thatthe carrying amount may not be recoverable. When required, impairment losses on assets to be held and used arerecognized based on the fair value of the asset.  We determine the fair value of these assetsbased upon estimates of future cash flows, market value of similar assets, ifavailable or independent appraisals, if required.  In analyzing the fair value andrecoverability using future cash flows, we make projections based on a numberof assumptions and estimates of growth rates, future economic conditions,assignment of discount rates and estimates of terminal values.  An impairment loss is recognized if thecarrying amount of the long-lived asset is not recoverable from itsundiscounted cash flows.  The measurementof impairment loss is the difference between the carrying amount and fair valueof the asset.  Long-lived assets to bedisposed of and/or held for sale are reported at the lower of carrying amountor fair value less cost to sell.  Wedetermine the fair value of these assets in the same manner as described forassets held and used.

 

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**RevenueRecognition (including Unbilled Revenue)****:** We consider revenue realized, or realizable, and earned when persuasiveevidence of an arrangement exists, the products or services have been providedto the customer, the sales price is fixed or determinable, and collection isreasonably assured.  The determination ofthe energy sales to customers is based on the reading of their meters, whichoccurs on a systematic basis throughout the month.  We recognize revenues using an accrual methodfor retail and other energy sales that have not yet been billed, but whereelectricity has been consumed.  This is termed “unbilled revenues” and isa widely recognized and accepted practice for utilities.  At the end of each month, unbilled revenuesare determined by the estimation of unbilled energy provided to customers sincethe date of the last meter reading, projected line losses, the assignment ofunbilled energy provided to customer classes and the average rate per customerclass.  Given our estimation method andthe fact that customers are billed monthly, we believe it is unlikely thatmaterially different results will occur in future periods when these amountsare subsequently billed.

 

**IncomeTaxes:**  Judgment and the use of estimates arerequired in developing the provision for income taxes and reporting oftax-related assets and liabilities.  Theinterpretation of tax laws involves uncertainty, since taxing authorities mayinterpret them differently. Ultimate resolution of income tax matters mayresult in favorable or unfavorable impacts to net income and cash flows andadjustments to tax-related assets and liabilities could be material.  Effective January 1, 2007, we adoptedFinancial Accounting Standards Board Interpretation No. 48 (FIN 48), “*Accounting for Uncertainty in Income Taxes*.”  Taking into consideration the uncertainty andjudgment involved in the determination and filing of income taxes, FIN 48establishes standards for recognition and measurement, in financial statements,of positions taken, or expected to be taken, by an entity on its income taxreturns.  Positions taken by an entity onits income tax returns that are recognized in the financial statements mustsatisfy a more-likely-than-not recognition threshold, assuming that theposition will be examined by taxing authorities with full knowledge of allrelevant information.

 

Deferred income taxassets and liabilities are provided, representing future effects on incometaxes for temporary differences between the bases of assets and liabilities forfinancial reporting and tax purposes.  Weevaluate quarterly the probability of realizing deferred tax assets byreviewing a forecast of future taxable income and the availability of taxplanning strategies that can be implemented, if necessary, to realize deferredtax assets.  Failure to achieveforecasted taxable income or successfully implement tax planning strategies mayaffect the realization of deferred tax assets.

 

**Regulatory Assets and Liabilities:**** **Application of FASB Statement of FinancialAccounting Standards No. 71, “Accounting for the Effects of Certain Typesof Regulation”**(SFAS 71) requiresus to reflect the effect of rate regulation in our Consolidated FinancialStatements.  For regulated businessessubject to federal or state cost-of-service rate regulation, regulatorypractices that assign costs to accounting periods may differ from accountingmethods generally applied by nonregulated companies.  When it is probable that regulators willpermit the recovery of current costs through future rates charged to customers,we defer these costs as regulatory assets that otherwise would be expensed bynonregulated companies.  Likewise, werecognize regulatory liabilities when it is probable that regulators willrequire customer refunds through future rates and when revenue is collectedfrom customers for expenditures that are not yet incurred.  Regulatory assets are amortized into expenseand regulatory liabilities are amortized into income over the recovery periodauthorized by the regulator.

 

We evaluate whether ornot recovery of our regulatory assets through future rates is probable and makevarious assumptions in our analyses.  Theexpectations of future recovery are generally based on orders issued byregulatory commissions or historical experience, as well as discussions withapplicable regulatory authorities. If recovery of a regulatory asset isdetermined to be less than probable, it will be written off in the period theassessment is made.  We currently believethe recovery of our regulatory assets is probable.  See Note 3 of Notes to Consolidated FinancialStatements.

 

**AssetRetirement Obligations: **In accordance with FASB Statement ofFinancial Accounting Standards No.143, “Accounting for Asset RetirementObligations” (SFAS 143) and FASB Interpretation No. 47 (FIN 47), “Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143,” legal obligations associated with the retirement oflong-lived assets are required to be recognized at their fair value at the timethose obligations are incurred.  Uponinitial recognition of a legal liability, costs are capitalized as part of therelated long-lived asset and allocated to expense over the useful life of theasset.  SFAS 143 also requires thatcomponents of previously recorded depreciation related to the cost of removalof assets upon retirement, whether legal asset retirement obligations or not,must be removed from a company’s accumulated depreciation reserve.  We make assumptions, estimates and judgmentsthat affect the reported amounts of assets, liabilities and expenses as theyrelate to asset retirement obligations. These assumptions and estimates are based on historical experience andassumptions that we believe to be reasonable at the time.

 

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### ***Insurance and Claims Costs***: In addition to insurance provided through third-partyproviders, our wholly-owned captive subsidiary (MVIC) provides insurancecoverage solely to us and to our subsidiaries. Insurance and Claims Costs on the consolidated balance sheets includesinsurance reserves of approximately $17.6 million and $20.0 million for 2008and 2007, respectively, based on actuarial methods and loss experiencedata.  Such reserves are actuariallydetermined, in the aggregate, based on a reasonable estimation of insuredevents occurring.  There is uncertaintyassociated with the loss estimates, and actual results may differ from theestimates.  Modification of these lossestimates, based on experience and changed circumstances, is reflected in theperiod in which the estimate is re-evaluated.

### * *

**Pension and Postretirement Benefits: **Weaccount and disclose pension and postretirement benefits in accordance with theprovisions of Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pensions and other Postretirement Plans, anamendment to FASB Statements 87, 88, 106 and 132R” (SFAS 158).  SFAS 158 requires the use of assumptions,such as the discount rate and long-term rate of return on assets, indetermining the obligations, annual cost, and funding requirements of theplans.

 

For2009, we are maintaining our long-term rate of return assumptions of 8.50% forpension and 6.00% for other postretirement benefits assets that reflect theeffect of recent trends on our long-term view.  We have increased ourassumed discount rate to 6.25% for pension and postretirement benefits expenseto reflect current interest rate conditions.  Changes in other componentsused in the determination of pension and postretirement benefits costs willresult in an increase of pension costs of $5.5 million, excluding any specialadjustments required under SFAS 88.  We do not anticipate any specialadjustments to expense in 2009.

 

In future periods,differences in the actual return on pension plan assets and assumed return, orchanges in the discount rate, will affect the timing of contributions to thepension plan, if any.  We providepostretirement healthcare benefits to employees who retired prior to 1987.  A one percentage point change in the assumedhealthcare trend rate would affect postretirement benefit costs byapproximately $0.1 million.

 

**Contingent and Other Obligations: **Duringthe conduct of our business, we are subject to a number of federal and state laws and regulations, aswell as other factors and conditions that potentially subject us toenvironmental, litigation, insurance and other risks.  We periodically evaluate our exposure to suchrisks and record reserves for those matters where a loss is considered probableand reasonably estimable in accordance with generally accepted accountingprinciples.  In recording such reserves,we may make assumptions, estimates and judgments that affect the reportedamounts of assets, liabilities and expenses as they relate to contingent andother obligations.  These assumptions andestimates are based on historical experience and assumptions and may be subjectto change.  We, however, believe suchestimates and assumptions are reasonable.

 

## **LEGAL AND OTHER MATTERS**

## ** **

Adiscussion of LEGAL AND OTHER MATTERS is described in Note 18 of Notes toConsolidated Financial Statements and in Item 3 - LEGAL PROCEEDINGS.  A discussion of environmental mattersaffecting both **DPL** and **DP&L**is described in Item 1 — ENVIRONMENTAL CONSIDERATIONS.  Such discussions are incorporated byreference in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations and made a part hereof.

 

**Recently Issued Accounting Pronouncements**

Adiscussion of recently issued accounting pronouncements is described in Note 1of Notes to Consolidated Financial Statements and such discussion isincorporated by reference in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and made a part hereof.

 

**Item 7A - Quantitative and Qualitative Disclosures aboutMarket Risk**

 

The information requiredby this item of Form 10-K is set forth in the MARKET RISK section underItem 7 - Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

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**Item8 - Financial Statements and Supplementary Data**

 

This report includes thecombined filing of **DPL Inc. (DPL)**and **The Dayton Power and Light Company****(DP&L).  DP&L**isthe principal subsidiary of **DPL**providingapproximately 98% of **DPL’s**totalconsolidated revenue and approximately 93% 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.

 

**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                                  | ** ** | **For the years ended December 31,** | ** **  |
|-------------------------------------------------------------|------------|-------------------------------------------|-------------|
| **$ in millions except per share amounts**             | ** ** | **2008**                                  | ** **  | **2007** | ** ** | **2006** | ** ** |
|                                                        |       |                                      |        |   |   |   |   |
| **Revenues**                                                | ** ** | **$**                                     | **1,601.6** |   | $ | 1,515.7 |   | $ | 1,393.5 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Cost of  revenues:**                                      | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Fuel                                                        | ** ** | **243.0**                                 |        | 328.2 |   | 349.1 |   |
| Purchased power                                             | ** ** | **377.4**                                 |        | 287.2 |   | 159.0 |   |
| Total cost of  revenues                                     | ** ** | **620.4**                                 |        | 615.4 |   | 508.1 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Gross  margin**                                           | ** ** | **981.2**                                 |        | 900.3 |   | 885.4 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Operating  expenses:**                                    | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Operation and  maintenance                                  | ** ** | **272.5**                                 |        | 272.8 |   | 265.4 |   |
| Impairment of  peaking stations                             | ** ** | **—**                                |        | — |   | 71.0 |   |
| Depreciation and  amortization                              | ** ** | **137.7**                                 |        | 134.8 |   | 151.8 |   |
| General taxes                                               | ** ** | **125.5**                                 |        | 111.8 |   | 108.6 |   |
| Amortization of  regulatory assets                          | ** ** | **10.0**                                  |        | 10.8 |   | 7.6 |   |
| Total operating  expenses                                   | ** ** | **545.7**                                 |        | 530.2 |   | 604.4 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Operating  income**                                       | ** ** | **435.5**                                 |        | 370.1 |   | 281.0 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Other  income / (expense), net**                          | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Investment  income                                          | ** ** | **3.6**                                   |        | 11.3 |   | 17.8 |   |
| Net gain on  settlement of executive litigation             | ** ** | **—**                                |        | 31.0 |   | — |   |
| Interest expense                                            | ** ** | **(90.7**                                 | **)**       | (81.0 | ) | (102.2 | ) |
| Other income  (deductions)                                  | ** ** | **(1.0**                                  | **)**       | 2.9 |   | (1.2 | ) |
| Total other  income / (expense), net                        | ** ** | **(88.1**                                 | **)**       | (35.8 | ) | (85.6 | ) |
|                                                        |       |                                      |        |   |   |   |   |
| **Earnings  from continuing operations before income tax**  | ** ** | **347.4**                                 |        | 334.3 |   | 195.4 |   |
|                                                        |       |                                      |        |   |   |   |   |
| Income tax  expense                                         | ** ** | **102.9**                                 |        | 122.5 |   | 69.8 |   |
| **Earnings  from continuing operations**                    | ** ** | **244.5**                                 |        | 211.8 |   | 125.6 |   |
| **Earnings  from discontinued operations, net of tax**      | ** ** | **—**                                |        | 10.0 |   | 14.0 |   |
| **Net  Income**                                             | ** ** | **$**                                     | **244.5**   |   | $ | 221.8 |   | $ | 139.6 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Average  number of common shares outstanding (millions)** | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Basic                                                       | ** ** | **110.2**                                 |        | 107.9 |   | 112.3 |   |
| Diluted                                                     | ** ** | **115.4**                                 |        | 117.8 |   | 121.9 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Earnings  per share of common stock**                     | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Basic:                                                      |       |                                      |        |   |   |   |   |
| Earnings from  continuing operations                        | ** ** | **$**                                     | **2.22**    |   | $ | 1.97 |   | $ | 1.12 |   |
| Earnings from  discontinued operations                      | ** ** | **—**                                |        | 0.09 |   | 0.12 |   |
| Total Basic                                                 | ** ** | **$**                                     | **2.22**    |   | $ | 2.06 |   | $ | 1.24 |   |
|                                                        |       |                                      |        |   |   |   |   |
| Diluted:                                                    |       |                                      |        |   |   |   |   |
| Earnings from  continuing operations                        | ** ** | **$**                                     | **2.12**    |   | $ | 1.80 |   | $ | 1.03 |   |
| Earnings from  discontinued operations                      | ** ** | **—**                                |        | 0.08 |   | 0.12 |   |
| Total Diluted                                               | ** ** | **$**                                     | **2.12**    |   | $ | 1.88 |   | $ | 1.15 |   |
|                                                        |       |                                      |        |   |   |   |   |
| **Dividends  paid per share of common stock**               | ** ** | **$**                                     | **1.10**    |   | $ | 1.04 |   | $ | 1.00 |   |

 

See Notes to Consolidated Financial Statements.

 

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**DPL INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                                             | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                                     | **244.5**  |   | $ | 221.8 |   | $ | 139.6 |   |
| Less: Income  from discontinued operations                                         | ** ** | **—**                                |       | (10.0 | ) | (14.0 | ) |
| Income from  continuing operations                                                 | ** ** | **244.5**                                 |       | 211.8 |   | 125.6 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                                     | ** ** | **137.7**                                 |       | 134.8 |   | 151.8 |   |
| Impairment of  peaking stations                                                    | ** ** | **—**                                |       | — |   | 71.0 |   |
| Amortization of  regulatory assets                                                 | ** ** | **10.0**                                  |       | 10.8 |   | 7.6 |   |
| Net gain on  settlement of executive litigation                                    | ** ** | **—**                                |       | (31.0 | ) | — |   |
| Net gain on sale  of aircraft                                                      | ** ** | **—**                                |       | (6.0 | ) | — |   |
| Deferred income  taxes                                                             | ** ** | **40.3**                                  |       | 0.3 |   | (32.7 | ) |
| Changes in  certain assets and liabilities:                                        |       |                                      |       |   |   |   |   |
| Accounts  receivable                                                               | ** ** | **(9.1**                                  | **)**      | (19.1 | ) | (36.4 | ) |
| Deposits and  other advances                                                       | ** ** | **(8.9**                                  | **)**      | 16.4 |   | (8.5 | ) |
| Accounts payable                                                                   | ** ** | **27.0**                                  |       | (0.5 | ) | 19.9 |   |
| Accrued taxes  payable                                                             | ** ** | **(65.4**                                 | **)**      | 21.3 |   | (12.7 | ) |
| Accrued interest  payable                                                          | ** ** | **(0.8**                                  | **)**      | (9.4 | ) | 4.9 |   |
| Prepayments                                                                        | ** ** | **(1.1**                                  | **)**      | (0.9 | ) | 5.4 |   |
| Inventories                                                                        | ** ** | **(0.2**                                  | **)**      | (19.6 | ) | (5.2 | ) |
| Deferred  compensation assets                                                      | ** ** | **(4.4**                                  | **)**      | 3.3 |   | 0.4 |   |
| Deferred  compensation obligations                                                 | ** ** | **(8.4**                                  | **)**      | 1.1 |   | 2.3 |   |
| Other                                                                              | ** ** | **2.0**                                   |       | 4.8 |   | (6.6 | ) |
| **Net  cash provided by operating activities**                                     | ** ** | **363.2**                                 |       | 318.1 |   | 286.8 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from investing activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              | ** ** | **(243.6**                                | **)**      | (346.2 | ) | (335.6 | ) |
| Proceeds from  sale of property - peakers                                          | ** ** | **—**                                |       | 151.0 |   | — |   |
| Proceeds from  sale of property - aircraft                                         | ** ** | **—**                                |       | 7.4 |   | — |   |
| Purchases of  short-term investments and securities                                | ** ** | **(4.9**                                  | **)**      | — |   | (856.0 | ) |
| Sales of  short-term investments and securities                                    | ** ** | **—**                                |       | — |   | 984.0 |   |
| **Net  cash used for investing activities**                                        | ** ** | **(248.5**                                | **)**      | (187.8 | ) | (207.6 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from financing activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exercise of  stock options                                                         | ** ** | **2.2**                                   |       | 14.6 |   | 7.8 |   |
| Tax impact  related to exercise of stock options                                   | ** ** | **0.3**                                   |       | 1.3 |   | 1.9 |   |
| Retirement of  long-term debt                                                      | ** ** | **(100.0**                                | **)**      | (225.0 | ) | — |   |
| Retirement of  pollution control bonds                                             | ** ** | **(90.0**                                 | **)**      | — |   | — |   |
| Issuance of  pollution control bonds, net                                          | ** ** | **98.4**                                  |       | 90.0 |   | 100.0 |   |
| Pollution  control bond proceeds held in trust                                     | ** ** | **(10.0**                                 | **)**      | (90.0 | ) | (100.0 | ) |
| Withdrawal of  restricted funds held in trust, net                                 | ** ** | **32.5**                                  |       | 63.2 |   | 89.9 |   |
| Dividends paid  on common stock                                                    | ** ** | **(120.5**                                | **)**      | (111.7 | ) | (112.4 | ) |
| Withdrawals from  revolving credit facility                                        | ** ** | **115.0**                                 |       | 95.0 |   | — |   |
| Repayment of  borrowings from revolving credit facility                            | ** ** | **(115.0**                                | **)**      | (95.0 | ) | — |   |
| Purchase of  Company’s common stock                                           | ** ** | **—**                                |       | — |   | (400.0 | ) |
| **Net  cash used for financing activities**                                        | ** ** | **(187.1**                                | **)**      | (257.6 | ) | (412.8 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  and cash equivalents:**                                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **(72.4**                                 | **)**      | (127.3 | ) | (333.6 | ) |
| Balance at  beginning of period                                                    | ** ** | **134.9**                                 |       | 262.2 |   | 595.8 |   |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**                                     | **62.5**   |   | $ | 134.9 |   | $ | 262.2 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid,  net of amounts capitalized                                         | ** ** | **$**                                     | **86.8**   |   | $ | 87.8 |   | $ | 91.4 |   |
| Income taxes  paid, net                                                            | ** ** | **$**                                     | **127.3**  |   | $ | 115.6 |   | $ | 113.6 |   |
| Non-cash  financing and investing activities:                                      |       |                                      |       |   |   |   |   |
| Restricted funds  held in trust                                                    | ** ** | **$**                                     | **14.5**   |   | $ | 37.0 |   | $ | 10.1 |   |
| Accruals for  capital expenditures                                                 | ** ** | **$**                                     | **34.1**   |   | $ | 45.6 |   | $ | 43.0 |   |

 

See Notes to Consolidated Financial Statements.

 

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** **

**DPL INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                     | ** ** | **At December 31,** | ** **  |
|------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                                                                         | ** ** | **2008**                 | ** **  | **2007** | ** ** |
|                                                                                           |       |                     |        |   |   |
| **ASSETS**                                                                                     | ** ** | ** **               | ** **  | ** ** | ** ** |
|                                                                                           |       |                     |        |   |   |
| **Current  assets:**                                                                           | ** ** | ** **               | ** **  | ** ** | ** ** |
| Cash and cash  equivalents                                                                     | ** ** | **$**                    | **62.5**    |   | $ | 134.9 |   |
| Restricted funds  held in trust                                                                | ** ** | **14.5**                 |        | 37.0 |   |
| Accounts  receivable, less provision for uncollectible accounts of $1.1 and $1.5, respectively |       | **259.9**                |        | 241.2 |   |
| Inventories, at  average cost                                                                  | ** ** | **105.1**                |        | 105.0 |   |
| Taxes applicable  to subsequent years                                                          | ** ** | **58.0**                 |        | 48.0 |   |
| Other current  assets                                                                          | ** ** | **27.0**                 |        | 11.8 |   |
| Total current  assets                                                                          | ** ** | **527.0**                |        | 577.9 |   |
|                                                                                           |       |                     |        |   |   |
| **Property:**                                                                                  | ** ** | ** **               | ** **  | ** ** | ** ** |
| Property, plant  and equipment                                                                 | ** ** | **5,227.0**              |        | 5,011.6 |   |
| Less:  Accumulated depreciation and amortization                                               | ** ** | **(2,350.6**             | **)**       | (2,234.6 | ) |
| Total net  property                                                                            | ** ** | **2,876.4**              |        | 2,777.0 |   |
|                                                                                           |       |                     |        |   |   |
| **Other  noncurrent assets:**                                                                  | ** ** | ** **               | ** **  | ** ** | ** ** |
| Regulatory  assets (Note 3)                                                                    | ** ** | **233.7**                |        | 165.2 |   |
| Other assets                                                                                   | ** ** | **38.0**                 |        | 46.5 |   |
| Total other  noncurrent assets                                                                 | ** ** | **271.7**                |        | 211.7 |   |
|                                                                                           |       |                     |        |   |   |
| **Total  Assets**                                                                              | ** ** | **$**                    | **3,675.1** |   | $ | 3,566.6 |   |

 

See Notes to Consolidated Financial Statements.

 

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**DPL INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                      | ** **             | **At December 31,** | ** **             |
|-----------------------------------------------------------------|------------------------|--------------------------|------------------------|
| **$ in millions**                                          | ** **             | **2008**                 | ** **             | **2007** | ** ** |
|                                                            |                   |                     |                   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                  | ** **             | ** **               | ** **             | ** ** | ** ** |
|                                                            |                   |                     |                   |   |   |
| **Current  liabilities:**                                       | ** **             | ** **               | ** **             | ** ** | ** ** |
| Current portion  - long-term debt                               | ** **             | **$**                    | **175.7**              |   | $ | 100.7 |   |
| Accounts payable                                                | ** **             | **178.3**                |                   | 163.1 |   |
| Accrued taxes                                                   | ** **             | **130.4**                |                   | 110.8 |   |
| Accrued interest                                                | ** **             | **25.0**                 |                   | 25.8 |   |
| Other current  liabilities                                      | ** **             | **34.5**                 |                   | 27.2 |   |
| Total current  liabilities                                      | ** **             | **543.9**                |                   | 427.6 |   |
|                                                            |                   |                     |                   |   |   |
| **Noncurrent  liabilities:**                                    | ** **             | ** **               | ** **             | ** ** | ** ** |
| Long-term debt                                                  | ** **             | **1,376.1**              |                   | 1,541.5 |   |
| Deferred taxes                                                  | ** **             | **433.7**                |                   | 374.9 |   |
| Unamortized  investment tax credit                              | ** **             | **38.0**                 |                   | 40.7 |   |
| Insurance and  claims costs                                     | ** **             | **17.6**                 |                   | 20.0 |   |
| Other deferred  credits                                         | ** **             | **267.3**                |                   | 266.3 |   |
| Total noncurrent  liabilities                                   | ** **             | **2,132.7**              |                   | 2,243.4 |   |
|                                                            |                   |                     |                   |   |   |
| Cumulative  preferred stock not subject to mandatory redemption | ** **             | **22.9**                 |                   | 22.9 |   |
|                                                            |                   |                     |                   |   |   |
| Commitments and  contingencies (Note 17)                        |                   |                     |                   |   |   |
|                                                            |                   |                     |                   |   |   |
| **Common  shareholders’ equity:**                          | ** **             | ** **               | ** **             | ** ** | ** ** |
| Common stock, at  par value of $0.01 per share:                 |                   |                     |                   |   |   |
|                                                            | **December 2008** | ** **               | **December 2007** |   |   |   |   |   |
| Shares  authorized                                              | 250,000,000            |                     | 250,000,000            |   |   |   |   |   |
| Shares issued                                                   | 163,724,211            |                     | 163,724,211            |   |   |   |   |   |
| Shares  outstanding                                             | 115,961,880            |                     | 113,558,444            | ** ** | **1.2** |   | 1.1 |   |
| Warrants                                                        | ** **             | **31.0**                 |                   | 50.0 |   |
| Common stock  held by employee plans                            | ** **             | **(27.6**                | **)**                  | (39.7 | ) |
| Accumulated  other comprehensive loss                           | ** **             | **(44.6**                | **)**                  | (9.2 | ) |
| Retained  earnings                                              | ** **             | **1,015.6**              |                   | 870.5 |   |
| Total common  shareholders’ equity                         | ** **             | **975.6**                |                   | 872.7 |   |
|                                                            |                   |                     |                   |   |   |
| **Total  Liabilities and Shareholders’ Equity**            | ** **             | **$**                    | **3,675.1**            |   | $ | 3,566.6 |   |

 

See Notes to Consolidated Financial Statements.

 

63

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**DPL INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| ** **                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Common**   | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-------------|------------|--------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                      | ** ** | ** **            | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Stock**    | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                      | ** ** | **Common  Stock (a)** | ** ** | **Other**  | ** ** | ** **  | ** ** | **Held by**  | ** ** | **Other**    | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                                      | ** ** | **Outstanding**       | ** ** | ** ** | ** ** | **Paid-in** | ** ** | ** **   | ** ** | **Employee** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **$ in  millions**                                                         | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Warrants** | ** ** | **Plans**    | ** ** | **Income/(Loss)** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                            |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| Beginning balance                                                               |       | 127,526,404           |       | $          | 1.3        |        | $          | 25.1         |       | $            | 50.0       |              | $          | (86.1        | )          | $          | (14.2      | ) | $ | 1,062.0 |   | $ | 1,038.1 |   |
|                                                                            |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| **2006:**                                                                       |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| Net income                                                                      |       |                  |       |       |       |        |       |         |       |         |       |              |       | 139.6        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                  |       |       |       |        |       |         |       |         |       | 1.6               |       |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                  |       |       |       |        |       |         |       |         |       | 0.7               |       |         |       |       |       |
| Minimum pension  liability                                                      |       |                  |       |       |       |        |       |         |       |         |       | 11.8              |       |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                  |       |       |       |        |       |         |       |         |       | (29.9             | )          |         |       |       |       |
| Total  comprehensive income                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       | 123.8      |       |
| Common stock  dividends (b)                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       | (112.4       | )          | (112.4     | )          |
| Treasury shares  purchased (c)                                                  |       | (14,862,432           | )          | (0.1       | )          | (389.3      | )          |         |       |         |       |              |       |         |       | (389.4     | )          |
| Treasury stock  reissued                                                        |       | 355,000               |       |       |       | 360.4       |       |         |       |         |       |              |       | (352.6       | )          | 7.8        |       |
| Tax effects to  equity                                                          |       |                  |       |       |       | 1.8         |       |         |       |         |       |              |       |         |       | 1.8        |       |
| Employee /  Director stock plans                                                |       |                  |       |       |       | 1.8         |       |         |       | 17.1         |       |              |       | (0.1         | )          | 18.8       |       |
| Other                                                                           |       |                  |       | (0.1       | )          | 0.2         |       |         |       |         |       |              |       |         |       | 0.1        |       |
| FAS 158  adjustment                                                             |       |                  |       |       |       |        |       |         |       |         |       | 23.5              |       |         |       | 23.5       |       |
| Ending balance                                                                  |       | 113,018,972           |       | $          | 1.1        |        | $          | (0.0         | )          | $            | 50.0       |              | $          | (69.0        | )          | $          | (6.5       | ) | $ | 736.5 |   | $ | 712.1 |   |
|                                                                            |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| **2007:**                                                                       |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| Net income                                                                      |       |                  |       |       |       |        |       |         |       |         |       |              |       | 221.8        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                  |       |       |       |        |       |         |       |         |       | (1.4              | )          |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                  |       |       |       |        |       |         |       |         |       | (7.2              | )          |         |       |       |       |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       |                  |       |       |       |        |       |         |       |         |       | 3.4               |       |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                  |       |       |       |        |       |         |       |         |       | 2.5               |       |         |       |       |       |
| Total  comprehensive income                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       | 219.1      |       |
| Common stock  dividends (b)                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       | (111.7       | )          | (111.7     | )          |
| Treasury stock  reissued                                                        |       | 539,472               |       |       |       | (8.0        | )          |         |       |         |       |              |       | 24.0         |       | 16.0       |       |
| Tax effects to  equity                                                          |       |                  |       |       |       | 1.3         |       |         |       |         |       |              |       |         |       | 1.3        |       |
| Employee /  Director stock plans                                                |       |                  |       |       |       | 6.6         |       |         |       | 29.2         |       |              |       | (0.1         | )          | 35.7       |       |
| Other                                                                           |       |                  |       |       |       | 0.1         |       |         |       | 0.1          |       |              |       |         |       | 0.2        |       |
| Ending balance                                                                  |       | 113,558,444           |       | $          | 1.1        |        | $          | (0.0         | )          | $            | 50.0       |              | $          | (39.7        | )          | $          | (9.2       | ) | $ | 870.5 |   | $ | 872.7 |   |
|                                                                            |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| **2008:**                                                                       |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       |       |       |
| Net income                                                                      |       |                  |       |       |       |        |       |         |       |         |       |              |       | 244.5        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                  |       |       |       |        |       |         |       |         |       | (0.8              | )          |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                  |       |       |       |        |       |         |       |         |       | (1.3              | )          |         |       |       |       |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       |                  |       |       |       |        |       |         |       |         |       | (33.1             | )          |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                  |       |       |       |        |       |         |       |         |       | (0.2              | )          |         |       |       |       |
| Total  comprehensive income                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       |         |       | 209.1      |       |
| Common stock  dividends (b)                                                     |       |                  |       |       |       |        |       |         |       |         |       |              |       | (120.5       | )          | (120.5     | )          |
| Treasury stock  reissued                                                        |       | 2,403,436             |       | 0.1        |       | (0.2        | )          | (19.0        | )          |         |       |              |       | 21.4         |       | 2.3        |       |
| Tax effects to  equity                                                          |       |                  |       |       |       | 0.3         |       |         |       |         |       |              |       |         |       | 0.3        |       |
| Employee /  Director stock plans                                                |       |                  |       |       |       | (0.2        | )          |         |       | 12.1         |       |              |       | (0.1         | )          | 11.8       |       |
| Other                                                                           |       |                  |       |       |       | 0.1         |       |         |       |         |       |              |       | (0.2         | )          | (0.1       | )          |
| Ending balance                                                                  |       | 115,961,880           |       | $          | 1.2        |        | $          | (0.0         | )          | $            | 31.0       |              | $          | (27.6        | )          | $          | (44.6      | ) | $ | 1,015.6 |   | $ | 975.6 |   |

----

*(a)**         **$0.01 par value,250,000,000 shares authorized.*

*(b)**         **Common stock dividendsper share were $1.00 in 2006, $1.04 in 2007, and $1.10 in 2008.*

*(c)**          **Number of shares outstanding at December 31, 2005were not affected by the December 30, 2005 transaction to purchase 406,000shares as the share repurchase was settled in early January 2006.  **DPL**completed the share repurchase program in August 2006.*

 

See Notes to Consolidated FinancialStatements.

 

64

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS**

 
| ** **                                      | ** ** | **For the years ended December 31,** | ** **  |
|-------------------------------------------------|------------|-------------------------------------------|-------------|
| **$ in millions**                          | ** ** | **2008**                                  | ** **  | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                                      |        |   |   |   |   |
| **Revenues**                                    | ** ** | **$**                                     | **1,572.9** |   | $ | 1,507.4 |   | $ | 1,385.2 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Cost of  revenues:**                          | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Fuel                                            | ** ** | **231.4**                                 |        | 315.4 |   | 335.2 |   |
| Purchased power                                 | ** ** | **379.9**                                 |        | 300.3 |   | 171.9 |   |
| Total cost of  revenues                         | ** ** | **611.3**                                 |        | 615.7 |   | 507.1 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Gross  margin**                               | ** ** | **961.6**                                 |        | 891.7 |   | 878.1 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Operating  expenses:**                        | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Operation and  maintenance                      | ** ** | **263.0**                                 |        | 271.0 |   | 231.7 |   |
| Depreciation and  amortization                  | ** ** | **127.8**                                 |        | 124.5 |   | 130.0 |   |
| General taxes                                   | ** ** | **124.2**                                 |        | 110.3 |   | 106.3 |   |
| Amortization of  regulatory assets              | ** ** | **10.0**                                  |        | 10.8 |   | 7.6 |   |
| Total operating  expenses                       | ** ** | **525.0**                                 |        | 516.6 |   | 475.6 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Operating  income**                           | ** ** | **436.6**                                 |        | 375.1 |   | 402.5 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Other  income / (expense), net**              | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Investment  income                              | ** ** | **7.0**                                   |        | 23.7 |   | 6.7 |   |
| Net gain on  settlement of executive litigation | ** ** | **—**                                |        | 35.3 |   | — |   |
| Interest expense                                | ** ** | **(36.5**                                 | **)**       | (22.3 | ) | (23.4 | ) |
| Other income (deductions)                       | ** ** | **(1.1**                                  | **)**       | 2.9 |   | (1.2 | ) |
| Total other  income / (expense), net            | ** ** | **(30.6**                                 | **)**       | 39.6 |   | (17.9 | ) |
|                                            |       |                                      |        |   |   |   |   |
| **Earnings  before income tax**                 | ** ** | **406.0**                                 |        | 414.7 |   | 384.6 |   |
|                                            |       |                                      |        |   |   |   |   |
| Income tax  expense                             | ** ** | **120.2**                                 |        | 143.1 |   | 142.2 |   |
| ** **                                      | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Net  Income**                                 | ** ** | **285.8**                                 |        | 271.6 |   | 242.4 |   |
|                                            |       |                                      |        |   |   |   |   |
| Preferred  dividends                            | ** ** | **0.9**                                   |        | 0.9 |   | 0.8 |   |
|                                            |       |                                      |        |   |   |   |   |
| **Earnings  on common stock**                   | ** ** | **$**                                     | **284.9**   |   | $ | 270.7 |   | $ | 241.6 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

65

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **$ in millions**                                                             | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | **$**                                     | **285.8**  |   | $ | 271.6 |   | $ | 242.4 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                                     | ** ** | **127.8**                                 |       | 124.5 |   | 130.0 |   |
| Net gain on  settlement of executive litigation                                    | ** ** | **—**                                |       | (35.3 | ) | — |   |
| Gain on transfer  of assets to pension                                             | ** ** | **—**                                |       | (14.8 | ) | — |   |
| Amortization of  regulatory assets                                                 | ** ** | **10.0**                                  |       | 10.8 |   | 7.6 |   |
| Deferred income  taxes                                                             | ** ** | **38.1**                                  |       | (3.0 | ) | (16.3 | ) |
| Changes in  certain assets and liabilities:                                        |       |                                      |       |   |   |   |   |
| Accounts  receivable                                                               | ** ** | **(6.6**                                  | **)**      | (18.9 | ) | (29.0 | ) |
| Deposits and  other advances                                                       | ** ** | **(9.2**                                  | **)**      | 15.8 |   | (11.0 | ) |
| Accounts payable                                                                   | ** ** | **26.9**                                  |       | 1.9 |   | 21.4 |   |
| Accrued taxes  payable                                                             | ** ** | **(56.5**                                 | **)**      | 19.6 |   | 0.5 |   |
| Accrued interest  payable                                                          | ** ** | **—**                                |       | 0.3 |   | 1.3 |   |
| Prepayments                                                                        | ** ** | **(1.3**                                  | **)**      | — |   | 5.5 |   |
| Inventories                                                                        | ** ** | **(0.2**                                  | **)**      | (20.6 | ) | (5.2 | ) |
| Deferred  compensation assets                                                      | ** ** | **0.7**                                   |       | 3.4 |   | 2.5 |   |
| Deferred  compensation obligations                                                 | ** ** | **(8.4**                                  | **)**      | 1.1 |   | 0.1 |   |
| Other                                                                              | ** ** | **(12.5**                                 | **)**      | (3.4 | ) | (6.0 | ) |
| **Net  cash provided by operating activities**                                     | ** ** | **394.6**                                 |       | 353.0 |   | 343.8 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from investing activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              | ** ** | **(242.0**                                | **)**      | (343.2 | ) | (332.9 | ) |
| **Net  cash used for investing activities**                                        | ** ** | **(242.0**                                | **)**      | (343.2 | ) | (332.9 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  flows from financing activities:**                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of  short-term debt                                                       | ** ** | **—**                                |       | 105.0 |   | — |   |
| Payment of  short-term debt                                                        | ** ** | **(20.0**                                 | **)**      | (85.0 | ) | — |   |
| Issuance of  pollution control bonds, net                                          | ** ** | **98.4**                                  |       | 90.0 |   | 100.0 |   |
| Pollution  control bond proceeds held in trust                                     | ** ** | **(10.0**                                 | **)**      | (90.0 | ) | (100.0 | ) |
| Retirement of  pollution control bonds                                             | ** ** | **(90.0**                                 | **)**      | — |   | — |   |
| Withdrawal of  restricted funds held in trust, net                                 | ** ** | **32.5**                                  |       | 63.2 |   | 89.9 |   |
| Withdrawals from  revolving credit facility                                        | ** ** | **115.0**                                 |       | — |   | — |   |
| Repayment of  borrowings from revolving credit facility                            | ** ** | **(115.0**                                | **)**      | — |   | — |   |
| Dividends paid  on preferred stock                                                 | ** ** | **(0.9**                                  | **)**      | (0.9 | ) | (0.9 | ) |
| Dividends paid  on common stock to parent                                          | ** ** | **(155.0**                                | **)**      | (125.0 | ) | (100.0 | ) |
| **Net  cash used for financing activities**                                        | ** ** | **(145.0**                                | **)**      | (42.7 | ) | (11.0 | ) |
|                                                                               |       |                                      |       |   |   |   |   |
| **Cash  and cash equivalents:**                                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change                                                                         | ** ** | **7.6**                                   |       | (32.9 | ) | (0.1 | ) |
| Balance at  beginning of period                                                    | ** ** | **13.2**                                  |       | 46.1 |   | 46.2 |   |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**                                     | **20.8**   |   | $ | 13.2 |   | $ | 46.1 |   |
|                                                                               |       |                                      |       |   |   |   |   |
| **Supplemental  cash flow information:**                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid,  net of amounts capitalized                                         | ** ** | **$**                                     | **33.4**   |   | $ | 18.5 |   | $ | 77.9 |   |
| Income taxes  paid, net                                                            | ** ** | **$**                                     | **127.0**  |   | $ | 114.7 |   | $ | 158.1 |   |
| Non-cash  financing and investing activities:                                      |       |                                      |       |   |   |   |   |
| Restricted funds  held in trust                                                    | ** ** | **$**                                     | **14.5**   |   | $ | 37.0 |   | $ | 10.1 |   |
| Accruals for  capital expenditures                                                 | ** ** | **$**                                     | **34.1**   |   | $ | 45.6 |   | $ | 43.0 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

66

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                                                      | ** ** | **At December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                                                                          | ** ** | **2008**                 | ** **  | **2007** | ** ** |
|                                                                                            |       |                     |        |   |   |
| **ASSETS**                                                                                      | ** ** | ** **               | ** **  | ** ** | ** ** |
|                                                                                            |       |                     |        |   |   |
| **Current  assets:**                                                                            | ** ** | ** **               | ** **  | ** ** | ** ** |
| Cash and cash  equivalents                                                                      | ** ** | **$**                    | **20.8**    |   | $ | 13.2 |   |
| Restricted funds  held in trust                                                                 | ** ** | **14.5**                 |        | 37.0 |   |
| Accounts  receivable, less provision for uncollectible accounts of $1.1 and $1.5,  respectively |       | **225.4**                |        | 221.8 |   |
| Inventories, at  average cost                                                                   | ** ** | **103.8**                |        | 103.6 |   |
| Taxes applicable  to subsequent years                                                           | ** ** | **57.9**                 |        | 48.0 |   |
| Other current  assets                                                                           | ** ** | **24.1**                 |        | 13.4 |   |
|                                                                                            | ** ** | ** **               |        |   |   |
| Total current  assets                                                                           | ** ** | **446.5**                |        | 437.0 |   |
|                                                                                            |       |                     |        |   |   |
| **Property:**                                                                                   | ** ** | ** **               | ** **  | ** ** | ** ** |
| Property, plant  and equipment                                                                  | ** ** | **4,970.9**              |        | 4,757.0 |   |
| Less:  Accumulated depreciation and amortization                                                | ** ** | **(2,265.5**             | **)**       | (2,159.1 | ) |
|                                                                                            | ** ** | ** **               |        |   |   |
| Net property                                                                                    | ** ** | **2,705.4**              |        | 2,597.9 |   |
|                                                                                            |       |                     |        |   |   |
| **Other  noncurrent assets:**                                                                   | ** ** | ** **               | ** **  | ** ** | ** ** |
| Regulatory  assets                                                                              | ** ** | **233.7**                |        | 165.2 |   |
| Other assets                                                                                    | ** ** | **50.2**                 |        | 76.6 |   |
|                                                                                            | ** ** | ** **               |        |   |   |
| Total other  noncurrent assets                                                                  | ** ** | **283.9**                |        | 241.8 |   |
|                                                                                            |       |                     |        |   |   |
| **Total  Assets**                                                                               | ** ** | **$**                    | **3,435.8** |   | $ | 3,276.7 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

67

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**THE DAYTONPOWER AND LIGHT COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

** **
| ** **                                                      | ** ** | **At December 31,** | ** **  |
|-----------------------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                                          | ** ** | **2008**                 | ** **  | **2007** | ** ** |
|                                                            |       |                     |        |   |   |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                  | ** ** | ** **               | ** **  | ** ** | ** ** |
|                                                            |       |                     |        |   |   |
| **Current  liabilities:**                                       | ** ** | ** **               | ** **  | ** ** | ** ** |
| Current portion  - long-term debt                               | ** ** | **$**                    | **0.7**     |   | $ | 0.7 |   |
| Accounts payable                                                | ** ** | **176.6**                |        | 161.9 |   |
| Accrued taxes                                                   | ** ** | **128.0**                |        | 112.7 |   |
| Accrued interest                                                | ** ** | **12.9**                 |        | 12.9 |   |
| Short-term debt  owed to parent                                 | ** ** | **—**               |        | 20.9 |   |
| Other current  liabilities                                      | ** ** | **34.0**                 |        | 26.9 |   |
| Total current  liabilities                                      | ** ** | **352.2**                |        | 336.0 |   |
|                                                            |       |                     |        |   |   |
| **Noncurrent  liabilities:**                                    | ** ** | ** **               | ** **  | ** ** | ** ** |
| Long-term debt                                                  | ** ** | **884.0**                |        | 874.6 |   |
| Deferred taxes                                                  | ** ** | **417.8**                |        | 367.0 |   |
| Unamortized  investment tax credit                              | ** ** | **38.0**                 |        | 40.7 |   |
| Other deferred  credits                                         | ** ** | **267.4**                |        | 266.2 |   |
| Total noncurrent  liabilities                                   | ** ** | **1,607.2**              |        | 1,548.5 |   |
|                                                            |       |                     |        |   |   |
| Cumulative  preferred stock not subject to mandatory redemption | ** ** | **22.9**                 |        | 22.9 |   |
|                                                            |       |                     |        |   |   |
| Commitments and  contingencies (Note 17)                        |       |                     |        |   |   |
|                                                            |       |                     |        |   |   |
| **Common  shareholder’s equity:**                          | ** ** | ** **               | ** **  | ** ** | ** ** |
| Common stock, at  par value of $0.01 per share                  | ** ** | **0.4**                  |        | 0.4 |   |
| Other paid-in  capital                                          | ** ** | **783.1**                |        | 784.8 |   |
| Accumulated  other comprehensive (loss) / income                | ** ** | **(37.5**                | **)**       | 6.5 |   |
| Retained  earnings                                              | ** ** | **707.5**                |        | 577.6 |   |
| Total common  shareholder’s equity                         | ** ** | **1,453.5**              |        | 1,369.3 |   |
|                                                            |       |                     |        |   |   |
| **Total  Liabilities and Shareholder’s Equity**            | ** ** | **$**                    | **3,435.8** |   | $ | 3,276.7 |   |

 

See Notes to ConsolidatedFinancial Statements.

** **

**68**

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Table of Contents

 

**THEDAYTON POWER AND LIGHT COMPANY**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDER’S EQUITY**

** **
| ** **                                                                      | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------|------------|------------|------------|-------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                      | ** ** | **Common Stock (a)** | ** ** | **Other**  | ** ** | **Other**   | ** ** | ** **        | ** ** | ** **   | ** ** |
| ** **                                                                      | ** ** | **Outstanding**      | ** ** | ** ** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| **$ in millions**                                                          | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Income/(Loss)** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                            |       |                 |       |       |       |        |       |              |       |         |       |       |       |
| Beginning  balance                                                              |       | 41,172,173           |       | $          | 0.4        |        | $          | 783.4             |       | $            | 5.1        |       | $          | 290.5 |   | $ | 1,079.4 |   |
|                                                                            |       |                 |       |       |       |        |       |              |       |         |       |       |       |
| **2006:**                                                                       | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                      |       |                 |       |       |       |        |       |              |       | 242.4        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                 |       |       |       |        |       | 3.9               |       |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                 |       |       |       |        |       | 0.7               |       |         |       |       |       |
| Minimum pension  liability                                                      |       |                 |       |       |       |        |       | 11.8              |       |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                 |       |       |       |        |       | (30.2             | )          |         |       |       |       |
| Total  comprehensive income                                                     |       |                 |       |       |       |        |       |              |       |         |       | 228.6      |       |
| Common stock  dividends                                                         |       |                 |       |       |       |        |       |              |       | (100.0       | )          | (100.0     | )          |
| Preferred stock  dividends                                                      |       |                 |       |       |       |        |       |              |       | (0.8         | )          | (0.8       | )          |
| Tax effects to  equity                                                          |       |                 |       |       |       | 1.8         |       |              |       |         |       | 1.8        |       |
| Employee /  Director stock plans                                                |       |                 |       |       |       | (1.6        | )          |              |       |         |       | (1.6       | )          |
| Other                                                                           |       |                 |       |       |       | 0.1         |       |              |       | (0.1         | )          | —     |       |
| FAS 158  adjustment                                                             |       |                 |       |       |       |        |       | 23.8              |       |         |       | 23.8       |       |
| Ending balance                                                                  |       | 41,172,173           |       | $          | 0.4        |        | $          | 783.7             |       | $            | 15.1       |       | $          | 432.0 |   | $ | 1,231.2 |   |
| ** **                                                                      | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| **2007:**                                                                       | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                      |       |                 |       |       |       |        |       |              |       | 271.6        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                 |       |       |       |        |       | (11.9             | )          |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                 |       |       |       |        |       | (7.2              | )          |         |       |       |       |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       |                 |       |       |       |        |       | 3.5               |       |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                 |       |       |       |        |       | 7.1               |       |         |       |       |       |
| Total  comprehensive income                                                     |       |                 |       |       |       |        |       |              |       |         |       | 263.1      |       |
| Common stock  dividends                                                         |       |                 |       |       |       |        |       |              |       | (125.0       | )          | (125.0     | )          |
| Preferred stock  dividends                                                      |       |                 |       |       |       |        |       |              |       | (0.9         | )          | (0.9       | )          |
| Tax effects to  equity                                                          |       |                 |       |       |       | 1.3         |       |              |       |         |       | 1.3        |       |
| Employee /  Director stock plans                                                |       |                 |       |       |       | (0.3        | )          |              |       |         |       | (0.3       | )          |
| Other                                                                           |       |                 |       |       |       | 0.1         |       | (0.1              | )          | (0.1         | )          | (0.1       | )          |
| Ending balance                                                                  |       | 41,172,173           |       | $          | 0.4        |        | $          | 784.8             |       | $            | 6.5        |       | $          | 577.6 |   | $ | 1,369.3 |   |
|                                                                            |       |                 |       |       |       |        |       |              |       |         |       |       |       |
| **2008:**                                                                       | ** ** | ** **           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **        | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net income                                                                      |       |                 |       |       |       |        |       |              |       | 285.8        |       |       |       |
| Net change in  unrealized gains (losses) on financial instruments               |       |                 |       |       |       |        |       | (15.0             | )          |         |       |       |       |
| Net change in  deferred gains (losses) on cash flow hedges                      |       |                 |       |       |       |        |       | (1.2              | )          |         |       |       |       |
| Net change in  unrealized gains (losses) on pension and postretirement benefits |       |                 |       |       |       |        |       | (33.4             | )          |         |       |       |       |
| Deferred income  taxes related to unrealized gains (losses)                     |       |                 |       |       |       |        |       | 5.6               |       |         |       |       |       |
| Total  comprehensive income                                                     |       |                 |       |       |       |        |       |              |       |         |       | 241.8      |       |
| Common stock  dividends                                                         |       |                 |       |       |       |        |       |              |       | (155.0       | )          | (155.0     | )          |
| Preferred stock  dividends                                                      |       |                 |       |       |       |        |       |              |       | (0.9         | )          | (0.9       | )          |
| Tax effects to  equity                                                          |       |                 |       |       |       | 0.3         |       |              |       |         |       | 0.3        |       |
| Employee /  Director stock plans                                                |       |                 |       |       |       | (2.0        | )          |              |       |         |       | (2.0       | )          |
| Ending balance                                                                  |       | 41,172,173           |       | $          | 0.4        |        | $          | 783.1             |       | $            | (37.5      | )          | $          | 707.5 |   | $ | 1,453.5 |   |

----

*(a)  50,000,000 shares authorized.*

 

See Notes to ConsolidatedFinancial Statements.

 

69

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** **

**Notes to ConsolidatedFinancial Statements**

 

This report includes thecombined filing of **DPL** and **DP&L. DP&L**is the principal subsidiary of **DPL**providing approximately 98% of **DPL’s**totalconsolidated revenue and approximately 93% of **DPL’s**totalconsolidated asset base. Throughout this report the terms we, us, our and oursare used to refer to both **DPL** and **DP&L**, respectively and altogether, unless the contextindicates otherwise. Discussions or areas of this report that apply only to **DPL** or **DP&L** willclearly be noted in the section.

 

**DPL’s**results ofoperations, financial position and cash flows, include the consolidated resultsof its subsidiaries, including its principal subsidiary **DP&L**andall of its consolidatedsubsidiaries. All material intercompany accounts and transactions have beeneliminated in consolidation. Some of the Notes presented in this report areonly applicable to **DPL** or **DP&L** as indicated. The other Notesapply to both registrants and the financial information presented is segregatedby registrant.

** **

*1.     Summary of Significant Accounting Policiesand Overview*

 

**Description of Business**

 

**DPL**is a diversifiedregional energy company organized in 1985 under the laws of Ohio. **DPL’s** principal subsidiary is **The Dayton Power and Light Company (DP&L)**.**DP&L** is a public utilityincorporated 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. Electricity for **DP&L’s** 24 county service area isprimarily generated at eight coal-fired power plants and is distributed to morethan 515,000 retail customers. **DP&L**also sells electricity to DPL Energy Resources, Inc. (DPLER), anaffiliate, to satisfy the electric requirements of its retail customers. Principalindustries served include automotive, food processing, paper, plasticmanufacturing and defense. **DP&L’s**sales reflect the general economic conditions and seasonal weather patterns ofthe area. **DP&L** sells anyexcess energy and capacity into the wholesale market.

 

**DPL’s** other significant subsidiaries (all ofwhich are wholly-owned) include DPL Energy LLC (DPLE), which engages in theoperation of peaking generating facilities; DPLER, which sells retail electricenergy under contract to major industrial and commercial customers in WestCentral Ohio; and Miami Valley Insurance Company (MVIC), our captive insurancecompany that provides insurance sources to us and our subsidiaries.

 

**DPL** and **DP&L**conduct their principal business in one business segment — Electric.

 

**Basis of Consolidation**

 

We prepareconsolidated financial statements in accordance with generally acceptedaccounting principles (GAAP) in the United States of America. The consolidatedfinancial statements include the accounts of **DPL**and **DP&L** and theirmajority-owned subsidiaries. Undivided interests in jointly-owned generationfacilities are consolidated on a pro rata basis. All material intercompany accountsand transactions are eliminated in consolidation.

 

**Estimates and Judgments**

 

The preparation offinancial statements in conformity with GAAP requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities, the disclosureof contingent assets and liabilities at the date of the financial statementsand the revenue and expenses of the period reported.  We recordliabilities for probable estimated losses in accordance with Statement ofFinancial 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 the lowend 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 of derivative instruments; thevaluation of insurance and claims costs; the valuation allowances forreceivables and deferred income taxes; regulatory assets and liabilities;reserves recorded for income tax exposures; litigation; contingencies andassets and liabilities related to employee benefits.

 

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**Reclassifications**

 

During thefourth quarter of 2007, we identified immaterial changes in certain accountspayable balances that had not been correctly presented in our 2006 cash flowstatements.  Changes in accounts payable balances representing capitalexpenditures had previously been classified with cash flows from operatingactivities and should have been classified with capital expenditures as part ofinvesting activities.  Accordingly, the **DPL**and **DP&L** consolidated statements ofcash flows for 2006 were reclassified to conform to the currentpresentation.  As a result of these reclassifications, cash provided byoperating activities for **DPL**decreased by $21.9 million from $308.7 million to $286.8 million for the yearended December 31, 2006. This same adjustment also decreased cash used forcapital expenditures within investing activities to $335.6 million from $357.5million in 2006.  Cash provided by operating activities for **DP&L** decreased by $21.9 million from$365.7 million to $343.8 million for the year ended December 31, 2006.This same adjustment also decreased cash used for capital expenditures withininvesting activities to $332.9 million from $354.8 million in 2006. These reclassificationsdid not impact operating income or net income, working capital, any earningsper share measures or net change in cash and cash equivalents as previouslyreported.

 

## **Revenues**

## ** **

We consider revenuerealized, or realizable, and earned when persuasive evidence of an arrangementexists, the products or services have been provided to the customer, the salesprice is fixed or determinable, and collection is reasonably assured. Thedetermination of the energy sales to customers is based on the reading of theirmeters, which occurs on a systematic basis throughout the month. We recognizerevenues using an accrual method for retail and other energy sales that havenot yet been billed, but where electricity has been consumed.  This istermed “unbilled revenues” and is a widely recognized and accepted practice forutilities. At the end of each month, unbilled revenues are determined by theestimation of unbilled energy provided to customers since the date of the lastmeter reading, projected line losses, the assignment of unbilled energyprovided to customer classes and the average rate per customer class. Alsoincluded in revenues are amounts charged to customers through a surcharge forrecovery of uncollected amounts from certain eligible low-income households. Thesecharges for both **DPL** and **DP&L** were $12.1 million for 2008, $13.1 million for2007, and $11.9 million for 2006.

 

**Accounts Receivable**

 

Our accounts receivableincludes utility customer receivables, amounts due from our partners forjointly-owned property, wholesale and subsidiary customer receivables, andelectric unbilled revenue. At December 31, 2008 and 2007, **DPL’s** accounts receivable include unbilledrevenue of $82.5 million and $68.4 million, respectively. **DP&L’s** accounts receivable include unbilledrevenue of $74.7 million and $60.5 million at December 31, 2008 and 2007,respectively. We also include miscellaneous accounts receivables such asrefundable taxes. The amount is presented net of a provision for uncollectibleaccounts in the accompanying consolidated balance sheets.

 

**Allowance for Uncollectible Accounts**

 

We establish provisionsfor uncollectible accounts using both historical average credit losspercentages of accounts receivable balances to project future losses andspecific provisions for known credit issues.

 

**Property, Plant and Equipment**

 

We record ourownership share of our undivided interest in jointly-held plants as an asset inproperty, plant and equipment. Property, plant and equipment are stated atcost. For regulated property, cost includes direct labor and material,allocable overhead expenses and an allowance for funds used during construction(AFUDC). AFUDC represents the cost of borrowed funds and equity used to financeregulated construction projects. Capitalization of AFUDC ceases at eitherproject completion or at the date specified by regulators. AFUDC capitalized in2008, 2007 and 2006 was not material.

 

For unregulated property,cost includes direct labor, material and overhead expenses and interestcapitalized during construction using FASB Statement of Accounting Standard No. 34,“Capitalization of Interest Cost.” Capitalized interest was $8.9 million in2008, $21.8 million in 2007 and $12.9 million in 2006.

 

For substantially alldepreciable property, when a unit of property is retired, the original cost ofthat property less any salvage value is charged to Accumulated Depreciation andAmortization.

 

Property is evaluated forimpairment when events or changes in circumstances indicate that its carryingamount may not be recoverable.

 

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## **Depreciation**

## ** **

Depreciation expense iscalculated using the straight-line method, which allocates the cost of propertyover its estimated useful life. For **DPL’s**generation, transmission, and distribution assets, straight-line depreciationis applied on an average annual composite basis using group rates thatapproximated 2.7% in 2008, 2.9% in 2007 and 3.3% in 2006. In July 2007, **DPL** completed a depreciation rate study for non-regulatedgeneration property based on its property, plant and equipment balances during2007. The results of the depreciation study concluded that **DPL’s**depreciation rates should be reduced due to projected asset lives beyondpreviously estimated useful lives. **DPL** adjustedthe depreciation rates for its non-regulated generation property, effective August 1,2007. For the period from August 1, 2007 to December 31, 2007, thereduction in depreciation expense increased income from continuing operationsby approximately $9.5 million, increased net income by approximately $6.0million, and increased basic EPS by approximately $0.06 per share. **DPL’s** depreciation expense was $137.7 millionin 2008, $134.8 million in 2007, and $151.8 million in 2006.

 

The following is asummary of **DPL’s** property, plantand equipment with corresponding composite depreciation rates at December 31,2008 and 2007:

 

| **DPL**                              | ** ** | ** **  | ** **  | ** **    | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** |
|--------------------------------------|------------|-------------|-------------|---------------|------------|------------|-------------|------------|---------------|------------|
| ** **                           | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** **  | ** ** | **Composite** | ** ** |
| **$ in millions**               | ** ** | **2008**    | ** **  | **Rate**      | ** ** | ** ** | **2007**    | ** ** | **Rate**      | ** ** |
| Regulated:                           |       |        |        |          |       |       |        |       |          |       |
| Transmission                         | ** ** | **$**       | **350.2**   |          | 2.4        | %          | ** **  | **$**      | **348.2**     |       | 2.4 | % |
| Distribution                         | ** ** | **1,146.1** |        | 3.7           | %          | ** ** | **1,104.2** |       | 3.6           | %          |
| General                              | ** ** | **66.7**    |        | 7.2           | %          | ** ** | **65.0**    |       | 8.9           | %          |
| Non-depreciable                      | ** ** | **56.9**    |        | N/A           | ** ** | ** ** | **56.3**    |       | N/A           |       |
| Total regulated                      | ** ** | **$**       | **1,619.9** | ** **    | ** ** | ** ** | ** **  | **$**      | **1,573.7**   | ** ** | ** ** | ** ** |
|                                 |       |        |        |          |       |       |        |       |          |       |
| Unregulated:                         |       |        |        |          |       |       |        |       |          |       |
| Production                           | ** ** | **$**       | **3,403.0** |          | 2.4        | %          | ** **  | **$**      | **3,024.4**   |       | 2.6 | % |
| Other                                | ** ** | **31.8**    |        | 3.5           | %          | ** ** | **31.0**    |       | 4.7           | %          |
| Non-depreciable                      | ** ** | **18.7**    |        | N/A           | ** ** | ** ** | **18.0**    |       | N/A           |       |
| Total  unregulated                   | ** ** | **$**       | **3,453.5** | ** **    | ** ** | ** ** | ** **  | **$**      | **3,073.4**   | ** ** | ** ** | ** ** |
|                                 |       |        |        |          |       |       |        |       |          |       |
| Total property  in service           | ** ** | **$**       | **5,073.4** |          | 2.7        | %          | ** **  | **$**      | **4,647.1**   |       | 2.9 | % |
| Construction  work in process        | ** ** | **153.6**   |        | N/A           | ** ** | ** ** | **364.5**   |       | N/A           |       |
|                                 |       |        |        |          |       |       |        |       |          |       |
| Total property,  plant and equipment | ** ** | **$**       | **5,227.0** | ** **    | ** ** | ** ** | ** **  | **$**      | **5,011.6**   | ** ** | ** ** | ** ** |

 

For **DP&L’s** generation, transmission, anddistribution assets, straight-line depreciation is applied on an average annualcomposite basis using group rates that approximated 2.6% in 2008, 2.8% in 2007and 3.2% in 2006. **DP&L’s**depreciation expense was $127.8 million in 2008, $124.5 million in 2007 and$130.0 million in 2006.

 

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The following is asummary of **DP&L’s** property,plant and equipment with corresponding composite depreciation rates at December 31,2008 and 2007:

 

| **DP&L**                         | ** ** | ** **  | ** **  | ** **    | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|-------------|-------------|---------------|------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | ** **  | ** **  | **Composite** | ** ** | ** ** | ** ** | ** ** | **Composite** | ** ** |
| **$ in millions**               | ** ** | **2008**    | ** **  | **Rate**      | ** ** | ** ** | **2007**   | ** ** | **Rate**      | ** ** |
| Regulated:                           |       |        |        |          |       |       |       |       |          |       |
| Transmission                         | ** ** | **$**       | **350.2**   |          | 2.4        | %          |       | $          | 348.2         |       | 2.4 | % |
| Distribution                         | ** ** | **1,146.2** |        | 3.7           | %          |       | 1,104.2    |       | 3.6           | %          |
| General                              | ** ** | **66.7**    |        | 7.2           | %          |       | 65.0       |       | 8.9           | %          |
| Non-depreciable                      | ** ** | **56.9**    |        | N/A           |       |       | 56.3       |       | N/A           |       |
| Total regulated                      | ** ** | **$**       | **1,620.0** |          |       |       |       | $          | 1,573.7       |       |   |   |
|                                 |       |        |        |          |       |       |       |       |          |       |
| Unregulated:                         |       |        |        |          |       |       |       |       |          |       |
| Production                           | ** ** | **$**       | **3,182.6** |          | 2.3        | %          |       | $          | 2,804.2       |       | 2.5 | % |
| Non-depreciable                      | ** ** | **15.3**    |        | N/A           |       |       | 15.3       |       | N/A           |       |
| Total  unregulated                   | ** ** | **$**       | **3,197.9** |          |       |       |       | $          | 2,819.5       |       |   |   |
|                                 |       |        |        |          |       |       |       |       |          |       |
| Total property  in service           | ** ** | **$**       | **4,817.9** |          | 2.6        | %          |       | $          | 4,393.2       |       | 2.8 | % |
| Construction  work in process        | ** ** | **153.0**   |        | N/A           |       |       | 363.8      |       | N/A           |       |
|                                 |       |        |        |          |       |       |       |       |          |       |
| Total property,  plant and equipment | ** ** | **$**       | **4,970.9** |          |       |       |       | $          | 4,757.0       |       |   |   |

 

## **AssetRetirement Obligations**

## ** **

We recognize assetretirement obligations (AROs) in accordance with Financial Accounting StandardsBoard (FASB) Statement of Financial Accounting Standards No. 143, “Accountingfor Asset Retirement Obligations” (SFAS 143) and FASB Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations — an interpretation ofFASB Statement No. 143” (FIN 47). Both SFAS 143 and FIN 47 require legalobligations associated with the retirement of long-lived assets to berecognized at their fair value at the time those obligations are incurred. Uponinitial recognition of a legal liability, costs are capitalized as part of therelated long-lived asset and depreciated over the useful life of the relatedasset. SFAS 143 and FIN 47 also require that components of previously recordeddepreciation related to the cost of removal of assets upon retirement, whetherlegal AROs or not, be removed from a company’s accumulated depreciationreserve. Our legal obligations associated with the retirement of our long-livedassets consisted primarily of river intake and discharge structures, coalunloading facilities, loading docks, ice breakers and ash disposal facilities.

 

Estimating the amount andtiming of future expenditures of this type requires significant judgment. Managementroutinely updates these estimates as additional information becomes available.

 

**Changes in the Liability forGeneration Asset Retirement Obligations**

** **
| **$ in millions**         | ** ** | **2008**   | ** ** | **2007** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|
| Balance at  January 1     | ** ** | **$**      | **12.5**   |     | $          | 11.7 |   |
| Accretion  expense             | ** ** | **0.7**    |       | 0.2      |       |
| Additions                      | ** ** | **—** |       | 0.3      |       |
| Settlements                    | ** ** | **(1.0**   | **)**      | (0.6     | )          |
| Estimated cash  flow revisions | ** ** | **1.0**    |       | 0.9      |       |
| Balance at  December 31   | ** ** | **$**      | **13.2**   |     | $          | 12.5 |   |

 

We continue to recordcost of removal for our regulated transmission and distribution assets throughour depreciation rates and recover those amounts in rates charged to ourcustomers. There are no known legal asset retirement obligations associatedwith these assets. We have recorded $96.0 million and $91.5 million inestimated costs of removal at December 31, 2008 and 2007, respectively, asregulatory liabilities for our transmission and distribution property. Theseamounts represent the excess of the cumulative removal costs recorded throughdepreciation rates versus the cumulative removal expenditures actuallyincurred. See Note 3 of Notes to Consolidated Financial Statements.

 

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**Changes in the Liability forTransmission and Distribution Asset Retirement Obligations**

 
| **$ in  millions**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1   | ** ** | **$**    | **91.5**   |     | $          | 86.2 |   |
| Additions                    | ** ** | **8.3**  |       | 8.0      |       |
| Settlements                  | ** ** | **(3.8** | **)**      | (2.7     | )          |
| Balance at  December 31 | ** ** | **$**    | **96.0**   |     | $          | 91.5 |   |

 

**RegulatoryAccounting**

 

We apply the provisionsof FASB Statement of Financial Accounting Standards No. 71, (SFAS 71) “Accountingfor the Effects of Certain Types of Regulation,” to the transmission anddistribution portion of our business. In accordance with SFAS 71, regulatoryassets and liabilities are recorded in the consolidated balance sheets. Regulatoryassets are the deferral of costs expected to be recovered in future customerrates and regulatory liabilities represent current recovery of expected futurecosts.

 

We evaluate ourregulatory assets each period and believe recovery of these assets is probable.We have received or requested a return on certain regulatory assets for whichwe are currently recovering or seeking recovery through rates. If we wererequired to terminate application of SFAS 71 for all of our regulatedoperations, we would have to write off the amounts of all regulatory assets andliabilities to the consolidated statement of results of operations at thattime. See Note 3 of Notes to Consolidated Financial Statements.

 

**Inventory**

 

Inventories, carried ataverage cost, include coal, limestone, oil and gas used for electricgeneration, and materials and supplies for utility operations. We account forour emission allowances as inventory, and record emission allowance inventoryat weighted average cost.  We calculate the weighted average cost by eachvintage (year) for which emission allowances can be used and charge to fuelcosts the weighted average cost of emission allowances used each quarter.

 

By the end of August 2008,we had successfully installed and placed into service flue gas desulfurization(FGD) equipment at our Killen and J.M. Stuart stations and are in the processof installing similar equipment at partner-operated facilities. Theinstallation of the FGD equipment is expected to significantly reduce ourfuture emissions resulting in emission allowance inventory in excess of ourneeds. Accordingly, we plan for and manage our excess allowances as part of ouroperations and record the net gains or losses from sales of these excessallowances as a component of our fuel costs and reflect these in operatingincome.

 

## **Repairsand Maintenance**

## ** **

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

 

**Income Taxes**

 

We apply the provisionsof FASB Statement of Financial Accounting Standards No. 109, “Accountingfor Income Taxes” (SFAS 109). SFAS 109 requires an asset and liability approachfor financial accounting and reporting of income taxes with tax effects ofdifferences, based on currently enacted income tax rates between the financialreporting and tax basis of accounting reported as deferred tax assets orliabilities in the consolidated balance sheets. Deferred tax assets arerecognized for deductible temporary differences. Valuation allowances areprovided against deferred tax assets unless it is more likely than not that theasset will be realized.

 

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

 

We file a consolidatedU.S. federal income tax return in conjunction with our subsidiaries. Theconsolidated tax liability is allocated to each subsidiary based on theseparate return method which is specified in our tax allocation agreement andwhich provides a consistent, systematic and rational approach. See Note 8 ofNotes to Consolidated Financial Statements.

 

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**Accountingfor Uncertainty in Income Taxes**

 

On January 1, 2007,we adopted FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (FIN 48). There was no material impact to our overall results ofoperations, cash flows or financial position. A reconciliation of the beginningand ending amount of unrecognized tax benefit is as follows:

 
| ** **                                  | ** ** | **($ in millions)** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|
| Balance as of  January 1, 2008         |       | $                        | 56.3       |   |
| Tax positions  taken during prior periods   |       | —                   |       |
| Tax positions  taken during current period  |       | 1.9                      |       |
| Settlement with  taxing authorities         |       | (56.3                    | )          |
| Lapse of  applicable statute of limitations |       | —                   |       |
| Balance as of  December 31, 2008       |       | $                        | 1.9        |   |

 

Of the December 31,2008 balance of unrecognized tax benefits, $1.3 million is due to uncertaintyin the timing of deductibility.

 

We recognize interest andpenalties related to unrecognized tax benefits in income taxes. During 2008, asa result of the settlement of several uncertain tax positions, we reversed allinterest related to unrecognized tax benefits. No interest or penalties havebeen accrued as of December 31, 2008.

 

Taxes for calendar years2005 through 2007 remain open to examination by the jurisdictions in which weare subject to taxation. None of the unrecognized tax benefits are expected tosignificantly increase or decrease within the next twelve months.

 

**Accounting for Taxes Collectedfrom Customers and Remitted to Governmental Authorities**

 

In January 2007, weadopted Emerging Issues Task Force (EITF) No. 6-03 “How Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement” (EITF No. 6-03). EITF No. 6-03 requires aregistrant to disclose how taxes collected from customers are presented in thefinancial statements, i.e., gross or net. **DP&L**collects certain excise taxes levied by state or local governments from itscustomers. **DP&L’s** excise taxes areaccounted for on a gross basis and recorded as revenues and general taxes inthe accompanying Consolidated Statements of Results of Operations for thetwelve months ended December 31, 2008, December 31, 2007 and December 31,2006 as follows:

 
| ** **                | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **December 31,**   | ** ** |
| **$ in millions**    | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| State/Local  excise taxes | ** ** | **$**                   | **52.3**   |   | $ | 53.2 |   | $ | 51.3 |   |
|                           |            |                         |            |  |  |  |  |  |  |  |

 

**Stock-Based Compensation**

 

In December 2004,the FASB issued Statement of Financial Accounting Standard No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires a publicentity to measure the cost of employee services received and paid with equityinstruments to be based on the fair-value of such equity on the grant date. Thiscost is recognized in results of operations over the period in which employeesare required to provide service. Liabilities initially incurred are based onthe fair-value of equity instruments and are to be re-measured at eachsubsequent reporting date until the liability is ultimately settled. Thefair-value for employee share options and other similar instruments at thegrant date are estimated using option-pricing models and any excess taxbenefits are recognized as an addition to paid-in capital. Cash retained fromthe excess tax benefits is presented in the statement of cash flows asfinancing cash inflows. The provisions of this statement became effective as ofJanuary 1, 2006. See Note 11 of Notes to Consolidated FinancialStatements.

 

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**Cash and Cash Equivalents**

 

## **Cashand cash equivalents are stated at cost, which approximates fair value. Allhighly liquid short-term investments with original maturities of three monthsor less are considered cash equivalents.**DPL’s cash and cash equivalents were $62.5 million at December 31,2008 and $134.9 million at December 31, 2007. DP&L’s cash and cash equivalents were $20.8 million at December 31,2008 and $13.2 million at December 31, 2007. At December 31, 2008, we had$14.5 million restricted funds held in trust relating to the issuance of the$100 million pollution control bonds. See Note 7 of Notes to ConsolidatedFinancial Statements. These restricted funds will be used to fund futurepollution control capital expenditures.

## ** **

**FinancialInstruments**

 

We apply the provision ofFASB Statement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities”**(SFAS 115), for our investments in debt and equityfinancial instruments of publicly traded entities and classify the securitiesinto different categories: held-to-maturity and available-for-sale. Available-for-salesecurities are carried at fair value and unrealized gains and losses on thosesecurities, net of deferred income taxes, are presented as a separate componentof shareholders’ equity. Other-than-temporary declines in value are recognizedcurrently in earnings. Financial instruments classified as held-to-maturity arecarried at amortized cost. The valuation of public equity security investmentsis based upon market quotations. The cost basis for public equity security andfixed maturity investments is average cost and amortized cost, respectively.

 

### ***Financial Derivatives***

### * *

Wefollow FASB Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activity” (SFAS 133), as amended. SFAS133 requires that all derivatives be recognized as either assets or liabilitiesin the consolidated balance sheets and be measured at fair value. Changes inthe fair value are recorded in earnings unless they are designated as a cashflow hedge of a forecasted transaction or qualify for the normal purchases andsales exception as discussed below.

 

We use forward contractsand options to reduce our exposure to changes in energy and commodity pricesand as a hedge against the risk of changes in cash flows associated withexpected electricity purchases. These purchases are required to meet full loadrequirements during times of peak demand or during planned and unplannedgeneration facility outages. We also hold forward sales contracts that hedgeagainst the risk of changes in cash flows associated with power sales duringperiods of projected generation facility availability. We use cash flowaccounting under SFAS 133 guidance when the hedge is deemed to be effective andmark to market accounting when the hedge is not effective. See Note 10 of Notesto Consolidated Financial Statements.

 

### ***Captive Insurance Subsidiary***

### * *

In addition to insuranceprovided through third-party providers, a wholly-owned captive subsidiary of **DPL** provides insurance coverage solely tous and to our subsidiaries. Insurance and Claims Costs on the consolidatedbalance sheets includes insurance reserves of approximately $17.6 million and$20.0 million for 2008 and 2007, respectively. Such reserves are actuariallydetermined, in the aggregate, based on a reasonable estimation of insuredevents occurring. There is uncertainty associated with the loss estimates, andactual results may differ from the estimates. Modification of these lossestimates based on experience and changed circumstances is reflected in theperiod in which the estimate is re-evaluated.

 

**Pension and Postretirement Benefits**

 

In September 2006,the FASB issued Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132(R)”**(SFAS 158). This Statement requires an employer that is abusiness entity and sponsors one or more single-employer defined benefit plansto: recognize the funded status of a benefit plan; recognize as a component ofother comprehensive income (OCI), net of tax, the gains or losses and priorservice costs or credits that arise during the period but are not recognized ascomponents of net periodic benefit cost; measure defined benefit plan assetsand obligations as of the date of the employer’s fiscal year end statement offinancial position; and disclose in the notes to financial statementsadditional information about certain effects on net periodic benefit costs forthe next fiscal year that arise from delayed recognition of the gains orlosses, prior service costs or credits, and transition assets or obligations.SFAS 158 was effective for fiscal years ending after December 15, 2006,except for the measuring of plan assets at the employer’s fiscal year end,which is effective for fiscal years ending after December 15, 2008. Weadopted SFAS 158 effective December 31, 2006. We account and disclosepension and postretirement benefits in accordance with the provisions of SFAS158. See Note 9 of Notes to Consolidated Financial Statements.

 

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** **

**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 amountsprovided in our consolidated financial statements, as prescribed by GAAP, areadequate in light of the probable and estimable contingencies.  However,there can be no assurances that the actual amounts required to satisfy allegedliabilities from various legal proceedings, claims, tax examinations and othermatters discussed below, and to comply with applicable laws and regulations,will not exceed the amounts reflected in our consolidated financialstatements.  As such, costs, if any, that may be incurred in excess ofthose amounts provided as of December 31, 2008, cannot be reasonablydetermined.

 

**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 10 of Notes to 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.”  FSP FIN 39-1 did not have aneffect on our overall results of operations, financial position or cash flows.

 

**Accounting for Income Tax Benefitsof 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.

 

**Determining Fair Value in anInactive Market**

 

We adopted FASB StaffPosition SFAS 157-3, “Determining the Fair Value of a Financial Asset when theMarket for That Asset is not Active” (FSP SFAS 157-3), on its issuance date of October 10,2008.  FSP SFAS 157-3 clarifies theapplication of SFAS 157 in a market that is not active and provides an exampleto illustrate key points.  FSP SFAS 157-3did not have a material impact on our overall results of operations, financialposition or cash flows.

 

**RecentlyIssued Accounting Standards**

 

**Disclosuresabout Derivative Instruments and Hedging Activities**

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentto FASB Statement No. 133” (SFAS 161), effective for fiscal yearsbeginning after November 15, 2008. We will adopt SFAS 161 on January 1, 2009.  SFAS 161 requires an entity to provideenhanced disclosures about: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedged items areaccounted for under SFAS 133 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. We have evaluated the impact of adopting SFAS 161 and do not expectthese new rules to have a material impact on our overall results ofoperations, financial position or cash flows.

 

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**ParticipatingSecurities and Earnings per Share (EPS)**

 

InJune 2008, the FASB issued Staff Position EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (FSP EITF 03-6-1), effective for fiscal yearsbeginning after December 15, 2008. We will adopt FSP EITF 03-6-1 on January 1, 2009.  FSP EITF 03-6-1 clarifies that unvestedshare-based awards that contain non-forfeitable rights to dividends or dividendequivalents (whether paid or unpaid) are participating securities and must beincluded in the computation of EPS pursuant to the two-class method.  We have evaluated the impact of adopting FSPEITF 03-6-1 and do not expect these new rules to have a material impact onour overall results of operations, financial position or cash flows.

 

**Meaningof “Indexed to a Company’s Own Stock”**

 

InJune 2008, the FASB approved the consensus of the Emerging Issues TaskForce (EITF) on “Determining Whether an Instrument (or Embedded Feature) isIndexed to an Entity’s Own Stock” (EITF 07-5), effective for fiscal yearsbeginning after December 15, 2008. We will adopt EITF 07-5 on January 1, 2009.  EITF 07-5 gives guidance on when a financialinstrument is considered to be indexed to a company’s own stock to meet thecriteria for paragraph 11(a) of FASB Statement No. 133, “Accountingfor Derivative Financial Instruments.” We have evaluated the impact of adopting EITF 07-5 and do not expectthese new rules to have a material impact on our overall results ofoperations, financial position or cash flows.

 

**Disclosuresabout Pensions and Other Postretirement Benefits**

 

InDecember 2008, the FASB issued Staff Position SFAS 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets” [FSP SFAS 132(R)-1],effective for fiscal years ending after December 15, 2009.  FSP SFAS 132(R)-1 requires disclosures aboutbenefit plan assets similar to the disclosure required in SFAS 157, “Fair ValueMeasurements.”  It also requiresdiscussions on investment allocation decisions, major categories of planassets, and significant concentrations of risk in plan assets for theperiod.  We are currently evaluating FSPSFAS 132(R)-1 and do not expect these new rules to have a material impacton our overall results of operations, financial position or cash flows.

 

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*2.     Supplemental Financial Information*

** **

**DPL Inc.**

*** ***
| ** **                                         | ** ** | **At December 31,** | ** **  |
|----------------------------------------------------|------------|--------------------------|-------------|
| **$ in millions**                             | ** ** | **2008**                 | ** **  | **2007** | ** ** |
|                                               |       |                     |        |   |   |
| **Accounts receivable, net:**                      | ** ** | ** **               | ** **  | ** ** | ** ** |
| Unbilled revenue                                   | ** ** | **$**                    | **82.5**    |   | $ | 68.4 |   |
| Retail customers                                   | ** ** | **70.8**                 |        | 71.7 |   |
| Partners in commonly-owned plants                  | ** ** | **28.0**                 |        | 56.7 |   |
| PJM including financial transmission rights        | ** ** | **27.0**                 |        | 23.2 |   |
| Coal sales                                         | ** ** | **25.6**                 |        | 1.9 |   |
| Refundable taxes                                   | ** ** | **14.9**                 |        | 5.2 |   |
| Wholesale and subsidiary customers                 | ** ** | **9.7**                  |        | 12.7 |   |
| Other                                              | ** ** | **2.5**                  |        | 2.9 |   |
| Provision for uncollectible accounts               | ** ** | **(1.1**                 | **)**       | (1.5 | ) |
| **Total accounts receivable, net**                 | ** ** | **$**                    | **259.9**   |   | $ | 241.2 |   |
|                                               |       |                     |        |   |   |
| **Inventories, at average cost:**                  | ** ** | ** **               | ** **  | ** ** | ** ** |
| Fuel and emission allowances                       | ** ** | **$**                    | **68.7**    |   | $ | 70.5 |   |
| Plant materials and supplies                       | ** ** | **36.3**                 |        | 34.1 |   |
| Other                                              | ** ** | **0.1**                  |        | 0.4 |   |
| **Total inventories, at average cost**             | ** ** | **$**                    | **105.1**   |   | $ | 105.0 |   |
|                                               |       |                     |        |   |   |
| **Other current assets:**                          | ** ** | ** **               | ** **  | ** ** | ** ** |
| Deposits and other advances                        | ** ** | **$**                    | **10.5**    |   | $ | 1.1 |   |
| Prepayments                                        | ** ** | **7.1**                  |        | 5.9 |   |
| Short-term investments                             | ** ** | **5.0**                  |        | — |   |
| Current deferred income taxes                      | ** ** | **2.2**                  |        | 2.1 |   |
| Other                                              | ** ** | **2.2**                  |        | 2.7 |   |
| **Total other current assets**                     | ** ** | **$**                    | **27.0**    |   | $ | 11.8 |   |
| ** **                                         | ** ** | ** **               | ** **  | ** ** | ** ** |
| **Property, plant and equipment:**                 | ** ** | ** **               | ** **  | ** ** | ** ** |
| Construction work in process                       | ** ** | **$**                    | **153.6**   |   | $ | 364.5 |   |
| Property, plant and equipment                      | ** ** | **5,073.4**              |        | 4,647.1 |   |
| **Total property, plant and equipment**            | ** ** | **$**                    | **5,227.0** |   | $ | 5,011.6 |   |
| ** **                                         | ** ** | ** **               | ** **  | ** ** | ** ** |
| **Other deferred assets:**                         | ** ** | ** **               | ** **  | ** ** | ** ** |
| Master Trust assets                                | ** ** | **$**                    | **13.3**    |   | $ | 9.6 |   |
| Unamortized debt expense                           | ** ** | **9.3**                  |        | 10.9 |   |
| Investments                                        | ** ** | **8.0**                  |        | 8.8 |   |
| Commercial activities tax benefit                  | ** ** | **6.8**                  |        | 6.8 |   |
| Prepaid pension                                    | ** ** | **—**               |        | 9.9 |   |
| Other                                              | ** ** | **0.6**                  |        | 0.5 |   |
| **Total other deferred assets**                    | ** ** | **$**                    | **38.0**    |   | $ | 46.5 |   |
|                                               |       |                     |        |   |   |
| **Accounts payable:**                              | ** ** | ** **               | ** **  | ** ** | ** ** |
| Trade payables                                     | ** ** | **$**                    | **68.7**    |   | $ | 65.6 |   |
| Fuel accruals                                      | ** ** | **51.9**                 |        | 34.4 |   |
| Other                                              | ** ** | **57.7**                 |        | 63.1 |   |
| **Total accounts payable**                         | ** ** | **$**                    | **178.3**   |   | $ | 163.1 |   |
|                                               |       |                     |        |   |   |
| **Other current liabilities:**                     | ** ** | ** **               | ** **  | ** ** | ** ** |
| Customer security deposits                         | ** ** | **$**                    | **19.8**    |   | $ | 19.2 |   |
| Low income service plan                            | ** ** | **2.4**                  |        | 2.2 |   |
| Pension and retiree benefits payable               | ** ** | **0.8**                  |        | 0.8 |   |
| Other                                              | ** ** | **11.5**                 |        | 5.0 |   |
| **Total other current liabilities**                | ** ** | **$**                    | **34.5**    |   | $ | 27.2 |   |
|                                               |       |                     |        |   |   |
| **Other deferred credits:**                        | ** ** | ** **               | ** **  | ** ** | ** ** |
| Pension and retiree benefits                       | ** ** | **$**                    | **100.5**   |   | $ | 40.6 |   |
| Asset retirement obligations - regulated property  | ** ** | **96.0**                 |        | 91.5 |   |
| SECA net revenue subject to refund                 | ** ** | **20.1**                 |        | 20.1 |   |
| Deferred compensation obligations                  | ** ** | **14.0**                 |        | 20.4 |   |
| Asset retirement obligations - generation property | ** ** | **13.2**                 |        | 12.5 |   |
| Taxes payable                                      | ** ** | **9.8**                  |        | 65.3 |   |
| Litigation and claims reserve                      | ** ** | **2.1**                  |        | 4.3 |   |
| Employee benefit reserves                          | ** ** | **4.4**                  |        | 4.3 |   |
| Customer advances in aid of construction           | ** ** | **3.4**                  |        | 3.5 |   |
| Environmental reserves                             | ** ** | **—**               |        | 0.1 |   |
| Other                                              | ** ** | **3.8**                  |        | 3.7 |   |
| **Total other deferred credits**                   | ** ** | **$**                    | **267.3**   |   | $ | 266.3 |   |

 

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** **

**DP&L**

 
| ** **                                          | ** ** | **At  December 31,** | ** **  |
|-----------------------------------------------------|------------|---------------------------|-------------|
| **$ in  millions**                             | ** ** | **2008**                  | ** **  | **2007** | ** ** |
|                                                |       |                      |        |   |   |
| **Accounts  receivable, net:**                      | ** ** | ** **                | ** **  | ** ** | ** ** |
| Unbilled revenue                                    | ** ** | **$**                     | **74.7**    |   | $ | 60.5 |   |
| Retail customers                                    | ** ** | **70.8**                  |        | 71.7 |   |
| Partners in  commonly-owned plants                  | ** ** | **28.0**                  |        | 56.7 |   |
| Coal sales                                          | ** ** | **25.6**                  |        | 1.9 |   |
| PJM including  financial transmission rights        | ** ** | **23.3**                  |        | 23.1 |   |
| Wholesale and  subsidiary customers                 | ** ** | **2.6**                   |        | 3.5 |   |
| Refundable  franchise tax                           | ** ** | **—**                |        | 3.1 |   |
| Other                                               | ** ** | **1.5**                   |        | 2.8 |   |
| Provision for  uncollectible accounts               | ** ** | **(1.1**                  | **)**       | (1.5 | ) |
| **Total  accounts receivable, net**                 | ** ** | **$**                     | **225.4**   |   | $ | 221.8 |   |
|                                                |       |                      |        |   |   |
| **Inventories,  at average cost:**                  | ** ** | ** **                | ** **  | ** ** | ** ** |
| Fuel and  emission allowances                       | ** ** | **$**                     | **68.7**    |   | $ | 70.5 |   |
| Plant materials  and supplies                       | ** ** | **35.0**                  |        | 32.7 |   |
| Other                                               | ** ** | **0.1**                   |        | 0.4 |   |
| **Total  inventories, at average cost**             | ** ** | **$**                     | **103.8**   |   | $ | 103.6 |   |
|                                                |       |                      |        |   |   |
| **Other  current assets:**                          | ** ** | ** **                | ** **  | ** ** | ** ** |
| Deposits and  other advances                        | ** ** | **$**                     | **10.5**    |   | $ | 0.9 |   |
| Prepayments                                         | ** ** | **8.9**                   |        | 7.5 |   |
| Current deferred  income taxes                      | ** ** | **2.3**                   |        | 2.1 |   |
| Other                                               | ** ** | **2.4**                   |        | 2.9 |   |
| **Total  other current assets**                     | ** ** | **$**                     | **24.1**    |   | $ | 13.4 |   |
| ** **                                          | ** ** | ** **                | ** **  | ** ** | ** ** |
| **Property,  plant and equipment:**                 | ** ** | ** **                | ** **  | ** ** | ** ** |
| Construction  work in process                       | ** ** | **$**                     | **153.0**   |   | $ | 363.8 |   |
| Property, plant  and equipent                       | ** ** | **4,817.9**               |        | 4,393.2 |   |
| **Total  property, plant and equipment**            | ** ** | **$**                     | **4,970.9** |   | $ | 4,757.0 |   |
| ** **                                          | ** ** | ** **                | ** **  | ** ** | ** ** |
| **Other  deferred assets:**                         | ** ** | ** **                | ** **  | ** ** | ** ** |
| Master Trust  assets                                | ** ** | **$**                     | **40.4**    |   | $ | 56.0 |   |
| Unamortized debt  expense                           | ** ** | **8.6**                   |        | 9.6 |   |
| Prepaid pension                                     | ** ** | **—**                |        | 9.9 |   |
| Other                                               | ** ** | **1.2**                   |        | 1.1 |   |
| **Total  other deferred assets**                    | ** ** | **$**                     | **50.2**    |   | $ | 76.6 |   |
|                                                |       |                      |        |   |   |
| **Accounts  payable:**                              | ** ** | ** **                | ** **  | ** ** | ** ** |
| Trade payables                                      | ** ** | **$**                     | **68.6**    |   | $ | 64.8 |   |
| Fuel accruals                                       | ** ** | **50.4**                  |        | 34.1 |   |
| Other                                               | ** ** | **57.6**                  |        | 63.0 |   |
| **Total  accounts payable**                         | ** ** | **$**                     | **176.6**   |   | $ | 161.9 |   |
|                                                |       |                      |        |   |   |
| **Other  current liabilities:**                     | ** ** | ** **                | ** **  | ** ** | ** ** |
| Customer  security deposits                         | ** ** | **$**                     | **19.8**    |   | $ | 19.2 |   |
| Low income service  plan                            | ** ** | **2.4**                   |        | 2.2 |   |
| Pension and  retiree benefits payable               | ** ** | **0.8**                   |        | 0.8 |   |
| Other                                               | ** ** | **11.0**                  |        | 4.7 |   |
| **Total  other current liabilities**                | ** ** | **$**                     | **34.0**    |   | $ | 26.9 |   |
|                                                |       |                      |        |   |   |
| **Other  deferred credits:**                        | ** ** | ** **                | ** **  | ** ** | ** ** |
| Pension and  retiree benefits                       | ** ** | **$**                     | **100.5**   |   | $ | 40.5 |   |
| Asset retirement  obligations - regulated property  | ** ** | **96.0**                  |        | 91.5 |   |
| SECA net revenue  subject to refund                 | ** ** | **20.1**                  |        | 20.1 |   |
| Deferred  compensation obligations                  | ** ** | **14.0**                  |        | 20.4 |   |
| Asset retirement  obligations - generation property | ** ** | **13.2**                  |        | 12.5 |   |
| Taxes payable                                       | ** ** | **9.8**                   |        | 65.3 |   |
| Employee benefit  reserves                          | ** ** | **4.4**                   |        | 4.3 |   |
| Litigation and  claims reserve                      | ** ** | **2.1**                   |        | 4.3 |   |
| Customer  advances in aid of construction           | ** ** | **3.4**                   |        | 3.5 |   |
| Other                                               | ** ** | **3.9**                   |        | 3.8 |   |
| **Total  other deferred credits**                   | ** ** | **$**                     | **267.4**   |   | $ | 266.2 |   |

 

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*3.     RegulatoryMatters*

 

We apply theprovisions of SFAS 71 to our regulated operations.  This accounting standard defines regulatoryassets as the deferral of costs expected to be recovered in future customerrates and regulatory liabilities as current cost recovery of expected futureexpenditures.

 

Regulatoryliabilities are reflected on the consolidated balance sheets under the captionentitled “Other Deferred Credits”. Regulatory assets and liabilities on the consolidated balance sheetsinclude:

 

| ** **                                         | ** ** | **Type of**      | ** ** | **Amortization** | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|--------------------------|------------|
| **$ in millions**                             | ** ** | **Recovery (a)** | ** ** | **Through**      | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| **Regulatory  Assets:**                            | ** ** | ** **       | ** ** | ** **       | ** ** | ** **               | ** ** | ** ** | ** ** |
| Deferred  recoverable income taxes                 |       | C/B              |       | Ongoing          | ** ** | **$**                    | **81.2**   |   | $ | 65.8 |   |
| Pension and postretirement  benefits               |       | C                |       | Ongoing          | ** ** | **83.3**                 |       | 41.5 |   |
| Unamortized loss  on reacquired debt               |       | C                |       | Ongoing          | ** ** | **17.2**                 |       | 18.8 |   |
| Electric Choice  systems costs                     |       | F                |       | 2010             | ** ** | **7.1**                  |       | 10.2 |   |
| Regional  transmission organization costs          |       | C                |       | 2014             | ** ** | **8.5**                  |       | 9.9 |   |
| Deferred storm  costs - 2004/2005                  |       | F                |       | 2008             | ** ** | **—**               |       | 1.9 |   |
| Deferred storm  costs - 2008                       |       | D                | ** ** | ** **       | ** ** | **13.1**                 |       | — |   |
| PJM  administrative costs                          |       | F                |       | 2009             | ** ** | **0.5**                  |       | 3.0 |   |
| Power plant  emission fees                         |       | C                |       | Ongoing          | ** ** | **6.3**                  |       | 4.7 |   |
| Rate case  expenses                                |       | F                |       | 2010             | ** ** | **0.5**                  |       | 0.8 |   |
| Settlement  system costs                           |       | D                | ** ** | ** **       |       | **3.1**                  |       | 3.1 |   |
| Customer  conservation and energy management costs |       | D                | ** ** | ** **       |       | **8.3**                  |       | 1.3 |   |
| PJM integration  costs                             |       | F                |       | 2015             | ** ** | **0.7**                  |       | 1.1 |   |
| Other costs                                        | ** ** | ** **       | ** ** | ** **       | ** ** | **3.9**                  |       | 3.1 |   |
| **Total  regulatory assets**                       | ** ** | ** **       | ** ** | ** **       | ** ** | **$**                    | **233.7**  |   | $ | 165.2 |   |
|                                               | ** ** | ** **       | ** ** | ** **       |       |                     |       |   |   |
| **Regulatory  Liabilities:**                       | ** ** | ** **       | ** ** | ** **       |       |                     |       |   |   |
| Asset retirement  obligations - regulated property | ** ** | ** **       | ** ** | ** **       | ** ** | **$**                    | **96.0**   |   | $ | 91.5 |   |
| Postretirement  benefits                           | ** ** | ** **       | ** ** | ** **       | ** ** | **5.8**                  |       | 6.8 |   |
| SECA net revenue  subject to refund                | ** ** | ** **       | ** ** | ** **       | ** ** | **20.1**                 |       | 20.1 |   |
| **Total  regulatory liabilities**                  | ** ** | ** **       | ** ** | ** **       | ** ** | **$**                    | **121.9**  |   | $ | 118.4 |   |

----

*(a)**      **F — Recovery of incurred costsplus rate of return.*

 

*C — Recovery of incurred costs only.*

 

*B — Balance has an offsetting liability resulting in no impact on ratebase.*

 

*D — Recovery not yet determined.*

 

**RegulatoryAssets**

** **

We evaluate ourregulatory assets each period and believe recovery of these assets isprobable.  We have received or requesteda return on certain regulatory assets for which we are currently recovering orseeking recovery through rates.

 

Deferred recoverableincome taxesrepresent deferred income tax assets recognized from the normalization offlow-through items as the result of amounts previously provided tocustomers.  Since currently existingtemporary differences between the financial statements and the related taxbasis of assets will reverse in subsequent periods, deferred recoverable incometaxes are amortized.

 

Pension andpostretirement benefits represent the unfunded benefit obligation related to the transmissionand distribution areas of our electric business.  We have historically recorded these costs onthe accrual basis and this is how these costs have been historically recoveredthrough rates.  This factor, combinedwith the historical precedents from the PUCO and the FERC, makes these costsprobable of future rate recovery.

 

Unamortized loss onreacquired debtrepresents costs associated with the redemption of a series of bonds financedby another issue.  These costs are beingamortized over the life of the original issue.

 

Electric Choice systemscosts representcosts incurred to modify the customer billing system for unbundled rates andelectric choice bills relative to other generation suppliers and informationreports provided to the state administrator of the low-income electricprogram.  In March 2006, the PUCOissued an order that approved our tariff as filed.  We began collecting this rider immediately,and expect to recover all costs over five years.

 

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Regional transmissionorganization costsrepresent costs incurred to join a Regional Transmission Organization (RTO)that controls the receipt and delivery of bulk power within the servicearea.  These costs are being amortizedover a 10-year period that commenced in October 2004.

 

Deferred storm costs in 2007 include costs incurred by us torepair damage from December 2004 and January 2005 ice storms.  These costs were fully recovered by July 2008.  The costs recorded in 2008 relate to thereparation of damage caused by hurricane force winds in September 2008, aswell as other major 2008 storms.  On January 14,2009, the PUCO granted **DP&L** theauthority to defer these costs with a return until such time that **DP&L** seeks recovery in a future rate proceeding.  We have yet to file for recovery of these2008 costs.

 

PJM Interconnection, LLC(PJM) administrative costs contain the administrative fees billed by PJM to usas a member of the PJM RTO.  Pursuant toa PUCO order issued on January 25, 2006, these deferred costs will berecovered over a 3-year period from retail ratepayers beginning February 2006.

 

Power plant emission fees represent costs paid to the State ofOhio for environmental monitoring that are or will be recovered over variousperiods under a PUCO rate rider from customers.

 

Settlement system costs represent costs to implement asettlement system thatreconciles the amount of energy a competitive retail electric service(CRES) supplier delivers to its customers and what its customers actuallyuse.  Based on case precedent in otherutilities’ cases, the cost of this system is recoverable through **DP&L**’s next transmission rate case that will be filed atthe FERC.  The timing of this case isuncertain at this time.

 

PJM integration costs include infrastructure costs and otherrelated expenses incurred by PJM and reimbursed by **DP&L**to integrate us into the RTO.  Pursuantto a FERC order, the costs are being recovered over a 10-year period beginning May 2005from wholesale customers within PJM.

 

Rate case expenses represent costs incurred in connectionwith the Rate Stabilization Surcharge that was approved by the PUCO andimplemented in January 2006.  Thesecosts are being amortized over a five-year period.

 

PJM transmissionexpansion costsrepresent costs incurred as a result of PJM Regional Transmission ExpansionPlan (RTEP) cost assignments.  On December 21,2007, **DP&L** filed seeking PUCO authorityto defer these costs for future recovery and was granted that authority by thePUCO on August 8, 2008.  These costsare included within Other costs.

 

Customer conservation andenergy management costs represent costs incurred as a result of studying and developingdistribution system upgrades and implementation of advanced meteringinfrastructure, as well as DSM program development and various new customerprograms.  The portion of these costsrelated to energy efficiency will be recovered as part of the StipulationAgreement beginning in 2009.  DP&Lintends to file a request for the recovery of the remaining costs related tothe advanced metering and smart grid portions of the case later in 2009. 

 

Other costs include consumer education advertisingregarding electric deregulation and rate case and are, or will be, recoveredover various periods.

 

**RegulatoryLiabilities**

** **

Asset retirementobligations - regulated property reflect an estimate of amounts recovered in ratesthat are expected to be expended to remove existing transmission anddistribution property from service upon retirement.

 

Postretirement benefits reflect a regulatory liability that wasrecorded for the portion of the unrealized gain on our postretirement trustassets related to the transmission and distribution areas of our electricbusiness.  We have historically recordedthese transactions on the accrual basis and this is how these costs have historicallybeen recovered through rates.  Thisfactor, combined with the historical precedents from the PUCO and the FERC,make it probable that these amounts will be reflected in future rates.

 

SECA (Seams Elimination Charge Adjustment) net revenuesubject to refundrepresents our deferral of net revenues collected in 2005 and 2006.  SECA revenue and expenses representFERC-ordered transitional payments for the use of transmission lines withinPJM.  A hearing was held in early 2006 todetermine if these transitional payments are subject to refund, but no rulinghas been issued.  We began receiving andpaying these transitional payments in May 2005.

 

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*4.  Ownership of Facilities*

 

We and otherOhio utilities have undivided ownership interests in seven electric generatingfacilities and numerous transmission facilities.  Certain expenses, primarily fuel costs forthe generating units, are allocated to the owners based on their energyusage.  The remaining expenses (as wellas investments in fuel inventory, plant materials and operating supplies) andcapital additions are allocated to the owners in accordance with theirrespective ownership interests.  As of December 31,2008, we had $109.0 million ofconstruction work in progress at such facilities.  Ourshare of the operating cost of such facilities is included in the consolidatedstatement of results of operations and our share of the investment in thefacilities is included in the consolidated balance sheets.

 

Our undividedownership interest in such facilities at December 31, 2008, is as follows:

 
| ** **                             | ** ** | **DP&L****Share** | ** ** | **DP&L****Investment**    | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Ownership (%)**     | ** ** | **Production  Capacity (MW)** | ** ** | **Gross Plant  In Service  ($ in millions)** | ** ** | **Accumulated  Depreciation  ($ in millions)** | ** ** | **Construction  Work in Progress  ($ in millions)** | ** ** |
| Production  Units:                     |       |                  |       |                          |       |   |   |   |   |   |   |
| Beckjord Unit 6                        |       | 50.0                  |       | 210                           |       | $ | 77 |   | $ | 54 |   | $ | 1 |   |
| Conesville Unit  4                     |       | 16.5                  |       | 129                           |       | 37 |   | 28 |   | 68 |   |
| East Bend  Station                     |       | 31.0                  |       | 186                           |       | 197 |   | 127 |   | 1 |   |
| Killen Station                         |       | 67.0                  |       | 402                           |       | 604 |   | 264 |   | 2 |   |
| Miami Fort Units  7&8              |       | 36.0                  |       | 368                           |       | 347 |   | 115 |   | 6 |   |
| Stuart Station                         |       | 35.0                  |       | 820                           |       | 661 |   | 225 |   | 25 |   |
| Zimmer Station                         |       | 28.1                  |       | 365                           |       | 1,056 |   | 585 |   | 6 |   |
| Transmission (at  varying percentages) |       |                  |       |                          |       | 90 |   | 52 |   | — |   |
| Total                                  |       |                  |       | 2,480                         |       | $ | 3,069 |   | $ | 1,450 |   | $ | 109 |   |

 

**DPL’s** share ofoperating costs associated with the jointly-owned generating facilities areincluded within the corresponding line in consolidated statements of results ofoperations.

 

*5.  Assets Sales*

 

**PeakerSales**

 

During 2006, inconnection with DPLE’s (wholly-owned subsidiary of **DPL**)decision to sell the Greenville Station and Darby Station electric peakinggeneration facilities, **DPL** concludedthat the related assets were impaired.  Greenville Station consisted offour natural gas peaking units with a net book value of approximately $66million.  Darby Station consisted of sixnatural gas peaking units with a net book value of approximately $156million.  During the fourth quarter of2006, **DPL** recorded a $71.0 million impairmentcharge to write-down the assets to their fair value.  The Greenville Station and Darby Stationassets were sold by DPLE in April 2007 for $49.2 million and $102.0 million,respectively, in two separate transactions.

 

**Aircraft Sale**

 

OnJune 7, 2007, Miami Valley CTC, Inc. (indirect, wholly-ownedsubsidiary of **DPL**), sold itscorporate aircraft and associated inventory and parts for $7.4 million.  The net book value of the assets sold wasapproximately $1.0 million, and severance and other costs of approximately $0.4million were accrued.  Miami Valley CTC, Inc.recorded a net gain on the sale of approximately $6.0 million during the secondquarter ending June 30, 2007, which is included in **DPL’s**operation and maintenance expense.

 

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*6.  Discontinued Operations*

 

On February 13, 2005,**DPL’s** subsidiaries, MVE, Inc.(MVE) and MVIC, entered into an agreement to sell their respective interests inforty-six private equity funds to AlpInvest/Lexington 2005, LLC, a jointventure of AlpInvest Partners and Lexington Partners, Inc.  During 2005, MVE and MVIC completed the saleof their interests in forty-three funds and a portion of another of thoseprivate equity funds.  During 2005, MVEentered into alternative closing arrangements with AlpInvest/Lexington 2005,LLC for funds where legal title to said funds could not be transferred until alater time.  Pursuant to thesearrangements, MVE transferred the economic aspects of the remaining privateequity funds, consisting of two funds and a portion of one fund, toAlpInvest/Lexington 2005, LLC without a change in ownership of theinterests.  The ownership interest inthese funds was transferred in 2006 and 2007, at which time DPL recognizedpreviously deferred gains.  **DPL** recognized $18.9 million of these previously deferredgains in 2006 and the remaining balance of these gains in the amount of $7.9million, net of associated expenses ($4.9 million after tax), were recognizedin 2007.  This transaction was recordedin discontinued operations for each period presented.

 

As a result of the May 21,2007 settlement of the litigation with three former executives (see Note 15 ofNotes to Consolidated Financial Statements), the three former executivesrelinquished all of their rights to certain deferred compensation, restrictedstock units, MVE incentives, stock options and reimbursement of legalfees.  The reversal of accruals relatedto 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 net gain of $8.1 million, net of associated expenses ($5.1 million aftertax), on the settlement of litigation being recorded in discontinued operationsin 2007.

 

There were nodiscontinued operations recorded in 2008.

 

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*7.  Long-term Debt*

 

**DPL Inc.**
| ** **                                           | ** **                                | **At 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  rates: 3.85% - 7.81% (b) | ** **               | **—**  |   | 90.0 |   |
| DP&L -                                           | Pollution  control series maturing        |                     |        |   |   |   |
|                                                 | 2040 - variable  rates: 0.80% - 1.25% (b) | ** **               | **100.0**   |   | — |   |
| DP&L -                                           | Pollution  control series maturing        | ** **               | ** **  |   |   |   |
|                                                 | through 2034 -  4.78% (a)                 | ** **               | **214.4**   |   | 214.4 |   |
|                                                 |                                      | **884.4**                |        | 874.4 |   |
|                                                 |                                      | ** **               |        |   |   |
| DPL Inc. - Note  to Capital Trust II 8.125% due 2031 | ** **                                | **195.0**                |        | 195.0 |   |
| DPL Inc. -  Senior Notes 6.875% Series due 2011 | ** **                                | **297.4**                |        | 297.4 |   |
| DPL Inc. -  Senior Notes 8.00% Series due 2009  | ** **                                | **—**               |        | 175.0 |   |
| DP&L -  Obligations for capital leases           | ** **                                | **0.6**                  |        | 1.3 |   |
| Unamortized debt  discount                           | ** **                                | **(1.3**                 | **)**       | (1.6 | ) |
| Total                                                | ** **                                | **$**                    | **1,376.1** |   | $ | 1,541.5 |   |

----

*(a) Weighted average interest rate for 2008 and 2007.*

 

*(b)  Rangeof interest rates for 2008 and 2007.*

 

**DP&L**
| ** **                                 | ** **                                | **At 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  rates: 3.85% - 7.81% (b) | ** **               | **—** |   | 90.0 |   |
| DP&L -                                 | Pollution  control series maturing        |                     |       |   |   |   |
|                                       | 2040 - variable  rates: 0.80% - 1.25% (b) | ** **               | **100.0**  |   | — |   |
| DP&L -                                 | Pollution  control series maturing        | ** **               | ** ** |   |   |   |
|                                       | through 2034 -  4.78% (a)                 | ** **               | **214.4**  |   | 214.4 |   |
|                                       |                                      | **884.4**                |       | 874.4 |   |
|                                       |                                      | ** **               |       |   |   |
| DP&L -  Obligations for capital leases | ** **                                | **0.6**                  |       | 1.3 |   |
| Unamortized debt  discount                 | ** **                                | **(1.0**                 | **)**      | (1.1 | ) |
| Total                                      | ** **                                | **$**                    | **884.0**  |   | $ | 874.6 |   |

----

*(a) Weighted average interest rate for 2008 and 2007.*

* *

*(b) Range of interest rates for 2008 and 2007.*

 

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At December 31, 2008, **DPL’s** scheduled maturities of long-termdebt, including capital lease obligations, over the next five years are$175.7 million in 2009, $0.6 million in 2010, $297.4 million in 2011,$0 in 2012, and $470.0 million in 2013.

 

At December 31, 2008, **DP&L’s** scheduled maturities oflong-term debt, including capital lease obligations, over the next five yearsare $0.7 million in 2009, $0.6 million in 2010, $0 in 2011 and 2012, and$470 million in 2013.  Substantially allproperty of **DP&L** is subject tothe mortgage lien securing the first mortgage bonds.

 

On March 1, 2007, pursuant to the Company’sstrategy of reducing its long-term debt, **DPL** redeemed$225 million of 8.25% Senior Notes when they became due.  **DPL** alsoredeemed $100 million of 6.25% Senior Notes when they became due on May 15,2008.

 

**Debt and Debt Covenants**

 

OnMarch 25, 2004, **DPL** completed a$175 million private placement of unsecured 8.00% Series Senior Notes due March 2009.  The purchasers were granted registrationrights in connection with the private placement under an Exchange andRegistration Rights Agreement.  Pursuantto this agreement, **DPL** wasobligated to file an exchange offer registration statement by July 22,2004, have the registration statement declared effective by September 20,2004 and consummate the exchange offer by October 20, 2004.  **DPL** failed: (1) tohave a registration statement declared effective; and (2) to complete theexchange offer according to this timeline. As a result, **DPL** had beenaccruing additional interest at a rate of 0.5% per year for each of these twoviolations, up to an additional interest rate not to exceed in the aggregate1.0% per year.  As each violation wascured, the additional interest rate decreased by 0.5% per annum.  **DPL’s** exchangeoffer registration statement for these securities was declared effective by theU.S. Securities and Exchange Commission on June 27, 2006.  As a result, on June 27, 2006, **DPL** ceased accruing 0.5% of the additional interest.  On July 31, 2006, **DPL**ceased accruing the other 0.5% of additional interest when the exchange ofregistered notes for the unregistered notes was completed.

 

Duringthe first quarter of 2006, the Ohio Department of Development (ODOD) awarded **DP&L** the ability to have issued, over the next threeyears, up to $200 million of qualified tax-exempt financing from the ODOD’s2005 volume cap carryforward.  Thefinancing is to be used to partially fund the ongoing flue gas desulfurizationcapital projects.  The PUCO approved **DP&L’s** application for this additional financing on July 26,2006.

 

OnNovember 21, 2006, **DP&L**entered into a $220 million unsecured revolving credit agreement replacing its$100 million facility.  This agreementhad a five-year term that expires on November 21, 2011 and that 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 with a ratio of0.39 to 1.00.  **DP&L**hadno outstanding borrowings under this credit facility at December 31,2008.  Fees associated with this creditfacility are approximately $0.2 million per year.  Changes in credit ratings, however, mayaffect fees and the applicable interest. This revolving credit agreement also contains a $50 million letter ofcredit sub-limit.  **DP&L**has certain contractual agreements for the sale and purchase of power, fuel andrelated energy services that contain credit rating related clauses allowing thecounter parties to seek additional surety under certain conditions.  As of December 31, 2008, **DP&L** had no outstanding letters of credit against thefacility.

 

Duringthe second quarter ended June 30, 2007, **DPL**entered into a short-term loan to **DP&L**for$105 million.  **DP&L**paid down $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 does notaffect our debt covenants.  There are noother inter-company debt collateralizations or debt guarantees between **DPL**, **DP&L** andtheir subsidiaries.  None of the debtobligations of **DPL** or **DP&L**are guaranteed or secured by affiliates and no cross-collateralization existsbetween any subsidiaries.

 

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On November 15,2007, The Ohio Air Quality Development Authority (OAQDA) issued $90 million ofcollateralized, variable rate OAQDA Revenue Bonds, 2007 Series A due November 1,2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due was insured by aninsurance policy issued by Financial Guaranty Insurance Company (FGIC).  During the first quarter of 2008, all threecredit rating agencies downgraded FGIC. These downgrades, as well as the downgrades of our major bond insurers,resulted in auction rate security bonds carrying substantially higher interestrates in succeeding auctions and incurring failed auctions.  On April 4, 2008, **DP&L**converted the 2007 Series A Bonds from Auction Rate Securities to VariableRate Demand Notes.  At that time, **DP&L** purchased these notes out of the market and placedthem with the Trustee to be held until the capital markets corrected.  These notes were redeemed in December 2008as discussed in the following paragraph.

 

On December 4, 2008,the OAQDA issued $100 million of collateralized, variable rate RevenueRefunding Bonds Series A and B due November 1, 2040.  In turn, **DP&L**borrowed these funds from the OAQDA.  Thepayment of principal and interest on the bonds when due is backed by a standbyletter of credit issued by a syndicated bank group credit facility.  **DP&L** isusing $10 million of these bonds to finance its portion of the costs ofacquiring, constructing and installing certain solid waste disposal and airquality facilities at the Conesville generation station.  The remaining $90 million was used to redeemthe 2007 Series A Bonds.

 

*8.  IncomeTaxes*

 

On February 13,2006, we received correspondence from the Ohio Department of Taxation (ODT)notifying us that ODT has completed their examination and review of our OhioCorporation Franchise Tax Returns for tax years 2002 through 2004 and that thefinal proposed audit adjustments result in a balance due of $90.8 millionbefore interest and penalties.  On June 27,2008, we entered into a $42.0 million settlement agreement with the ODTresolving all outstanding audit issues and appeals, including uncertain taxpositions for tax years 1998 through 2006. The $42 million payment was made to the ODT in July 2008.  Due to this settlement agreement, the balanceof our unrecognized state tax liabilities recorded at December 31, 2007,in the amount of $56.3 million, was reversed resulting in a recorded income taxbenefit of $8.5 million, net of federal tax impact, in 2008.

 

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For the years ended December 31,2008, 2007 and 2006, **DPL’s**components of income tax were as follows:

 

**DPL Inc.**
| ** **                                        | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **$ in millions**                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Computation  of Tax Expense**                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal income  tax (a)                           | ** ** | **$**                                      | **121.9**  |   | $ | 117.3 |   | $ | 68.7 |   |
|                                              |       |                                       |       |   |   |   |   |
| Increases  (decreases) in tax resulting from -    |       |                                       |       |   |   |   |   |
| State income  taxes, net of federal effect (b)    | ** ** | **4.1**                                    |       | 11.6 |   | (4.0 | ) |
| Depreciation                                      | ** ** | **(4.3**                                   | **)**      | (4.8 | ) | (3.1 | ) |
| Investment tax  credit amortized                  | ** ** | **(2.8**                                   | **)**      | (2.8 | ) | (2.9 | ) |
| Non-deductible  compensation                      | ** ** | **—**                                 |       | — |   | 0.2 |   |
| Section 199  - domestic production deduction | ** ** | **(4.2**                                   | **)**      | (2.0 | ) | (0.8 | ) |
| Accrual  (settlement) for open tax years (c)      | ** ** | **(7.2**                                   | **)**      | 2.7 |   | 5.1 |   |
| Other, net (d)                                    | ** ** | **(4.6**                                   | **)**      | 0.5 |   | 6.6 |   |
| Total tax  expense (e)                            | ** ** | **$**                                      | **102.9**  |   | $ | 122.5 |   | $ | 69.8 |   |
|                                              |       |                                       |       |   |   |   |   |
| **Components  of Tax Expense**                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxes currently  payable (b)                      | ** ** | **$**                                      | **62.7**   |   | $ | 100.8 |   | $ | 109.3 |   |
| Deferred taxes -                                  |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                    | ** ** | **12.9**                                   |       | 4.6 |   | (37.9 | ) |
| Investment loss                                   | ** ** | **—**                                 |       | — |   | 6.6 |   |
| Compensation                                      | ** ** | **2.7**                                    |       | 16.6 |   | — |   |
| Employee  benefits                                | ** ** | **—**                                 |       | 6.3 |   | (3.4 | ) |
| Accrual for open  tax years (f)                   | ** ** | **21.5**                                   |       | — |   | — |   |
| Other                                             | ** ** | **5.9**                                    |       | (3.0 | ) | (1.9 | ) |
| Deferred  investment tax credit, net              | ** ** | **(2.8**                                   | **)**      | (2.8 | ) | (2.9 | ) |
| Total tax  expense (e)                            | ** ** | **$**                                      | **102.9**  |   | $ | 122.5 |   | $ | 69.8 |   |

 

**Components of Deferred Tax Assets andLiabilities**

 
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|
| **$ in millions**                    | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| **Net  Non-Current Assets (Liabilities)** | ** ** | ** **               | ** ** | ** ** | ** ** |
| Depreciation/property  basis              | ** ** | **$**                    | **(416.7** | **)** | $ | (395.2 | ) |
| Income taxes  recoverable                 | ** ** | **(28.4**                | **)**      | (23.0 | ) |
| Regulatory  assets                        | ** ** | **(7.7**                 | **)**      | (9.6 | ) |
| Investment tax  credit                    | ** ** | **13.3**                 |       | 14.3 | ** ** |
| Investment loss                           | ** ** | **0.1**                  |       | 0.1 | ** ** |
| Compensation and  employee benefits       | ** ** | **12.7**                 |       | 15.5 | ** ** |
| Insurance                                 | ** ** | **0.8**                  |       | 1.1 | ** ** |
| Other (g)                                 | ** ** | **(7.8**                 | **)**      | 21.9 | ** ** |
| Net non-current  (liabilities)            | ** ** | **$**                    | **(433.7** | **)** | $ | (374.9 | ) |
|                                      | ** ** | ** **               |       |   |   |
| **Net  Current Assets (h)**               | ** ** | ** **               |       |   |   |
| Other                                     | ** ** | **$**                    | **2.2**    |   | $ | 2.1 | ** ** |
| Net current  assets                       | ** ** | **$**                    | **2.2**    |   | $ | 2.1 | ** ** |

----

*(a)     The statutorytax rate of 35% was applied to pre-tax income from continuing operations beforepreferred dividends.*

* *

*(b)     We haverecorded $0.2 million, $0.5 million and $10.4 million in 2008, 2007 and 2006,respectively, for state tax credits available related to the consumption ofcoal mined in Ohio.  In addition, ($0.5)million in 2008, $0.9 million in 2007 and $1.0 million in 2006 was recorded asa result of the phase out of the Ohio Franchise Tax.*

 

*(c)     We haverecorded ($40.7) million, $2.7 million and $5.1 million in 2008, 2007 and 2006,respectively, of tax provisions for tax deduction or income positions taken inprior tax returns that we believe were properly treated on such tax returns butfor which it is possible that these positions may be contested.  The 2008 amount relates to the ODT settlementdiscussed above.*

 

*(d)     Includes ($3.8)million in 2008 and $5.0 million in 2006 of income tax expense related toadjustments from prior years.*

* *

*(e)     Excludes $6.0million in 2007 and $3.6 million in 2006 of income taxes reported asdiscontinued operations.*

 

*(f)      We recorded$21.5 million in 2008 related to federal tax impacts on the ODT settlementdiscussed above.*

 

*(g)     The Othernon-current liabilities caption includes deferred tax assets related to statetax net operating loss carryforwards, net of related valuation allowances of$10.7 million in 2008 and $12.4 million in 2007.  As of December 31, 2008, all deferred taxassets related to net operating losses were either written off or valued atzero.*

 

*(h)     Amounts areincluded within other current assets in the consolidated balance sheets.*

 

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For the years ended December 31,2008, 2007 and 2006, **DP&L’s**components of income tax were as follows:

 

**DP&L**
| ** **                                        | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **$ in millions**                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Computation  of Tax Expense**                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal income  tax (a)                           | ** ** | **$**                                      | **142.1**  |   | $ | 145.1 |   | $ | 134.6 |   |
|                                              |       |                                       |       |   |   |   |   |
| Increases  (decreases) in tax resulting from -    |       |                                       |       |   |   |   |   |
| State income  taxes, net of federal effect (b)    | ** ** | **2.6**                                    |       | 9.6 |   | 2.4 |   |
| Depreciation                                      | ** ** | **(4.3**                                   | **)**      | (4.7 | ) | (3.1 | ) |
| Investment tax  credit amortized                  | ** ** | **(2.8**                                   | **)**      | (2.8 | ) | (2.9 | ) |
| Non-deductible  compensation                      | ** ** | **—**                                 |       | — |   | 0.1 |   |
| Section 199  - domestic production deduction | ** ** | **(4.2**                                   | **)**      | (2.0 | ) | (0.8 | ) |
| Accrual  (settlement) for open tax years (c)      | ** ** | **(7.2**                                   | **)**      | 2.7 |   | 5.1 |   |
| Other, net (d)                                    | ** ** | **(6.0**                                   | **)**      | (4.8 | ) | 6.8 |   |
| Total tax expense                                 | ** ** | **$**                                      | **120.2**  |   | $ | 143.1 |   | $ | 142.2 |   |
|                                              |       |                                       |       |   |   |   |   |
| **Components  of Tax Expense**                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Taxes currently  payable (b)                      | ** ** | **$**                                      | **82.1**   |   | $ | 124.7 |   | $ | 158.5 |   |
| Deferred taxes -                                  |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                    | ** ** | **11.3**                                   |       | 1.7 |   | (17.1 | ) |
| Compensation                                      | ** ** | **2.7**                                    |       | 19.5 |   | — |   |
| Employee benefits                                 | ** ** | **—**                                 |       | 6.3 |   | (3.4 | ) |
| Accrual for open  tax years (e)                   | ** ** | **21.5**                                   |       | — |   | — |   |
| Other                                             | ** ** | **5.4**                                    |       | (6.3 | ) | 7.1 |   |
| Deferred  investment tax credit, net              | ** ** | **(2.8**                                   | **)**      | (2.8 | ) | (2.9 | ) |
| Total tax  expense                                | ** ** | **$**                                      | **120.2**  |   | $ | 143.1 |   | $ | 142.2 |   |

 

**Components of Deferred Tax Assets andLiabilities**

 
| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|
| **$ in millions**                    | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| **Net  Non-Current Assets (Liabilities)** |       |                     |       |   |   |
| Depreciation/property  basis              | ** ** | **$**                    | **(398.6** | **)** | $ | (378.5 | ) |
| Income taxes  recoverable                 | ** ** | **(28.4**                | **)**      | (23.0 | ) |
| Regulatory  assets                        | ** ** | **(13.3**                | **)**      | (9.6 | ) |
| Investment tax  credit                    | ** ** | **13.3**                 |       | 14.3 |   |
| Compensation and  employee benefits       | ** ** | **12.7**                 |       | 15.5 |   |
| Other (f)                                 | ** ** | **(3.5**                 | **)**      | 14.3 |   |
| Net non-current  (liabilities)            | ** ** | **$**                    | **(417.8** | **)** | $ | (367.0 | ) |
|                                      |       |                     |       |   |   |
| **Net  Current Assets (g)**               |       |                     |       |   |   |
| Other                                     | ** ** | **$**                    | **2.3**    |   | $ | 2.1 |   |
| Net current  assets                       | ** ** | **$**                    | **2.3**    |   | $ | 2.1 |   |

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*(a)     The statutorytax rate of 35% was applied to pre-tax income from continuing operations beforepreferred dividends.*

* *

*(b)     We haverecorded $0.2 million, $0.5 million and $10.4 million in 2008, 2007 and2006,  respectively, for state taxcredits available related to the consumption of coal mined in Ohio.  In addition, ($0.9) million in 2008,**($0.5)million in 2007 and $3.1 million in 2006 was recorded as a result of the phaseout of the Ohio Franchise Tax.*

* *

*(c)     We haverecorded ($40.7) million, $2.7 million and $5.1 million in 2008, 2007 and 2006,respectively, of tax provisions for tax deduction or income positions taken inprior tax returns that we believe were properly treated on such tax returns butfor which it is possible that these positions may be contested.  The 2008 amount relates to the ODT settlementdiscussed above.*

* *

*(d)     Includes ($3.5)million in 2008 and $5.0 million in 2006 of income tax expense related toadjustments from prior years.*

* *

*(e)     We recorded$21.5 million in 2008 related to federal tax impacts on the ODT settlementdiscussed above. *

* *

*(f)      The Othernon-current liabilities caption includes deferred tax assets related to statetax net operating loss**carryforwards, net of relatedvaluation allowances of $0.3 million in 2007. At December 31, 2008, there were no deferred tax assets orvaluation allowances related to net operating losses on our books.*

* *

*(g)     Amounts areincluded within other current assets in the consolidated balance sheets.*

 

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*9.  Pensionand Postretirement 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. Benefits under this SERP have been frozen and no additional benefits canbe earned.  We****alsohave unfunded liabilities related to retirement benefits for certain active,terminated and retired key executives. These liabilities totaled approximately $1.0 million at December 31,2008.

 

On February 23,2006, **DPL**’s Board of Directors approved a newcompensation and benefits program that includes The DPL Inc. SupplementalExecutive Defined Contribution Retirement Plan (SEDCRP) which replaces ourSupplemental Executive Retirement Plan (SERP) that was terminated as to new participantsin 2000. The Compensation Committee of the Board of Directors designates theeligible employees.  Pursuant to theSEDCRP, we provide a supplemental retirement benefit to participants bycrediting an account established for each participant in accordance with thePlan requirements.  We designate ashypothetical investment funds under the SEDCRP one or more of the investmentfunds provided under The Dayton Power and Light Company Employee Savings Plan.Each participant may change his or her hypothetical investment fundselection at specified times.  If aparticipant does not elect a hypothetical investment fund(s), then we selectthe hypothetical investment fund(s) for such participant.

 

A participant shallbecome 100% vested in all amounts credited to his or her account upon thecompletion of five vesting years, as defined in The Dayton Power and LightCompany Retirement Income Plan, or upon a change of control or the participant’sdeath or disability.  If a participant’semployment is terminated, other than by death or disability, prior to suchparticipant becoming 100% vested in his or her account, the account shall beforfeited as of the date of termination.

 

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.

 

We adopted SFAS 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132(R)” for the yearended December 31, 2006.  SFAS 158requires that an entity’s funded status of its pension and other postretirementbenefit obligations be recognized on the face of the financial statements andnot just in the footnotes.

 

Regulatory assets andliabilities are recorded for the portion of the under- or over-fundedobligations related to the transmission and distribution areas of our electricbusiness.  We have historically recordedthese costs on the accrual basis and this is how these costs have beenhistorically recovered.  This factor,combined with the historical precedents from the PUCO and FERC, make thesecosts probable of future rate recovery.

 

The following tables setforth our pension and postretirement benefit plans’ obligations and assetsrecorded on the consolidated balance sheets as of December 31.  The amounts presented in the following tablesfor pension include both the defined benefit pension plan and the SupplementalExecutive Retirement Plan in the aggregate, and use a measurement date of December 31,2008.  The amounts presented forpost-retirement include both health and life insurance benefits and use ameasurement date of December 31, 2008.

 

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| **$ in millions**                                                                          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                                      | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Change  in Benefit Obligation During Year**                                                   | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit  obligation at January 1                                                           | ** ** | **$**       | **285.0**  |               | $          | 294.5 | ** ** | **$** | **26.4** |   | $ | 27.1 |   |
| Service cost                                                                                    | ** ** | **3.3**     |       | 3.2                | ** ** | **—** |   | — |   |
| Interest cost                                                                                   | ** ** | **16.7**    |       | 16.2               | ** ** | **1.4** |   | 1.5 |   |
| Plan amendments                                                                                 | ** ** | **6.9**     |       | —             | ** ** | **—** |   | — |   |
| Actuarial (gain)  loss                                                                          | ** ** | **2.0**     |       | (9.6               | )          | **(0.1** | **)** | 0.6 |   |
| Benefits paid                                                                                   | ** ** | **(19.3**   | **)**      | (19.3              | )          | **(2.5** | **)** | (2.8 | ) |
| Benefit  obligation at December 31                                                         | ** ** | **$**       | **294.6**  |               | $          | 285.0 | ** ** | **$** | **25.2** |   | $ | 26.4 |   |
|                                                                                            |       |        |       |               |       |   |   |   |   |
| **Change  in Plan Assets During Year**                                                          | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of  plan assets at January 1                                                    | ** ** | **$**       | **291.0**  |               | $          | 266.4 | ** ** | **$** | **6.5** |   | $ | 7.0 |   |
| Actual return on  plan assets                                                                   | ** ** | **(46.7**   | **)**      | 16.1               | ** ** | **0.2** |   | 0.3 |   |
| Contributions to  plan assets                                                                   | ** ** | **0.4**     |       | 27.8               | ** ** | **2.1** |   | 2.0 |   |
| Benefits paid                                                                                   | ** ** | **(19.3**   | **)**      | (19.3              | )          | **(2.7** | **)** | (2.9 | ) |
| Medical  reimbursements                                                                         | ** ** | **—**  |       | —             | ** ** | **0.1** |   | 0.1 |   |
| Fair value of  plan assets at December 31                                                  | ** ** | **$**       | **225.4**  |               | $          | 291.0 | ** ** | **$** | **6.2** |   | $ | 6.5 |   |
|                                                                                            |       |        |       |               |       |   |   |   |   |
| **Funded  Status of Plan**                                                                      | ** ** | **$**       | **(69.2**  | **)**              | $          | 6.0 | ** ** | **$** | **(19.0** | **)** | $ | (19.9 | ) |
|                                                                                            |       |        |       |               |       |   |   |   |   |
| **Amounts  Recognized in the**                                                                  | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Consolidated  Balance Sheets at December 31**                                            | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-current  assets                                                                             | ** ** | **$**       | **—** |               | $          | 9.9 | ** ** | **$** | **—** |   | $ | — |   |
| Current liabilities                                                                             | ** ** | **(0.4**    | **)**      | (0.3               | )          | **(0.4** | **)** | (0.5 | ) |
| Non-current  liabilities                                                                        | ** ** | **(68.8**   | **)**      | (3.6               | )          | **(18.6** | **)** | (19.4 | ) |
| Net  asset/(liability) at December 31                                                      | ** ** | **$**       | **(69.2**  | **)**              | $          | 6.0 | ** ** | **$** | **(19.0** | **)** | $ | (19.9 | ) |
|                                                                                            |       |        |       |               |       |   |   |   |   |
| **Amounts  Recognized in Accumulated Other**                                                    | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Comprehensive  Income, Regulatory Assets and**                                                | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Regulatory  Liabilities**                                                                     | ** ** | ** **  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net transition  obligation (asset)                                                              | ** ** | **$**       | **—** |               | $          | — | ** ** | **$** | **—** |   | $ | — |   |
| Prior service  cost (credit)                                                                    | ** ** | **16.7**    |       | 12.2               | ** ** | **—** |   | — |   |
| Net actuarial  loss (gain)                                                                      | ** ** | **129.9**   |       | 59.7               | ** ** | **(7.8** | **)** | (8.9 | ) |
| Accumulated  other comprehensive income, regulatory assets and regulatory liabilities,  pre-tax | ** ** | **$**       | **146.6**  |               | $          | 71.9 | ** ** | **$** | **(7.8** | **)** | $ | (8.9 | ) |

 

The accumulated benefitobligation for our defined benefit pension plans was $283.3 million and $274.6million at December 31, 2008 and 2007, respectively.

 

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The net periodic benefitcost (income) of the pension and postretirement benefit plans at December 31were:

 
| **Net Periodic Benefit Cost (Income)**        | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                        | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                  | ** ** | **$**       | **3.2**    |               | $          | 3.2 |   | $ | 4.2 | ** ** | **$** | **—** |   | $ | — |   | $ | — |   |
| Interest cost                                 | ** ** | **16.7**    |       | 16.2               |       | 16.6 | ** ** | **1.4** |   | 1.5 |   | 1.5 |   |
| Expected return  on assets (a)                | ** ** | **(24.1**   | **)**      | (22.0              | )          | (21.7 | ) | **(0.4** | **)** | (0.5 | ) | (0.5 | ) |
| Amortization of  unrecognized:                |       |        |       |               |       |   |   |   |   |   |   |   |   |
| Actuarial (gain)  loss                        | ** ** | **2.6**     |       | 3.4                |       | 3.9 | ** ** | **(0.9** | **)** | (0.9 | ) | (1.3 | ) |
| Prior service  cost                           | ** ** | **2.4**     |       | 2.4                |       | 2.6 | ** ** | **—** |   | — |   | — |   |
| Transition  obligation                        | ** ** | **—**  |       | —             |       | — | ** ** | **—** |   | 0.2 |   | 0.2 |   |
| Net benefit cost  (income) before adjustments | ** ** | **0.8**     |       | 3.2                |       | 5.6 | ** ** | **0.1** |   | 0.3 |   | (0.1 | ) |
|                                          |       |        |       |               |       |   |   |   |   |   |   |   |   |
| Settlement costs  (b)                         | ** ** | **—**  |       | —             |       | 2.6 | ** ** | **—** |   | — |   | — |   |
| Special  termination benefit costs (c)        | ** ** | **—**  |       | —             |       | 0.3 | ** ** | **—** |   | — |   | — |   |
| Net benefit cost  (income) after adjustments  | ** ** | **$**       | **0.8**    |               | $          | 3.2 |   | $ | 8.5 | ** ** | **$** | **0.1** |   | $ | 0.3 |   | $ | (0.1 | ) |

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(a)   The market-related value ofassets is equal to the fair value of assets at implementation with subsequentasset gains and losses recognized in the market-related value systematicallyover a three-year period. 

(b)   The settlement cost relatedto a former officer who elected to receive a lump sum distribution in 2007 fromthe Supplemental Executive Retirement Plan.

(c)   In 2006 and 2005, specialtermination benefit costs were recognized as a result of 32 employees whoparticipated in a voluntary early retirement program.  16 employees retired at various dates during2005 and 16 additional employees retired at various dates during 2006; thisprogram was completed as of April 1, 2006.

 

**Other Changes in Plan Assets andBenefit Obligation Recognized in Accumulated Other Comprehensive Income**

 
| ** **                                                                                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                                                                    | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net actuarial  (gain)/loss                                                                | ** ** | **$**       | **72.8**   |               | $          | (3.7 | ) | **$** | **0.2** |   | $ | 0.7 |   |
| Prior service  cost/(credit)                                                              | ** ** | **6.9**     |       | —             | ** ** | **—** |   | — |   |
| Reversal of  amortization item:                                                           |       |        |       |               |       |   |   |   |   |
| Net actuarial  (gain)/loss                                                                | ** ** | **(2.6**    | **)**      | (3.4               | )          | **0.9** |   | 0.9 |   |
| Prior service  cost/(credit)                                                              | ** ** | **(2.4**    | **)**      | (2.4               | )          | **—** |   | — |   |
| Transition  (asset)/obligation                                                            | ** ** | **—**  |       | —             | ** ** | **—** |   | (0.2 | ) |
|                                                                                      |       |        |       |               |       |   |   |   |   |
| Total recognized  in accumulated other comprehensive income                               | ** ** | **$**       | **74.7**   |               | $          | (9.5 | ) | **$** | **1.1** |   | $ | 1.4 |   |
|                                                                                      |       |        |       |               |       |   |   |   |   |
| Total recognized  in net periodic benefit cost and accumulated other comprehensive income | ** ** | **$**       | **75.5**   |               | $          | (6.3 | ) | **$** | **1.2** |   | $ | 1.7 |   |

 

Estimated amounts that will be amortized from accumulated othercomprehensive income into net periodic benefit cost during 2009 are: 

 
| **$ in millions**       | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|------------------------------|------------|-------------|------------|--------------------|------------|
| Net actuarial  (gain)/loss   | ** ** | **$**       | **4.5**    | ** **         | **$**      | **(0.2** | **)** |
| Prior service  cost/(credit) | ** ** | **3.0**     | ** ** | **—**         | ** ** |
|                              |            |             |            |                    |            |  |  |

 

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**DP&L’s** pension and postretirement plan assetswere comprised of the following asset categories at December 31:

 
| ** **          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|---------------------|------------|-------------|------------|--------------------|------------|
| **Asset  Category** | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Equity  securities  | ** ** | **39**      | **%**      | 56                 | %          | **0** | **%** | 0 | % |
| Debt securities     | ** ** | **45**      | **%**      | 33                 | %          | **100** | **%** | 100 | % |
| Other               | ** ** | **16**      | **%**      | 11                 | %          | **0** | **%** | 0 | % |
| Total               | ** ** | **100**     | **%**      | 100                | %          | **100** | **%** | 100 | % |

 

Plan assets are investedusing a total return investment approach whereby a mix of equity securities,debt securities and other investments are used to preserve asset values, diversifyrisk and achieve our target investment return benchmark.  Investment strategies and asset allocationsare based on careful consideration of plan liabilities, the plan’s fundedstatus and our financial condition. Investment performance and asset allocation are measured and monitoredon an ongoing basis.

 

On November 26,2007, **DP&L**contributed $27.4 million in **DPL** common stock from its Master Trust assets to theRetirement Income Plan to fully fund the pension liability as of December 31,2007.  **DPL**common stock is now 9% of plan assets.

 

Our expected return onplan asset assumptions, used to determine benefit obligations, are based onhistorical long-term rates of return on investment, which use the widelyaccepted capital market principle that assets with higher volatility generate agreater return over the long run. Current market factors, such as inflation and interest rates, as well asasset diversification and portfolio rebalancing, are evaluated when long-termcapital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonabilityand appropriateness.

 

Our overall expectedlong-term rate of return on assets is approximately 8.50% for pension planassets and approximately 6.00% for retiree benefit plan assets.  This expected return is based exclusively onhistorical returns, without adjustments. There can be no assurance of our ability to generate that rate of returnin the future.

 

Our overall discount ratewas evaluated in relation to the December 31, 2008 Hewitt Yield Curvewhich represents a portfolio of top-quartile AA-rated bonds used to settlepension obligations.  Peer data andhistorical returns were also reviewed to verify the reasonableness andappropriateness of our discount rate used in the calculation of benefitobligations and expense.

 

The weighted averageassumptions used to determine benefit obligations for the years ended December 31were:

 
| ** **                          | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-------------------------------------|------------|-------------|------------|--------------------|------------|
| **Benefit  Obligation Assumptions** | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Discount rate for  obligations      | ** ** | **6.25**    | **%**      | 6.00               | %          | **6.25** | **%** | 6.00 | % |
| Rate of  compensation increases     | ** ** | **5.44**    | **%**      | 5.44               | %          | **N/A** |   | N/A |   |

 

The weighted-averageassumptions used to determine net periodic benefit cost (income) for the yearsended December 31 were:

 
| **Net Periodic Benefit**                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|-----------------------------------------|------------|-------------|------------|--------------------|------------|
| **Cost (Income) Assumptions**           | ** ** | **2008**    | ** ** | **2007**           | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Discount rate                           | ** ** | **6.00**    | **%**      | 5.75               | %          | 5.75 | % | **6.00** | **%** | 5.75 | % | 5.75 | % |
| Expected rate of  return on plan assets | ** ** | **8.50**    | **%**      | 8.50               | %          | 8.50 | % | **6.00** | **%** | 6.75 | % | 6.75 | % |
| Rate of  compensation increases         | ** ** | **5.44**    | **%**      | 5.44               | %          | 5.44 | % | **N/A** |   | N/A |   | N/A |   |

 

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The assumed health carecost trend rates at December 31 are as follows:

 
| ** **                                   | ** ** | **Expense** | ** ** | **Benefit Obligations** | ** ** |
|----------------------------------------------|------------|-------------|------------|-------------------------|------------|
| **Health Care Cost Assumptions**             | ** ** | **2008**    | ** ** | **2007**                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current health  care cost trend rate         | ** ** | **10.00**   | **%**      | 10.00                   | %          | **9.50** | **%** | 10.00 | % |
| Ultimate health  care cost trend rate        | ** ** | **5.00**    | **%**      | 5.00                    | %          | **5.00** | **%** | 5.00 | % |
| Ultimate health  care cost trend rate - year | ** ** | **2013**    |       | 2012                    | ** ** | **2014** |   | 2013 |   |

 

The assumed health carecost trend rates have a significant effect on the amounts reported for thehealth care plans.  A one-percentagepoint change in assumed health care cost trend rates would have the following effectson the net periodic postretirement benefit cost and the accumulatedpostretirement benefit obligation:

 
| **Effect of Change in Health**                | ** ** | ** **      | ** ** | ** **      | ** ** |
|-----------------------------------------------|------------|-----------------|------------|-----------------|------------|
| **Care Cost Trend Rate ($ in millions)** | ** ** | **Increase 1%** | ** ** | **Decrease 1%** | ** ** |
|                                          |       |            |       |            |       |
| Service cost  plus interest cost              |       | $               | 0.1        |            | $          | (0.1 | ) |
| Benefit  obligation                           |       | $               | 1.5        |            | $          | (1.4 | ) |

 

The following benefitpayments, which reflect future service, are expected to be paid as follows:

 
| **Estimated Future Benefit Payments** | ** ** | ** **  | ** ** | ** **         | ** ** |
|---------------------------------------|------------|-------------|------------|--------------------|------------|
| **$ in millions**                | ** ** | **Pension** | ** ** | **Postretirement** | ** ** |
|                                  |       |        |       |               |       |
| 2009                                  |       | $           | 20.1       |               | $          | 2.7 |   |
| 2010                                  |       | $           | 20.5       |               | $          | 2.7 |   |
| 2011                                  |       | $           | 20.9       |               | $          | 2.6 |   |
| 2012                                  |       | $           | 21.5       |               | $          | 2.5 |   |
| 2013                                  |       | $           | 22.2       |               | $          | 2.4 |   |
| 2014 - 2018                           |       | $           | 117.1      |               | $          | 9.7 |   |

 

We expect to contribute$0.4 million to our pension plans and $2.7 million to our other postretirementbenefit plans in 2009.

 

The Pension ProtectionAct (the Act) of 2006 contained new requirements for our single employerdefined benefit pension plans. In addition to establishing a 100% fundingtarget for plan years beginning after December 31, 2008, the Act alsolimits some benefits if the funded status of pension plans drops below certainthresholds.  Among other restrictionsunder the Act, if the funded status of a plan falls below a predetermined ratiowhich will increase to 80%, lump-sum payments to new retirees are limited to50% of amounts that otherwise would have been paid and new benefit improvementsmay not go into effect.  This 80% fundingthreshold will be phased-in through 2011 with 65% being the applicable ratiofor 2008.  For the 2008 plan year, thefunded status of our defined benefit pension plan as calculated under therequirements of the Act was 83% and is estimated to be 80% for the 2009 planyear.  The Worker, Retiree, and EmployerRecovery Act of 2008 (WRERA), which was signed into law on December 23,2008, grants plan sponsors certain relief from funding requirements and benefitrestrictions of the Act.  **DPL** and **DP&L** are inthe process of evaluating the impact of this legislation on the fundingrequirements and benefits restrictions of the Act.  We do not expect the requirements of the Actto have a material impact on our overall results of operations, financialposition or cash flows.

 

*10.  FinancialInstruments*

 

In the normalcourse of business, **DPL** and **DP&L** enter into various financial instruments, includingderivative financial instruments.  Adescription of these financial instruments is as follows:

 

***Derivatives***

 

We use derivativesprincipally to manage the risk of changes in market prices for commodities. Thederivatives that we use to hedge these risks are governed by our riskmanagement policies for forward contracts, futures, options, and swaps. Our netpositions are continually assessed within our structured hedging programs todetermine whether new or offsetting transactions are required. The objective ofthe hedging program is generally to mitigate financial risks while ensuringthat sufficient volumes are available to meet our requirements.  We monitor and value derivative positionsmonthly as part of our risk management processes.

 

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We use published sourcesfor pricing when possible to mark positions to market. We rely on modeledvaluations only when no other method exists.

 

***CashFlow Hedges***

 

Our risk managementprocesses identify the relationships between hedging instruments and hedgeditems, as well as the risk management objective and strategy for undertakingvarious hedge transactions. The mark-to-market value of cash flow hedges asdetermined by current public market prices will continue to fluctuate withchanges in market prices up to contract expiration. The effective portion ofthe hedging transaction is recognized in Other Comprehensive Income (OCI) andtransferred to earnings when the hedged forecasted transaction takes place orwhen the hedged forecasted transaction is no longer probable of occurring.  The ineffective portion of the cash flowhedge is recognized in earnings in the current period.

 

These instruments areused to hedge the risk of price changes for sales and purchases of power.  All risk components were taken into accountto determine the hedge effectiveness of the cash flow hedges.  Power hedges are usually transacted over a 1to 3 month period.  We recognizedunrealized losses on our forward power cash flow hedges of $0.3 million and$1.5 million in OCI in 2008 and 2007, respectively.  Approximately $0.3 million of accumulatedlosses in OCI related to the above mentioned power hedges are expected to bereclassified to earnings over the next twelve months.

 

Changes in interest ratesexpose **DPL** and **DP&L**to risk as a result of the issuance of corporate bonds.  In 2003 we entered into an interest ratehedge to manage this risk.  The balanceof the remaining deferred gain from the interest rate hedge in OCI was $17.2million and $19.7 million in 2008 and 2007 respectively.  Approximately $2.5 million of accumulatedgains in OCI related to the above referenced interest rate hedge are expectedto be reclassified to earnings over the next twelve months.

 

The following tableprovides information concerning gains or losses recognized in OCI for the cashflow hedges:

 
| ** **                                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| ** **                                                       | ** ** | **Power and**         | ** ** | **Interest Rate**     | ** ** | **Power and**         | ** ** | **Interest Rate** | ** ** | **Power and** | ** ** | **Interest Rate** | ** ** |
| **$ in millions**                                           | ** ** | **Capacity**          | ** ** | **Hedge**             | ** ** | **Capacity**          | ** ** | **Hedge** | ** ** | **Capacity** | ** ** | **Hedge** | ** ** |
|                                                             |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Beginning  accumulated  derivative (gain) / loss in OCI          |       | $                     | 1.5        |                  | $          | (19.7                 | )          | $ | (3.2 | ) | $ | (22.1 | ) | $ | 0.3 |   | $ | (24.6 | ) |
|                                                             |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net change  associated with current  period hedging transactions |       | (7.4                  | )          | —                |       | 0.5                   |       | — |   | (9.4 | ) | — |   |
|                                                             |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Net amount of  any reclassifications  into earnings              |       | 6.2                   |       | 2.5                   |       | 4.2                   |       | 2.4 |   | 5.9 |   | 2.5 |   |
|                                                             |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Ending  accumulated  derivative (gain) / loss in OCI             |       | $                     | 0.3        |                  | $          | (17.2                 | )          | $ | 1.5 |   | $ | (19.7 | ) | $ | (3.2 | ) | $ | (22.1 | ) |

 

***Markto Market***

 

Certain derivativecontracts are entered into on a regular basis as part of our risk managementprogram but do not qualify for hedge accounting or the normal purchase andsales exceptions under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended. Accordingly, such contractsare recorded at fair value with changes in the fair value charged or creditedto the income statement in the period in which the change occurred. Contractswe enter into as part of our risk management program may be settledfinancially, by physical delivery, or net settled with the counterparty.

 

***Master Trust Assets***

 

**DP&L** established a Master Trustto hold assets for the benefit of employees participating in **DP&L’s** Deferred Compensation Plan and other employeebenefit purposes and these assets are not used for general operatingpurposes.  These assets are primarilycomprised of mutual funds and **DPL** commonstock. The **DPL** common stock held by theMaster Trust in **DP&L’s** consolidated balancesheet is eliminated in consolidation and is not reflected in **DPL**’s consolidated balance sheet. These assets are valuedusing current public market prices on a quarterly basis.  Any unrealized gains or losses are recognizedin Other Comprehensive Income until the securities are sold.

 

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**DPL** recognized $6.2 million ofunrealized gains on the Master Trust assets in OCI in both 2008 and 2007 and$6.6 million and $5.9 million of unrealized losses in OCI in 2008 and 2007,respectively.  **DP&L**recognized $17.0 million and $31.2 million of unrealized gains and $6.6 millionand $5.9 million of unrealized losses in OCI in 2008 and 2007,respectively.  No unrealized gains orlosses are expected to be transferred to earnings in 2009.

 

**Transfer of Master Trust Assetsto Pension**

 

On October 26, 2007,the Board of Directors approved a resolution permitting the transfer of 925,000shares of **DPL Inc.**common stock from the **DP&L** Master Trust to The Dayton Power and Light CompanyRetirement Income Plan Trust (Pension). This transaction was completed on November 26, 2007, contributingshares of common stock with a fair value of $27.4 million to the Pension andresulting in a fully funded status at December 31, 2007.

 

***Long-term Debt***

 

Long-term debt is fair valued based on current public market prices fordisclosure purposes only.  Unrealizedgains or losses are not recognized in the financial statements, as long-termdebt is presented at amortized cost in the financial statements.  The long-term debt amounts include thecurrent portion payable in the next twelve months and have maturities thatrange from 2009 to 2040.

 

The fairvalues of our financial instruments and debt are based on market quotes ofsimilar instruments and represent estimates of possible value that may not berealized in the future. The table below presents the fair value and cost of theseinstruments at December 31, 2008 and 2007.

 
| ** **              | ** ** | **At December 31,** | ** ** |
|-------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **2008**                 | ** ** | **2007** | ** ** |
| **$ in millions**  | ** ** | **Cost**                 | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| **DPL  Inc.**           | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Master Trust  Assets    |       | $                        | 13.6       |   | $ | 13.1 |   | $ | 9.2 |   | $ | 9.6 |   |
| Derivative  Assets      |       | —                   |       | — |   | 0.4 |   | 0.4 |   |
| Total Assets            |       | $                        | 13.6       |   | $ | 13.1 |   | $ | 9.6 |   | $ | 10.0 |   |
|                    |       |                     |       |   |   |   |   |   |   |
| **Liabilities**         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt                    |       | $                        | 1,551.8    |   | $ | 1,470.5 |   | $ | 1,642.2 |   | $ | 1,664.3 |   |
| Derivative  Liabilities |       | —                   |       | 6.6 |   | — |   | 1.5 |   |
| Total  Liabilities      |       | $                        | 1,551.8    |   | $ | 1,477.1 |   | $ | 1,642.2 |   | $ | 1,665.8 |   |
|                    |       |                     |       |   |   |   |   |   |   |
| **DP&L**            | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Master Trust  Assets    |       | $                        | 29.9       |   | $ | 40.2 |   | $ | 30.5 |   | $ | 56.0 |   |
| Derivative  Assets      |       | —                   |       | — |   | 0.4 |   | 0.4 |   |
| Total Assets            |       | $                        | 29.9       |   | $ | 40.2 |   | $ | 30.9 |   | $ | 56.4 |   |
|                    |       |                     |       |   |   |   |   |   |   |
| **Liabilities**         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt                    |       | $                        | 884.7      |   | $ | 815.7 |   | $ | 875.3 |   | $ | 871.5 |   |
| Derivative  Liabilities |       | —                   |       | 6.6 |   | — |   | 1.5 |   |
| Total  Liabilities      |       | $                        | 884.7      |   | $ | 822.3 |   | $ | 875.3 |   | $ | 873.0 |   |

 

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 additional layers to several asset retirement obligations.

 

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 unobservable inputswhen measuring fair value.  The standarddescribes three levels of inputs that may be used to measure fair value:

 

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**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 fromover-the-counter (OTC) markets or direct broker quotes that are traded lessfrequently than exchange-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.

 

The fair value ofassets and 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** | ** ** |
| ** **              | ** ** | **December 31, 2008**                                             | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$ in millions**  | ** ** | **DPL**                                                                | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L (a)** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| **Assets**              | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Master Trust  Assets    |       | $                                                                      | 13.1       |   | $ | 40.2 |   | $ | — |   | $ | 27.1 |   | $ | 13.1 |   | $ | 13.1 |   | $ | — |   | $ | — |   |
| Derivative  Assets      |       | —                                                                 |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total                   |       | $                                                                      | 13.1       |   | $ | 40.2 |   | $ | — |   | $ | 27.1 |   | $ | 13.1 |   | $ | 13.1 |   | $ | — |   | $ | — |   |
|                    |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**         | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative  Liabilities |       | $                                                                      | 6.6        |   | $ | 6.6 |   | $ | 6.3 |   | $ | 6.3 |   | $ | 0.3 |   | $ | 0.3 |   | $ | — |   | $ | — |   |
| Total                   |       | $                                                                      | 6.6        |   | $ | 6.6 |   | $ | 6.3 |   | $ | 6.3 |   | $ | 0.3 |   | $ | 0.3 |   | $ | — |   | $ | — |   |

----

*(a)  **DP&L**holds **DPL** stock in the Master Trust that iseliminated 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:

 

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| ** **             | ** ** | **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** | ** ** |
| ** **             | ** ** | **December 31, 2008**                                                  | ** ** | **Market** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **$ in millions** | ** ** | **DPL**                                                                     | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** | **DPL** | ** ** | **DP&L** | ** ** |
| Asset retirement       |       |                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| obligations  recorded  |       |                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| during period          |       | $                                                                           | 0.6        |   | $ | 0.6 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.6 |   | $ | 0.6 |   |
|                        |            |                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 December 31,2008, **DP&L** added an additional layer toseveral asbestos removal and ash landfill AROs in the amount of $0.6 milliondue to changes in the cost and timing estimates for asbestos removal and ashlandfill closures and the acceleration of the removal of some asbestos.

 

At December 31,2008, **DPL** had $15.0 million in money marketmutual funds classified as cash and cash equivalents in its consolidatedbalance sheet.

 

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*11. Stock-Based Compensation*

 

The following tablesummarizes share-based compensation expense:

 
| ** **                                                               | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                               | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                   | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock options                                                            | ** ** | **$**                   | **—** |   | $ | — |   | $ | 1.3 |   |
| Restricted stock  units                                                  | ** ** | **(0.1**                | **)**      | — |   | 3.0 |   |
| Performance  shares                                                      | ** ** | **0.9**                 |       | 1.5 |   | 2.0 |   |
| Restricted  shares                                                       | ** ** | **0.3**                 |       | 0.3 |   | — |   |
| Non-employee  directors’ RSUs                                       | ** ** | **0.5**                 |       | 0.3 |   | — |   |
| Management  performance shares                                           | ** ** | **0.3**                 |       | — |   | — |   |
| Share-based  compensation included in operations and maintenance expense | ** ** | **1.9**                 |       | 2.1 |   | 6.3 |   |
| Income tax  expense                                                      | ** ** | **(0.7**                | **)**      | (0.7 | ) | (2.2 | ) |
| Total  share-based compensation, net of tax                              | ** ** | **$**                   | **1.2**    |   | $ | 1.4 |   | $ | 4.1 |   |

 

Share-based awards issuedin **DPL’s**common stock will be distributedfrom treasury stock.  **DPL** has sufficient treasury stock to satisfy all outstandingshare-based awards.

 

**DeterminingFair Value**

 

*Valuationand Amortization Method —*We estimate the fair value of stock options and RSUsusing a Black-Scholes-Merton model; performance shares are valued using a MonteCarlo simulation; restricted shares are valued at the closing market price onthe day of grant and the Directors’ RSUs are valued at the closing market priceon the day prior to the grant date.  We amortizethe fair value of all awards on a straight-line basis over the requisiteservice periods, which are generally the vesting periods.

 

*ExpectedVolatility —*Our expected volatility assumptions are based on the historicalvolatility of **DPL** stock. The volatility rangecaptures the high and low volatility values for each award granted based on itsspecific terms.

 

*ExpectedLife —*Theexpected life assumption represents the estimated period of time from grantuntil exercise and reflects historical employee exercise patterns.

 

*Risk-FreeInterest Rate —*The risk-free interest rate for the expected term ofthe award is based on the corresponding yield curve in effect at the time ofthe valuation for U.S. Treasury bonds having the same term as the expected lifeof the award, i.e., a five year bond rate is used for valuing an award with afive year expected life.

 

*ExpectedDividend Yield —*The expected dividend yield is based on **DPL’s** current dividend rate, adjusted as necessary tocapture anticipated dividend changes and the 12 month average **DPL** stock price.

 

*ExpectedForfeitures —*The forfeiture rate used to calculate compensation expense is based on **DPL’s** historical experience, adjusted as necessary toreflect special circumstances.

 

**StockOptions**

 

In 2000, **DPL’s** Board of Directors adopted and **DPL’s** shareholders approved The DPL Inc.Stock Option Plan.  On April 26,2006, **DPL’s** shareholders approved The DPLInc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of the EPIP, no new awardswill be granted under The DPL Inc. Stock Option Plan, but shares relating toawards that are forfeited or terminated under The DPL Inc. Stock Option Planmay be granted under the EPIP.  As of December 31,2008, there were no unvested stock options.

 

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Summarized stock optionactivity was as follows:

 
| ** **                                 | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **December 31,**   | ** ** |
| ** **                                 | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Options:                                   |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year          | ** ** | **946,500**             |       | 5,091,500 |   | 5,486,500 |   |
| Granted                                    | ** ** | **—**              |       | — |   | — |   |
| Exercised                                  | ** ** | **(110,000**            | **)**      | (525,000 | ) | (355,000 | ) |
| Forfeited (a)                              | ** ** | **—**              |       | (3,620,000 | ) | (40,000 | ) |
| Outstanding at  year-end                   | ** ** | **836,500**             |       | 946,500 |   | 5,091,500 |   |
| Exercisable at  year-end                   | ** ** | **836,500**             |       | 946,500 |   | 5,081,500 |   |
|                                       |       |                    |       |   |   |   |   |
| Weighted average  option prices per share: |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year          | ** ** | **$**                   | **24.09**  |   | $ | 21.95 |   | $ | 21.86 |   |
| Granted                                    | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Exercised                                  | ** ** | **$**                   | **18.56**  |   | $ | 26.79 |   | $ | 21.00 |   |
| Forfeited                                  | ** ** | **$**                   | **—** |   | $ | 20.38 |   | $ | 15.88 |   |
| Outstanding at  year-end                   | ** ** | **$**                   | **24.64**  |   | $ | 24.09 |   | $ | 21.95 |   |
| Exercisable at  year-end                   | ** ** | **$**                   | **24.64**  |   | $ | 24.09 |   | $ | 21.94 |   |

----

*(a)**      **As a result of the settlement ofthe former executive litigation on May 21, 2007, 3.6 million outstandingoptions shown above were forfeited in the second quarter of 2007 and anotherapproximately one million disputed options not shown above were also forfeited.*

 

 

Thefollowing table reflects information about stock options outstanding at December 31,2008:

 
| ** **            | ** ** | ** **      | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-----------------------|------------|-----------------|------------|-------------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **      | ** ** | **Weighted-**           | ** ** | **Weighted-**           | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **            | ** ** | ** **      | ** ** | **Average**             | ** ** | **Average**             | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of Exercise** | ** ** | ** **      | ** ** | **Contractual**         | ** ** | **Exercise**            | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Prices**            | ** ** | **Outstanding** | ** ** | **Life**                | ** ** | **Price**               | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
|                  |       |            |       |                    |       |                    |       |   |   |   |   |
| $14.95 - $21.00       |       | 510,000         |       | 1.6 years               |       | $                       | 20.98      |   | 510,000 |   | $ | 20.98 |   |
| $21.01 - $29.63       |       | 326,500         |       | 2.6 years               |       | $                       | 28.82      |   | 326,500 |   | $ | 28.82 |   |

 

Thefollowing table reflects information about stock option activity during theperiod:

 
| ** **                                                                   | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                       | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  grant date fair value of options granted during the period | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Intrinsic value  of options exercised during the period                      | ** ** | **$**                   | **1.0**    |   | $ | 2.3 |   | $ | 2.5 |   |
| Proceeds from  stock options exercised during the period                     | ** ** | **$**                   | **2.2**    |   | $ | 14.6 |   | $ | 7.8 |   |
| Excess tax benefit  from proceeds of stock options exercised                 | ** ** | **$**                   | **0.3**    |   | $ | 1.3 |   | $ | 1.9 |   |
| Fair value of  shares that vested during the period                          | ** ** | **$**                   | **—** |   | $ | — |   | $ | 1.3 |   |
| Unrecognized  compensation expense                                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | 0.1 |   |
| Weighted average  period to recognize compensation expense (in years)        | ** ** | **—**              |       | — |   | 1.0 |   |

 

No options weregranted during 2006, 2007 or 2008.

 

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**Restricted Stock Units (RSUs)**

 

RSUswere granted to certain key employees prior to 2001.  As a result of the settlement of the formerexecutive litigation, all disputed RSUs were forfeited by the three formerexecutives.  There were 10,120 RSUsoutstanding as of December 31, 2008, none of which has vested. Thenon-vested RSUs will be paid in cash upon vesting and will vest asfollows:  6,809 in 2009 and 3,311 in 2010.  Non-vested RSUs are valued quarterly at fairvalue using the Black-Scholes-Merton model to determine the amount ofcompensation expense to be recognized. Non-vested RSUs do not earn dividends.

 
| ** **                            | ** ** | ** **    | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|---------------|------------|-------------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **RSUs**      | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2008   |       | 22,976        |       | $                 | 0.5        |   |
| Granted in 2008                       |       | —        |       | $                 | —     |   |
| Vested in 2008                        |       | (11,253       | )          | $                 | (0.2       | ) |
| Forfeited in  2008                    |       | (1,603        | )          | $                 | —     |   |
| Non-vested at  December 31, 2008 |       | 10,120        |       | $                 | 0.3        |   |

 

Summarized RSU activity was as follows:

 
| ** **                        | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| RSUs:                             |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **22,976**              |       | 1,334,339 |   | 1,319,399 |   |
| Granted                           | ** ** | **—**              |       | — |   | — |   |
| Dividends                         | ** ** | **—**              |       | 11,656 |   | 46,434 |   |
| Exercised                         | ** ** | **(11,253**             | **)**      | (20,097 | ) | (22,516 | ) |
| Forfeited                         | ** ** | **(1,603**              | **)**      | (1,302,922 | ) | (8,978 | ) |
| Outstanding at  period end        | ** ** | **10,120**              |       | 22,976 |   | 1,334,339 |   |
| Exercisable at  period end        | ** ** | **—**              |       | — |   | — |   |

 

Compensationexpense is recognized each quarter based on the change in the market price of **DPL** common shares.

 

As ofDecember 31, 2008, 2007 and 2006, liabilities recorded for outstandingRSUs were $0.2 million, $0.6 million and $36.9 million, respectively, which areincluded in “Other deferred credits” on the consolidated balance sheets.  The decrease in the liability between 2006and 2007 is due to the executive litigation settlement and the forfeiture of1.3 million RSUs.  See Note 15 of Notesto Consolidated Financial Statements.

 

Thefollowing table shows the assumptions used in the Black-Scholes-Merton model tocalculate the fair value of the non-vested RSUs during the respective periods:

 
| ** **                            | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected  volatility                  | ** ** | **24.8% -  28.1%**      |       | 6.1% - 15.3% |   | 9.5% - 17.3% |   |
| Weighted-average  expected volatility | ** ** | **26.0%**               |       | 13.0% |   | 14.6% |   |
| Expected life  (years)                | ** ** | **1.0 -  2.0**          |       | 1.0 - 3.0 |   | 1.0 - 4.0 |   |
| Expected  dividends                   | ** ** | **4.5%**                |       | 3.8% |   | 3.7% |   |
| Weighted-average  expected dividends  | ** ** | **4.5%**                |       | 3.8% |   | 3.7% |   |
| Risk-free  interest rate              | ** ** | **0.2% -  0.4%**        |       | 3.0% - 3.3% |   | 4.7% - 4.9% |   |

 

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**Performance Shares**

 

Under the EPIP, the Board adopted a Long-TermIncentive Plan (LTIP) under which **DPL** will granta targeted number of performance shares of common stock to executives.  Grants under the LTIP will be awarded basedon a Total Shareholder Return Relative to Peers performance.  No performance shares will be earned in a performanceperiod if the three-year Total Shareholder Return Relative to Peers is belowthe threshold of the 40th percentile. Further, the LTIP awards will be capped at 200% of the target number ofperformance shares, if the Total Shareholder Return Relative to Peers is at orabove the threshold of the 90th percentile. The Total Shareholder Return Relative to Peers is considered a marketcondition under FAS 123R.  There is athree year requisite service period for each portion of the performance shares.

 

The schedule of non-vested performance shareactivity for the twelve months ended December 31, 2008 follows:

 
| ** **                            | ** ** | **Number of**   | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|-----------------|------------|-------------------|------------|
| ** **                            | ** ** | **Performance** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **Shares**      | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2008   |       | 104,682         |       | $                 | 3.1        |   |
| Granted in 2008                       |       | 93,298          |       | $                 | 2.2        |   |
| Vested in 2008                        |       | (36,445         | )          | $                 | (0.8       | ) |
| Forfeited in 2008                     |       | (41,680         | )          | $                 | (1.2       | ) |
| Non-vested at  December 31, 2008 |       | 119,855         |       | $                 | 3.3        |   |

 
| ** **                        | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Performance  shares:              |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **142,108**             |       | 154,768 |   | — |   |
| Granted                           | ** ** | **93,298**              |       | 78,559 |   | 244,423 |   |
| Exercised                         | ** ** | **—**              |       | (22,462 | ) | — |   |
| Expired                           | ** ** | **(37,426**             | **)**      | (21,583 | ) | — |   |
| Forfeited                         | ** ** | **(41,680**             | **)**      | (47,174 | ) | (89,655 | ) |
| Outstanding at  period end        | ** ** | **156,300**             |       | 142,108 |   | 154,768 |   |
| Exercisable at  period end        | ** ** | **36,445**              |       | 37,426 |   | 44,045 |   |

 

The following table reflects information aboutperformance share activity during the period:

 
| ** **                                                                              | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                              | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                  | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  grant date fair value of performance shares granted during the period | ** ** | **$**                   | **2.2**    |   | $ | 2.6 |   | $ | 6.3 |   |
| Intrinsic value  of performance shares exercised during the period                      | ** ** | **$**                   | **—** |   | $ | 0.6 |   | $ | — |   |
| Proceeds from  performance shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of performance shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  performance shares that vested during the period                         | ** ** | **$**                   | **0.8**    |   | $ | 0.8 |   | $ | 1.3 |   |
| Unrecognized  compensation expense                                                      | ** ** | **$**                   | **1.6**    |   | $ | 1.9 |   | $ | 1.5 |   |
| Weighted average  period to recognize compensation expense (in years)                   | ** ** | **1.6**                 |       | 1.7 |   | 1.6 |   |

 

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Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the performance shares granted during the period:

 
| ** **                            | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected  volatility                  | ** ** | **15.0% -  15.7%**      |       | 15.8% - 17.3% |   | 17.9% - 20.3% |   |
| Weighted-average  expected volatility | ** ** | **15.1%**               |       | 16.6% |   | 20.1% |   |
| Expected life  (years)                | ** ** | **3.0**                 |       | 3.0 |   | 3.0 |   |
| Expected  dividends                   | ** ** | **3.5% -  4.1%**        |       | 3.3% - 3.9% |   | 3.7% |   |
| Weighted-average  expected dividends  | ** ** | **4.1%**                |       | 3.4% |   | 3.7% |   |
| Risk-free  interest rate              | ** ** | **2.2% -  3.2%**        |       | 4.5% - 4.9% |   | 4.6% - 4.7% |   |

 

**Restricted Shares**

 

Under the EPIP, the Board granted shares of **DPL** Restricted Shares to various executives.  The Restricted Shares are registered in theexecutive’s name, carry full voting privileges, receive dividends as declaredand paid on all **DPL** common stock and vest after aspecified service period.

 

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 period fromJuly 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.

 
| ** **                            | ** ** | **Number of**  | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|----------------|------------|-------------------|------------|
| ** **                            | ** ** | **Restricted** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **Shares**     | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2008   |       | 42,200         |       | $                 | 1.2        |   |
| Granted in 2008                       |       | 39,347         |       | $                 | 1.1        |   |
| Vested in 2008                        |       | (1,000         | )          | $                 | —     |   |
| Forfeited in  2008                    |       | (11,400        | )          | $                 | (0.4       | ) |
| Non-vested at  December 31, 2008 |       | 69,147         |       | $                 | 1.9        |   |

 
| ** **                        | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Restricted  shares:               |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **42,200**              |       | 19,000 |   | — |   |
| Granted                           | ** ** | **39,347**              |       | 23,200 |   | 19,000 |   |
| Exercised                         | ** ** | **(1,000**              | **)**      | — |   | — |   |
| Forfeited                         | ** ** | **(11,400**             | **)**      | — |   | — |   |
| Outstanding at  period end        | ** ** | **69,147**              |       | 42,200 |   | 19,000 |   |
| Exercisable at  period end        | ** ** | **—**              |       | — |   | — |   |

 

The following table reflects information aboutrestricted share activity during the period:

 
| ** **                                                                             | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                             | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                 | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted-average  grant date fair value of restricted shares granted during the period |       | **$**                   | **1.1**    |   | $ | 0.7 |   | $ | 0.5 |   |
| Intrinsic value  of restricted shares exercised during the period                      | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Proceeds from  restricted shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of restricted shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  restricted shares that vested during the period                         | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Unrecognized  compensation expense                                                     | ** ** | **$**                   | **1.3**    |   | $ | 0.9 |   | $ | 0.5 |   |
| Weighted average  period to recognize compensation expense (in years)                  | ** ** | **2.7**                 |       | 2.8 |   | 4.1 |   |

 

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**Non-Employee Director Restricted Stock Units**

 

Under the EPIP, as part of their annualcompensation for service to **DPL** and **DP&L**, each non-employee Director receives a $54,000retainer in RSUs on the date of the annual meeting.  The RSUs will become non-forfeitable on April 15of the following year.  All of the RSUsbecome non-forfeitable in the event of death, disability, or change in controlbut if the Director resigns or retires prior to the April 15 vesting date,the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in theform of additional RSUs.  Upon vesting,the RSUs will become exercisable and will be distributed in **DPL** common shares, unless the Director chooses to deferreceipt of the shares until a later date. The RSUs are valued at the closing stock price on the day prior to thegrant and the compensation expense is recognized evenly over the vestingperiod.

 
| ** **                            | ** ** | **Number of** | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|---------------|------------|-------------------|------------|
| ** **                            | ** ** | **Director**  | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **RSUs**      | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2008*  |       | 13,573        |       | $                 | 0.4        |   |
| Granted in 2008                       |       | 17,022        |       | $                 | 0.5        |   |
| Dividends  accrued in 2008            |       | 931           |       | $                 | —     |   |
| Vested in 2008                        |       | (14,831       | )          | $                 | (0.5       | ) |
| Forfeited in  2008                    |       | (1,149        | )          | $                 | —     |   |
| Non-vested at  December 31, 2008 |       | 15,546        |       | $                 | 0.4        |   |

----

*                 2007 incorrectly stated vested shares as (10,238) whenit should have been (142).The non-vested at 1/1/2008 reflects this correction.

 
| ** **                        | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006*** | ** ** |
| Restricted stock  units:          |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **13,573**              |       | — |   | — |   |
| Granted                           | ** ** | **17,022**              |       | 14,920 |   | — |   |
| Dividends  accrued                | ** ** | **931**                 |       | 348 |   | — |   |
| Exercised and  issued             | ** ** | **(7,910**              | **)**      | (142 | ) | — |   |
| Exercised and  deferred           | ** ** | **(6,921**              | **)**      | — |   | — |   |
| Forfeited                         | ** ** | **(1,149**              | **)**      | (1,553 | ) | — |   |
| Outstanding at  period end        | ** ** | **15,546**              |       | 13,573 |   | — |   |
| Exercisable at  period end        | ** ** | **—**              |       | — |   | — |   |

----

****                **Director RSUs were not issued in2006.*

 

The following table reflects information aboutnon-employee director RSU activity during the period:

 
| ** **                                                                                      | ** ** | **Twelve Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                      | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                          | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006*** | ** ** |
| Weighted-average  grant date fair value of non-employee director RSUs granted during the period |       | **$**                   | **0.5**    |   | $ | 0.5 |   | $ | — |   |
| Intrinsic value  of non-employee director RSUs exercised during the period                      | ** ** | **$**                   | **0.4**    |   | $ | — |   | $ | — |   |
| Proceeds from  non-employee director RSUs exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of non-employee director RSUs exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  non-employee director RSUs that vested during the period                         | ** ** | **$**                   | **0.5**    |   | $ | 0.3 |   | $ | — |   |
| Unrecognized  compensation expense                                                              | ** ** | **$**                   | **0.1**    |   | $ | 0.1 |   | $ | — |   |
| Weighted average  period to recognize compensation expense (in years)                           | ** ** | **0.3**                 |       | 0.3 |   | — |   |

----

****                **Director RSUs were not issued in2006.*

 

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**Management Performance Shares**

 

On May 28,2008, the Board of Directors granted compensation awards for select managementemployees.  A total of 39,144 managementperformance shares were granted.  Thegrants have a three year requisite service period from January 1, 2008 to December 31,2010 and certain performance conditions during the performance period.  The management performance shares can only beawarded in **DPL**common shares.

 
| ** **                            | ** ** | **Number of**        | ** ** | **Weighted-Avg.** | ** ** |
|---------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                            | ** ** | **Mgt. Performance** | ** ** | **Grant Date**    | ** ** |
| **$ in millions**                | ** ** | **Shares**           | ** ** | **Fair Value**    | ** ** |
| Non-vested at  January 1, 2008   |       | —               |       | $                 | —     |   |
| Granted in 2008                       |       | 39,144               |       | $                 | 1.1        |   |
| Vested in 2008                        |       | —               |       | $                 | —     |   |
| Forfeited in  2008                    |       | —               |       | $                 | —     |   |
| Non-vested at  December 31, 2008 |       | 39,144               |       | $                 | 1.1        |   |

 
| ** **                        | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | **December 31,**   | ** ** |
| ** **                        | ** ** | **2008**                | ** ** | **2007*** | ** ** | **2006*** | ** ** |
| Management  Performance Shares:   |       |                    |       |   |   |   |   |
| Outstanding at  beginning of year | ** ** | **—**              |       | — |   | — |   |
| Granted                           | ** ** | **39,144**              |       | — |   | — |   |
| Exercised                         | ** ** | **—**              |       | — |   | — |   |
| Forfeited                         | ** ** | **—**              |       | — |   | — |   |
| Outstanding at  period end        | ** ** | **39,144**              |       | — |   | — |   |
| Exercisable at  period end        | ** ** | **—**              |       | — |   | — |   |

----

****                **Management performance shareswere not issued in 2007 or 2006.*

 

Thefollowing table shows the assumptions used in the Monte Carlo Simulation tocalculate the fair value of the management performance shares granted duringthe period:

 
| ** **                            | ** ** | **Twelve Months Ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **December 31,**   | ** ** |
| ** **                            | ** ** | **2008**                | ** ** | **2007*** | ** ** | **2006*** | ** ** |
| Expected  volatility                  | ** ** | **14.9%**               |       | 0.0% |   | 0.0% |   |
| Weighted-average  expected volatility | ** ** | **14.9%**               |       | 0.0% |   | 0.0% |   |
| Expected life  (years)                | ** ** | **3.0**                 |       | — |   | — |   |
| Expected  dividends                   | ** ** | **3.9%**                |       | 0.0% |   | 0.0% |   |
| Weighted-average  expected dividends  | ** ** | **3.9%**                |       | 0.0% |   | 0.0% |   |
| Risk-free  interest rate              | ** ** | **2.9%**                |       | 0.0% |   | 0.0% |   |

----

****                **Management performance shareswere not issued in 2007 or 2006.*

 

The following table reflects information aboutmanagement performance share activity during the period:

 
| ** **                                                                                         | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                         | ** ** | **December 31,**   | ** ** |
| **$ in millions**                                                                             | ** ** | **2008**                | ** ** | **2007*** | ** ** | **2006*** | ** ** |
| Weighted-average  grant date fair value of management perfomance shares granted during the  period |       | **$**                   | **1.1**    |   | $ | — |   | $ | — |   |
| Intrinsic value  of management performance shares exercised during the period                      | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Proceeds from  management performance shares exercised during the period                           | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Excess tax  benefit from proceeds of management performance shares exercised                       | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Fair value of  management performance shares that vested during the period                         | ** ** | **$**                   | **—** |   | $ | — |   | $ | — |   |
| Unrecognized  compensation expense                                                                 | ** ** | **$**                   | **0.8**    |   | $ | — |   | $ | — |   |
| Weighted average  period to recognize compensation expense (in years)                              | ** ** | **2.0**                 |       | — |   | — |   |

----

**      Management performance shares were notissued in 2007 or 2006.*

 

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Asa result of the May 21, 2007 settlement of the litigation with threeformer executives (see Note 15 of Notes to Consolidated Financial Statements),the three former executives relinquished all of their rights to certaindeferred compensation, RSUs, MVE incentives, stock options and reimbursement oflegal fees.  A portion of this settlementincluded the forfeitures and cancellations of Restricted Stock Units (RSUs) andstock options of 1.3 million and 3.6 million, respectively.

 

*12.  Preferred Stock*

 

**DP&L**:                         $25 par value, 4,000,000 shares authorized, no sharesoutstanding; and $100 par value, 4,000,000 shares authorized, 228,508 shareswithout mandatory redemption provisions outstanding.

 

| ** **              | ** ** | ** **    | ** ** | ** **     | ** ** | **Current Shares**    | ** ** | **Par Value at**         | ** ** | **Par Value at**         | ** ** |
|-------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **Preferred** | ** ** | **Current**    | ** ** | **Outstanding at**    | ** ** | **December 31,**    | ** ** | **December 31,**    | ** ** |
| ** **              | ** ** | **Stock**     | ** ** | **Redemption** | ** ** | **December 31,** | ** ** | **2008**                 | ** ** | **2007**                 | ** ** |
| ** **              | ** ** | **Rate**      | ** ** | **Price**      | ** ** | **2008**              | ** ** | **($ in millions)** | ** ** | **($ in millions)** | ** ** |
| DP&L Series A  |       | 3.75          | %          | $              | 102.50     |                  | 93,280     |                     | 9.3        |                     | 9.3        |   |
| DP&L  Series B |       | 3.75          | %          | $              | 103.00     |                  | 69,398     |                     | 7.0        |                     | 7.0        |   |
| DP&L  Series C |       | 3.90          | %          | $              | 101.00     |                  | 65,830     |                     | 6.6        |                     | 6.6        |   |
| Total                   |       |          |       |           |       | 228,508               |       | $                        | 22.9       |                     | $          | 22.9 |   |
|                         |            |               |            |                |            |                       |            |                          |            |                          |            |  |  |  |

 

The **DP&L**preferred stock may be redeemed at **DPL’s** option atthe per-share prices indicated, plus cumulative accrued dividends.

 

As long as any **DP&L** preferred stock is outstanding, **DP&L’s** Amended Articles of Incorporation containprovisions restricting the payment of cash dividends on any of its Common Stockif, after giving effect to such dividend, the aggregate of all such dividendsdistributed subsequent to December 31, 1946 exceeds the net income of **DP&L** available for dividends on its Common Stocksubsequent to December 31, 1946, plus $1.2 million.  As of year-end, all earnings reinvested inthe business of **DP&L** were available for CommonStock dividends.  **DPL**records dividends on preferred stock of **DP&L** aspart of interest expense.  We expect all2008 earnings reinvested in the business of **DP&L**to be available for **DP&L** commonstock dividends, payable to **DPL**.

 

*13.  Common Shareholders’ Equity*

 

**DPL** has 250,000,000 authorized commonshares, of which 115,961,880 are outstanding at December 31, 2008.  **DPL** had 902,490authorized but unissued shares reserved for its dividend reinvestment plan at December 31,2008.  The plan provides that eitheroriginal issue shares or shares purchased on the open market may be used tosatisfy plan requirements.

 

On July 27, 2005, **DPL’s** Board authorized the repurchase of up to $400.0million of common stock from time to time in the open market or through privatetransactions.  **DPL**completed this share repurchase program on August 21, 2006.  In total, 14.9 million shares wererepurchased at a cost of $400.0 million. These Board-authorized repurchase transactions resulted in an 11.7%reduction of the outstanding stock of December 31, 2005 at an averageprice of $26.91 per share.  These sharesare currently held as treasury shares. There were no other repurchases during 2008, 2007 and 2006.

 

In September 2001,**DPL**’s Board of Directors renewed itsShareholder Rights Plan, attaching one right to each common share outstandingat the close of business on December 13, 2001.  The rights separate from the common sharesand become exercisable at the exercise price of $130 per right in the event ofcertain attempted business combinations. The renewed plan expires on December 31, 2011.

 

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In February 2000,**DPL** entered into a series ofrecapitalization transactions including the issuance of $550 million of acombination of voting preferred and trust preferred securities and warrants toan affiliate of investment company Kohlberg Kravis Roberts & Co.(KKR).  As part of this recapitalizationtransaction, 31.6 million warrants were issued. These warrants were sold for an aggregate purchase price of $50 million.The warrants are exercisable, in whole or in part, for common shares at anytime during the twelve-year period commencing on March 13, 2000.  Each warrant is exercisable for one commonshare, subject to anti-dilution adjustments (i.e., stock split, stockdividend).  The exercise price of thewarrants is $21.00 per common share, subject to anti-dilution adjustments.

 

In addition, inthe event of a declaration, issuance or consummation of any dividend, spin-offor other distribution or similar transaction by **DPL**of the capital stock of any of its subsidiaries, additional warrants of suchsubsidiary will be issued to the warrant holder so that after the transaction,the warrant holder will have the same interest in the fully diluted number ofcommon shares of such subsidiary the warrant holder had in **DPL**immediately prior to such transaction.

 

Pursuant to thewarrant agreement, **DPL** hasreserved authorized common shares sufficient to provide for the exercise infull of all outstanding warrants.

 

On September 18,2008, Lehman Brothers, Inc. (Lehman) exercised 12.0 million warrants undera cashless exercise transaction resulting in the issuance by **DPL** of 2.3 million shares of common stock.  Such shares were issued from treasurystock.  Lehman no longer holds any **DPL** warrants.

 

During October 1992,our Board of Directors approved the formation of a Company-sponsored EmployeeStock Ownership Plan (ESOP) to fund matching contributions to **DP&L’s** 401(k) retirement savings plan and certainother payments to eligible full-time employees. This leveraged ESOP is funded by an exempt loan, which is secured by theESOP shares.  As debt service paymentsare made on the loan, shares are released on a pro rata basis.  ESOP shares used to fund matchingcontributions to **DP&L’s** 401(k) vest afterthree years of service; other compensation shares awarded vest immediately.

 

In general, participantsare eligible for lump sum payments upon termination of their employment and thesubmission and subsequent approval of an application for benefits.  Earlier distributions can occur for QualifiedDomestic Relations Order and for death. Otherwise, distribution must occur within 60 days after the plan year inwhich the later of one of the following events occur:  65th birthday, 10th anniversary of participation, or terminationof employment.  Participants are allowedto take distributions during employment if older than 591⁄2 and/or for a hardshipas defined in the Plan document. Distributions are made in cash unless the participant requests thedistribution be made in stock.  Arepurchase obligation exists for vested shares held by the ESOP if they cannotbe sold in the open market.  The fairvalue of shares subject to the repurchase obligation at December 31, 2008and 2007 was approximately $42.4 million and $52.5 million, respectively.

 

In 1992, the Plan enteredinto a $90 million loan agreement with **DPL** in order topurchase shares of **DPL** commonstock in the open market.  The term loanagreement provided for principal and interest on the loan to be paid prior to October 9,2007, with the right to extend the loan for an additional ten years.  In 2007, the maturity date was extended to October 7,2017.  The loan bears interest at a fixedrate of 7.625%, payable annually. Dividends received by the ESOP for unallocated shares are used to repaythe principal and interest on the ESOP loan to **DPL**.  Dividends on the allocated shares are chargedto retained earnings.

 

The ESOP used the fullamount of the loan to purchase 4.7 million shares of our common stock in theopen market.  As a result of the 1997stock split, the ESOP held 7.1 million shares of our common stock.  The cost of shares held by the ESOP and notyet released is reported as a reduction of shareholders’ equity.  At December 31, 2008, commonshareholders’ equity reflects the cost of 3.1 million unreleased sharesheld in suspense by the trust.  The fairvalue of the 3.1 million ESOP shares held in suspense at December 31, 2008was $70.2 million.  When shares arecommitted to be released from the ESOP, compensation expense is recorded basedon the fair value of the shares committed to be released, with a correspondingcredit to our equity.  Compensationexpense associated with the ESOP, which is based on the fair value of theshares committed to be released for allocation, amounted to $1.5 million in2008, $9.0 million in 2007 and $4.1 million in 2006.

 

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For purposes of earningsper share (EPS) computations and in accordance with SOP 93-6, we treat ESOPshares as outstanding if they have been allocated to participants, released orcommitted to be released.  As of December 31,2008, the ESOP has 3.9 million shares allocated to participants with anadditional 0.1 million shares which have been released but unallocated toparticipants.  ESOP cumulative sharesoutstanding for the calculation of earnings per share were 4.0 million in 2008,3.9 million in 2007 and 3.4 million in 2006.

 

In April 2006, **DPL’s** shareholders approved The DPL Inc. Equity andPerformance Incentive Plan (the EPIP) which became immediately effective andwill remain in effect for a term of ten years, unless sooner terminated inaccordance with its terms. The Compensation Committee of the Board of Directorswill designate the employees and directors eligible to participate in the EPIPand the times and types of awards to be granted. Under the EPIP, theCompensation Committee may grant equity-based compensation in theform of stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares and units, and other stock-basedawards. Awards may be subject to the achievement of certain managementobjectives. In addition, the EPIP provides, upon recommendation of the ChiefExecutive Officer and Chairman of the Board, for a grant of a special equityaward to recognize outstanding performance. A total of 4,500,000 shares of theCompany’s common stock were reserved for issuance under the EPIP.

 

*14.  Earnings per Share*

 

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

 

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

 

| **In millions**           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| Common  equivalent shares | ** ** | **0.3**  |       | 0.1      |       | 0.4      |       |

 

The following illustratesthe reconciliation of the numerators and denominators of the basic and dilutedEPS computations for income after discontinued operations and cumulative effectof accounting change:

 

$ and shares in millionsexcept per share amounts

 
| ** **                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**       | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                        | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **(a)  Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** | **(a)  Income** | ** ** | **Shares** | ** ** | **Per  Share** | ** ** |
| **Basic  EPS**                                    | ** ** | **$**      | **244.5**  | ** ** | **110.2**  | ** **     | **$**      | **2.22** |   | $ | 221.8 |   | 107.9 |   | $ | 2.06 |   | $ | 139.6 |   | 112.3 |   | $ | 1.24 |   |
|                                              |       |       |       |       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities:**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock Incentive  Units                            | ** ** | ** ** |       | **—** |       |           |       |   |   | 0.5 |   |   |   |   |   | 1.3 |   |   |   |
| Warrants (b)                                      | ** ** | ** ** |       | **5.0**    |       |           |       |   |   | 8.6 |   |   |   |   |   | 7.1 |   |   |   |
| Stock options,  performance and restricted shares | ** ** | ** ** |       | **0.2**    |       |           |       |   |   | 0.8 |   |   |   |   |   | 1.2 |   |   |   |
|                                              |       |       |       |       |       |           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                                  | ** ** | **$**      | **244.5**  | ** ** | **115.4**  | ** **     | **$**      | **2.12** |   | $ | 221.8 |   | 117.8 |   | $ | 1.88 |   | $ | 139.6 |   | 121.9 |   | $ | 1.15 |   |

 

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*(a)  Income after discontinued operations.*

*(b)  On September 18, 2008, Lehman Brothers Inc.exercised 12 million warrants under a cashless exercise**transactionresulting in the issuance by **DPL**of 2.3 million shares of common stock. See Note 13 of Notes to Consolidated Financial Statements.*

 

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*15.  Executive Litigation*

 

On May 21, 2007, wesettled the litigation with three former executives.  As part of thissettlement, the three former executives relinquished and dismissed all theirclaims including those related to certain deferred compensation, RSUs, MVEincentives, stock options and legal fees. The RSUs and stock optionsrelinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, we had accruedobligations of $64.2 million.  Included in these amounts was $3.1 millionassociated with the forfeiture of stock options.  In exchange for our payment of $25 millionand the relinquishment by the former executives of certain contestedcompensation discussed above, all of these claims by all parties were settledand released.

 

**DPL**

 

As a result of thissettlement, during 2007, **DPL**realizeda net pre-tax gain in continuing and discontinued operations of approximately$31.0 million and $8.2 million, respectively.  The net gain is comprisedof the reversal of the $64.2 million of accrued obligations less the $25million settlement.  The obligations related to the discontinuedoperations were associated with the management of **DPL’s**financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005with the sale of the financial asset portfolio. The $25 million settlement expense was allocated between continuing anddiscontinued operations based on the proportionate share of continuing anddiscontinued obligations.

 

**DP&L**

 

As a result of thissettlement during 2007, **DP&L**realizeda net pre-tax gain in continuing operations of $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.

 

The $25 millionsettlement was funded from the sale of financial assets held in **DP&L’s** Master Trust Plan for deferred compensation.  As part of this transaction, during thesecond quarter ended June 30, 2007, **DPL** and **DP&L** recorded a $3.2 million realized gain which wasreflected in investment income**.**

 

*16.  Insurance Recovery*

 

On April 30, 2007, **DP&L**executed a settlement agreement for $14.5 million with one of our insurers,Associated Electric & Gas Insurance Services (AEGIS), under afiduciary liability policy to recoup a portion of legal fees associated withour litigation against three former executives. This was recorded as a reduction to operation and maintenance expenseduring 2007.

 

On May 16, 2007, **DPL** filed an insurance claim with Energy Insurance Mutual(EIM) to recoup legal expenses associated with our litigation against three ofour former executives.  The litigationagainst the former executives was settled on May 21, 2007.  Mediation with EIM on this claim occurred on May 29,2008, at which time the parties did not reach agreement.  **DPL** and EIM arecurrently engaged in an arbitration process regarding this insurance claim.

 

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*17.  Contractual Obligations, CommercialCommitments and Contingencies*

 

**DPL Inc. - Guarantees**

 

In the normal course ofbusiness, **DPL**enters into various agreements with itswholly-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.”

 

At December 31,2008, **DPL** had $35.3 million ofguarantees to third parties for future financial or performance assurance undersuch agreements, on behalf of DPLE.  Theguarantee arrangements entered into by**DPL** with thesethird parties cover all present and future obligations of DPLE to suchbeneficiaries and are terminable at any time by **DPL**upon written notice to the beneficiaries. The carrying amount of obligationsfor commercial transactions covered by these guarantees and recorded in ourconsolidated balance sheets was $1.6 million at December 31, 2008.

 

In twoseparate transactions in November and December 2006, **DPL** also agreed to be a guarantor of the obligations of DPLEregarding the sale, in April 2007, of the Darby Electric Peaking Stationto American Electric Power and the sale of the Greenville Electric PeakingStation to Buckeye Electric Power, Inc. In both cases, **DPL** agreed toguarantee the obligations of DPLE over a multiple year period as follows:

 

| **$ in millions** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Darby                  |       | $        | 23.0       |     | $          | 15.3     |       | $ | 7.7 |   |
|                   |       |     |       |     |       |     |       |
| Greenville             |       | $        | 11.1       |     | $          | 7.4      |       | $ | 3.7 |   |

 

In 2008, neither **DPL** nor **DP&L**incurred any losses related to the guarantees of DPLE’s obligations and  we believe it is unlikely that either **DPL** or **DP&L**would be required to perform or incur any losses in the future associated withany of the above guarantees of DPLE’s obligations.

 

**DP&L - Equity Ownership Interest**

 

**DP&L** owns a 4.9% equity ownership interest in an electricgeneration company.  As of December 31,2008, **DP&L** could beresponsible for the repayment of 4.9%, or $51.2 million, of a $1,045 milliondebt obligation that matures in 2026. This would only happen if this electricgeneration company defaulted on its debt payments. 

 

Other than the guaranteesdiscussed above, **DPL** and **DP&L**do not have any other off-balance sheet arrangements that have or arereasonably likely to have a current or future material effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

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**Contractual Obligations andCommercial Commitments**

 

We enter into various contractualobligations and other commercial commitments that may affect the liquidity ofour operations.  At December 31,2008, these include:

 

| ** **                           | ** ** | ** ** | ** ** | **Payment Year** | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|
| **$ in millions**               | ** ** | **Total**  | ** ** | **2009**         | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **Thereafter** | ** ** |
| **DPL**                              | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 1,551.8    |             | $          | 175.0 |   | $ | 297.4 |   | $ | 470.0 |   | $ | 609.4 |   |
| Interest  payments                   |       | 937.1      |       | 79.7             |       | 145.7 |   | 105.6 |   | 606.1 |   |
| Pension and  postretirement payments |       | 244.9      |       | 22.8             |       | 46.7 |   | 48.6 |   | 126.8 |   |
| Capital leases                       |       | 1.3        |       | 0.7              |       | 0.6 |   | — |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                  |       | 1,675.1    |       | 514.2            |       | 539.8 |   | 168.4 |   | 452.7 |   |
| Limestone  contracts                 |       | 52.2       |       | 4.7              |       | 10.8 |   | 11.5 |   | 25.2 |   |
| Reserve for  uncertain tax positions |       | 1.9        |       | —           |       | 1.9 |   | — |   | — |   |
| Other  contractual obligations       |       | 97.3       |       | 40.5             |       | 46.9 |   | 8.5 |   | 1.4 |   |
| Total  contractual obligations       |       | $          | 4,562.4    |             | $          | 838.0 |   | $ | 1,090.1 |   | $ | 812.7 |   | $ | 1,821.6 |   |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| **DP&L**                         | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |       |       |             |       |   |   |   |   |   |   |
| Long-term debt                       |       | $          | 884.4      |             | $          | — |   | $ | — |   | $ | 470.0 |   | $ | 414.4 |   |
| Interest  payments                   |       | 519.9      |       | 40.0             |       | 79.9 |   | 73.9 |   | 326.1 |   |
| Pension and  postretirement payments |       | 244.9      |       | 22.8             |       | 46.7 |   | 48.6 |   | 126.8 |   |
| Capital leases                       |       | 1.3        |       | 0.7              |       | 0.6 |   | — |   | — |   |
| Operating leases                     |       | 0.8        |       | 0.4              |       | 0.3 |   | 0.1 |   | — |   |
| Coal contracts  (a)                  |       | 1,675.1    |       | 514.2            |       | 539.8 |   | 168.4 |   | 452.7 |   |
| Limestone  contracts                 |       | 52.2       |       | 4.7              |       | 10.8 |   | 11.5 |   | 25.2 |   |
| Reserve for  uncertain tax positions |       | 1.9        |       | —           |       | 1.9 |   | — |   | — |   |
| Other  contractual obligations       |       | 99.5       |       | 41.6             |       | 48.0 |   | 8.5 |   | 1.4 |   |
| Total  contractual obligations       |       | $          | 3,480.0    |             | $          | 624.4 |   | $ | 728.0 |   | $ | 781.0 |   | $ | 1,346.6 |   |

 

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(a) Total at **DP&L**-operated units

 

Long-term debt:

**DPL’s** long-term debt as of December 31,2008, consists of **DP&L’s** firstmortgage bonds, tax-exempt pollution control bonds and **DPL** unsecured senior notes.  These long-term debt figures include currentmaturities and unamortized debt discounts.  During 2008, the OAQDA issued $100 million of tax-exempt pollutioncontrol bonds which mature in 2040.  Inturn, **DP&L** borrowed the proceeds of thebonds and issued $100 million of its First Mortgage Bonds to secure its paymentobligations.

 

**DP&L’s** long-term debt as of December 31,2008, consists of first mortgage bonds and tax-exempt pollution controlbonds.  These long-term debt figuresinclude current maturities and unamortized debt discounts.  During 2008, the OAQDA issued $100 million oftax-exempt pollution control bonds which mature in 2040.  In turn, **DP&L**borrowed the proceeds of the bonds and issued $100 million of its FirstMortgage Bonds to secure its payment obligations.

 

See Note 7 of Notes toConsolidated Financial Statements.

 

Interest payments:

Interest paymentsassociated with the long-term debt described above.

 

Pension andpostretirement payments:

As of December 31,2008, **DP&L** had estimatedfuture benefit payments as outlined in Note 9 of Notes to ConsolidatedFinancial Statements.  These estimatedfuture benefit payments are projected through 2018.

 

Capital leases:

As of December 31,2008, **DP&L** had one capitallease that expires in September 2010.

 

Operating leases:

As of December 31,2008, **DPL** and **DP&L** had several operating leases withvarious terms and expiration dates.

 

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Coal contracts:

**DP&L** has entered into various long-term coalcontracts to supply the coal requirements for the generating plants itoperates.  Contract prices are subject toperiodic adjustment and have features that limit price escalation in any givenyear.

 

Limestonecontracts:

**DP&L** has entered into various limestonecontracts to supply limestone for its generating facilities.

 

Reserve foruncertain tax positions:

On January 1, 2007,we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (FIN 48).  As of December 31,2008, our total reserve for uncertain tax positions is $1.9 million.  See Note 1 of Notes to Consolidated FinancialStatements.

 

Other contractualobligations:

As of December 31,2008, **DPL** and **DP&L** had various other contractualobligations including non-cancelable contracts to purchase goods and serviceswith various terms and expiration dates.

 

At December 31,2008, the commercial commitments that may affect the liquidity of ouroperations include:

 

Credit facilities:

In November 2006, **DP&L** replaced its previous $100 millionrevolving credit agreement with a $220 million five year facility that expireson November 21, 2011.  At December 31,2008, there were no borrowings outstanding under this credit agreement.  **DP&L** hasthe ability to increase the size of the facility by an additional $50 millionat any time.

 

**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 ourconsolidated financial statements, as prescribed by GAAP, are adequate in lightof the probable and estimable contingencies. See Note 1 of Notes to Consolidated Financial Statements.  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, and tocomply with applicable laws and regulations, will not exceed the amountsreflected in our consolidated financial statements.  As such, costs, if any, that may be incurredin excess of those amounts provided as of December 31, 2008, cannot bereasonably determined.

 

**EnvironmentalMatters**

 

**DPL**,**DP&L** and our subsidiaries’ facilities and operations are subjectto a wide range of environmental regulations and law.  In the normalcourse of business, we have investigatory and remedial activities underway atthese facilities to comply, or to determine compliance, with suchregulations.  We have been identified, either by a government agency or bya private party seeking contribution to site clean-up costs, as a potentiallyresponsible party (PRP) at two sites pursuant to state and federal laws. We record liabilities for probable estimated loss in accordance with Statementof Financial Accounting Standards No. 5 (SFAS 5), “Accounting forContingencies” as discussed in Note 1 of Notes to Consolidated FinancialStatements.  We evaluate the potential liability related to probablelosses quarterly and may revise our estimates.  Such revisions in theestimates of the potential liabilities could have a material effect on ourresults of operations and financial position.

 

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*18.  Legal Matters*

 

**StateIncome Tax Audit**

 

On February 13,2006, we received correspondence from the Ohio Department of Taxation (ODT)notifying us that ODT has completed their examination and review of our OhioCorporation Franchise Tax Returns for tax years 2002 through 2004 and that thefinal proposed audit adjustments result in a balance due of $90.8 millionbefore interest and penalties.  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 through2006.  The $42.0 million payment was madeto the ODT in July 2008.

 

We are alsounder audit review by various state agencies for tax years 2002 through2006.   Depending upon the outcome of these audits and the appeal, wemay be required to increase our tax provision if actual amounts ultimatelydetermined exceed recorded reserves.  We believe we have adequate reservesin each tax jurisdiction but cannot predict the outcome of these audits.

 

**SierraClub**

 

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, the co-owners of the Stuart generating station agreed to: (i) certainemission targets related to nitrogen oxides (NOx), sulfur dioxide (SO2) andparticulate matter; (ii) make energy efficiency and renewable energycommitments that are conditioned on receiving Public Utilities Commission ofOhio approval for the recovery of costs; (iii) forfeit 5,500 sulfurdioxide allowances; and (iv) provide funding to a third party non-profit organizationto establish a solar water heater rebate program.  **DP&L**andthe other owners of the station also entered into an attorney fee agreement topay a portion of the Sierra Club’s attorney and expert witness fees.  On October 23, 2008, the United StatesDistrict Court approved the consent decree with funding for the third partynon-profit organization set at $300,000. We have accrued for our share of the $300,000 at December 31,2008.  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.

 

**Governmental and Regulatory Inquiries**

 

On March 10, 2004, **DPL’s** and **DP&L’s**Corporate Controller sent a memorandum (the Memorandum) to the Chairman of theAudit Committee of our Board of Directors. The Memorandum expressed the Corporate Controller’s “concerns,perspectives and viewpoints” regarding financial reporting and governanceissues within **DPL** and **DP&L**.  In response, the Board initiated an internalinvestigation whose findings and recommendations led to corrective action takenregarding internal controls, process issues and the tone at the top.

 

On May 28, 2004, theU.S. Attorney’s Office for the Southern District of Ohio, assisted by theFederal Bureau of Investigation, notified **DPL**and **DP&L** that it had initiatedan inquiry involving matters connected to our internal investigation.  This inquiry remains pending.

 

On or about June 24,2004, the SEC commenced a formal investigation into the issues raised by theMemorandum.  This investigation remainspending.

 

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**Report ofIndependent Registered Public Accounting Firm**

** **

The Board of Directors and Shareholders ofDPL Inc.:

 

We have audited theaccompanying consolidated**balance sheetsof DPL Inc. and subsidiaries (the Company) as of December 31, 2008 and2007, and the related consolidatedstatements of results of operations, consolidatedstatements of shareholders’ equity and consolidated statements of cash flows for each of the years inthe three-year period ended December 31, 2008. In connection with ouraudits of the consolidated financial statements, we have audited theconsolidated financial statement schedule, “Schedule II — Valuation andQualifying Accounts.”  We also haveaudited the Company’s internal control over financial reporting as of December 31,2008, based on criteria established in*Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s management is responsible for these consolidated financial statements,for maintaining effective internal control over financial reporting, and forits assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal ControlOver Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements andan opinion on the Company’s internal control over financial reporting based onour audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of theconsolidated financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. Our audit ofinternal control over financial reporting included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

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In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2008 and 2007, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2008, inconformity with accounting principles generally accepted in the United Statesof America. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2008, based on criteria established in*Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) and the related financial statement schedule when considered inrelation to the basic consolidated financial statements taken as a whole,present fairly in all material respects, the information set forth therein.

 

**/s/ KPMG LLP**

** **

**KPMG LLP**

Philadelphia, PennsylvaniaFebruary 26, 2009

 

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**Report ofIndependent Registered Public Accounting Firm**

** **

The Board of Directors and Shareholder ofThe Dayton Power and Light Company:

 

We have audited theaccompanying consolidated**balance sheetsof The Dayton Power and Light Company (**DP&L**) as ofDecember 31, 2008 and 2007, and the related consolidated statements of results of operations, consolidated statements of shareholder’sequity and consolidated statements of cashflows for each of the years in the three-year period ended December 31,2008. In connection with our audits of the consolidated financial statements,we have audited the consolidated financial statement schedule, “Schedule II —Valuation and Qualifying Accounts.”  Wealso have audited **DP&L’s**internal control over financial reporting as of December 31, 2008, basedon criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). **DP&L’s** management isresponsible for these consolidatedfinancial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Report onInternal Control Over Financial Reporting. Our responsibility is to express anopinion on these consolidatedfinancial statements and an opinion on **DP&L’s**internal control over financial reporting based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and whether effective internal control overfinancial reporting was maintained in all material respects. Our audits of theconsolidated financial statements included examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. Our audit ofinternal control over financial reporting included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinions.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

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In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of **DP&L** as of December 31,2008 and 2007, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2008, inconformity with accounting principles generally accepted in the United Statesof America. Also in our opinion, **DP&L**maintained, in all material respects, effective internal control over financialreporting as of December 31, 2008, based on criteria established in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and the relatedfinancial statement schedule when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly in allmaterial respects, the information set forth therein.

 
| /s/ KPMG LLP                |   |
|-----------------------------|--------|
|                        |   |
| KPMG LLP                    |   |
| Philadelphia,  Pennsylvania |   |
| February 26, 2009      |   |

 

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**DPL Inc. - Selected Quarterly Information (Unaudited)**

 
| ** **                                           | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **March 31,**             | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**                               | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                             |       | **$**                          | **416.1**  | ** ** | $ | 379.7 |   | **$** | **378.8** | ** ** | $ | 343.1 |   | **$** | **414.5** | ** ** | $ | 422.0 |   | **$** | **392.2** |   | $ | 370.9 |   |
| Operating Income                                     | ** ** | **142.7**                      |       | 103.5 | ** ** | **85.8** |   | 69.4 | ** ** | **96.2** |   | 110.8 | ** ** | **110.8** |   | 86.4 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings from  continuing operations                 | ** ** | **77.3**                       |       | 51.2 | ** ** | **47.6** |   | 53.6 | ** ** | **48.0** |   | 60.7 | ** ** | **71.6** |   | 46.3 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings from  discontinued operations, net of taxes | ** ** | **—**                     |       | 4.9 | ** ** | **—** |   | 5.1 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
| Net Income                                           | ** ** | **$**                          | **77.3**   |   | $ | 56.1 | ** ** | **$** | **47.6** |   | $ | 58.7 | ** ** | **$** | **48.0** |   | $ | 60.7 | ** ** | **$** | **71.6** |   | $ | 46.3 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings  per share of common stock:           |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                               | ** ** | **$**                          | **0.71**   |   | $ | 0.48 | ** ** | **$** | **0.43** |   | $ | 0.50 | ** ** | **$** | **0.44** |   | $ | 0.56 | ** ** | **$** | **0.64** |   | $ | 0.43 |   |
| Discontinued  operations                             | ** ** | **—**                     |       | 0.04 | ** ** | **—** |   | 0.04 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
| Total basic  earnings per common share               | ** ** | **$**                          | **0.71**   |   | $ | 0.52 | ** ** | **$** | **0.43** |   | $ | 0.54 | ** ** | **$** | **0.44** |   | $ | 0.56 | ** ** | **$** | **0.64** |   | $ | 0.43 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share of common stock:         |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                               | ** ** | **$**                          | **0.66**   |   | $ | 0.43 | ** ** | **$** | **0.41** |   | $ | 0.45 | ** ** | **$** | **0.42** |   | $ | 0.53 | ** ** | **$** | **0.63** |   | $ | 0.40 |   |
| Discontinued  operations                             | ** ** | **—**                     |       | 0.04 | ** ** | **—** |   | 0.04 | ** ** | **—** |   | — | ** ** | **—** |   | — |   |
| Total diluted  earnings per common share             | ** ** | **$**                          | **0.66**   |   | $ | 0.47 | ** ** | **$** | **0.41** |   | $ | 0.49 | ** ** | **$** | **0.42** |   | $ | 0.53 | ** ** | **$** | **0.63** |   | $ | 0.40 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends paid  per share                            | ** ** | **$**                          | **0.275**  |   | $ | 0.260 | ** ** | **$** | **0.275** |   | $ | 0.260 | ** ** | **$** | **0.275** |   | $ | 0.260 | ** ** | **$** | **0.275** |   | $ | 0.260 |   |
|                                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common stock  market price                           | - High     | ** **                     | **$**      | **30.18** |   | $ | 31.44 | ** ** | **$** | **28.70** |   | $ | 31.91 | ** ** | **$** | **26.76** |   | $ | 29.36 | ** ** | **$** | **24.59** |   | $ | 30.83 |   |
|                                                 | - Low      | ** **                     | **$**      | **24.58** |   | $ | 27.56 | ** ** | **$** | **26.10** |   | $ | 28.08 | ** ** | **$** | **23.00** |   | $ | 26.04 | ** ** | **$** | **19.16** |   | $ | 26.05 |   |

 

**DP&L - Selected Quarterly Information (Unaudited)**

** **
| ** **                  | ** ** | **For the three months ended** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **March 31,**             | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **$ in millions**      | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                    | ** ** | **$**                          | **413.9**  |   | $ | 377.5 | ** ** | **$** | **376.4** |   | $ | 342.1 | ** ** | **$** | **401.5** |   | $ | 419.6 | ** ** | **$** | **381.1** |   | $ | 368.2 |   |
| Operating Income            | ** ** | **146.4**                      |       | 114.7 | ** ** | **90.5** |   | 59.7 | ** ** | **93.5** |   | 113.2 | ** ** | **106.2** |   | 87.5 |   |
| Income before  income taxes | ** ** | **140.6**                      |       | 111.6 | ** ** | **83.6** |   | 94.7 | ** ** | **84.8** |   | 112.7 | ** ** | **97.0** |   | 95.7 |   |
| Net Income                  | ** ** | **89.0**                       |       | 69.8 | ** ** | **63.3** |   | 59.1 | ** ** | **54.8** |   | 70.6 | ** ** | **78.7** |   | 72.1 |   |
| Earnings on  common stock   | ** ** | **88.8**                       |       | 69.6 | ** ** | **63.1** |   | 58.9 | ** ** | **54.6** |   | 70.4 | ** ** | **78.4** |   | 71.8 |   |
| Cash dividends  paid        | ** ** | **$**                          | **80.0**   |   | $ | 125.0 | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **—** |   | $ | — | ** ** | **$** | **75.0** |   | $ | — |   |

 

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**Item 9 - Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

** **

None.

 

 

**Item 9A - Controls and Procedures**

 

**Disclosure Controls and Procedures**

Our Chief ExecutiveOfficer (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 arecommunicated 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 no change inour internal control over financial reporting during the most recentlycompleted fiscal period that has materially affected, or is reasonably likelyto materially affect, internal control over reporting.

 

The following report isour report on internal control over financial reporting as of December 31,2008.

 

**Management’sReport on Internal Control over Financial Reporting**

We are responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with theparticipation of management, including the CEO and CFO, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *InternalControl - Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on an evaluation under the framework in *Internal Control - Integrated Framework,*we concluded thatour internal control over financial reporting was effective as of December 31,2008.

 

Ourinternal control over financial reporting as of December 31, 2008, hasbeen audited by KPMG LLP, the independent registered public accounting firmthat audited the financial statements contained herein, as stated in theirreport which is included herein.

 

 

**Item 9B - Other Information**

 

None.

 

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** **

**PART III**

 

**Item 10 - Directors and ExecutiveOfficers of DPL Inc.**

 

The information requiredto be furnished pursuant to this item with respect to Directors of **DPL Inc.** will be set forth under captioned “Election ofDirectors” in **DPL****Inc.’s**proxy statement (the Proxy Statement) to be furnished to shareholders inconnection with the solicitation of proxies by our Board of Directors for useat the 2009 Annual Meeting of Shareholders to be held on April 29, 2009and is incorporated herein by reference.

 

The information requiredto be furnished pursuant to this item for **DPL****Inc.** with respect to the identification of the AuditCommittee, the Audit Committee financial expert and the registrant’s code ofethics will be set forth under the caption “Corporate Governance” in the ProxyStatement and is incorporated herein by reference.

 

 

**Item 11 -****ExecutiveCompensation**

 

The information requiredto be furnished pursuant to this item for **DPL Inc.** willbe set forth under the caption “Executive Compensation” in the Proxy Statementand is incorporated herein by reference.

 

 

**Item 12 -****Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters**

 

The information requiredto be furnished pursuant to this item for **DPL Inc.** willbe set forth under the captions “Security Ownership of Certain BeneficialOwners,” “Security Ownership of Management” and “Equity Compensation PlanInformation” in the Proxy Statement and is incorporated herein by reference.

 

 

**Item 13 - Certain Relationships andRelated Transactions**

 

The information requiredto be furnished pursuant to this item for **DPL Inc.** willbe set forth under the caption “Certain Relationships and Related Transactions”in the Proxy Statement and is incorporated herein by reference.

 

 

**Item 14 - Principal Accountant Feesand Services**

 

The information requiredto be furnished pursuant to this item for **DPL Inc.** willbe set forth under the caption “Audit and Non-Audit Fees” in the ProxyStatement and is incorporated herein by reference.

 

**DP&L Accountant Fees and Services**

 

The following table presents the aggregate fees billedfor professional services rendered to us by KPMG LLP for 2008 and 2007.  Other than as set forth below, noprofessional services were rendered or fees billed by KPMG LLP during 2008 and2007.

 
| **KPMG LLP**            | ** ** | **Fees Invoiced 2008** | ** ** | **Fees Invoiced 2007 (3)** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------------|------------|
| Audit Fees (1)          |       | $                      | 1,409,800  |                       | $          | 1,502,087 |   |
| Audit-Related  Fees (2) |       | 84,800                 |       | 147,679                    |       |
| Tax Fees                |       | —                 |       | —                     |       |
| All Other Fees          |       | —                 |       | —                     |       |
| Total                   |       | $                      | 1,494,600  |                       | $          | 1,649,766 |   |

----

(1)                      Audit feesrelate to professional services rendered for the audit of our annual financialstatements and the reviews of our quarterly financial statements.

(2)                      Audit-relatedfees relate to services rendered to us for assurance and related services.

(3)                      Includes$341,390 of audit and related fees invoiced by, and paid to KPMG LLP in 2008for services rendered in connection with the audit of our 2007 financialstatements.

 

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**PART IV**

** **

**Item 15 — Exhibits and FinancialStatement Schedules**

 
| ** **                                                                                                                                  | ** ** | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| (a)**          **The  following documents are filed as part of this report:               |       |              |
|                                                                                                                                        |       |              |
| 1.**            ****Financial Statements**                                      | ** ** | ** **        |
|                                                                                                                                        |       |              |
| **DPL Inc. -  Consolidated Statements of Results of Operations for each of the three years in  the period ended December 31, 2008**    |       | 60                |
| ** **                                                                                                                                  |       |              |
| **DPL Inc. -  Consolidated Statements of Cash Flows for each of the three years in the  period ended December 31, 2008**               |       | 61                |
| ** **                                                                                                                                  |       |              |
| **DPL Inc. -  Consolidated Balance Sheets at December 31, 2008 and 2007**                                                              |       | 62                |
| ** **                                                                                                                                  |       |              |
| **DPL Inc. -  Consolidated Statement of Shareholders’ Equity for each of the three years in  the period ended December 31, 2008** |       | 64                |
| ** **                                                                                                                                  |       |              |
| **DP&L -  Consolidated Statements of Results of Operations for each of the three years  in the period ended December 31, 2008**    |       | 65                |
| ** **                                                                                                                                  |       |              |
| **DP&L - Consolidated Statements of Cash Flows for each  of the three years in the period ended December 31, 2008**                |       | 66                |
| ** **                                                                                                                                  |       |              |
| **DP&L - Consolidated Balance Sheets at  December 31, 2008 and 2007**                                                              |       | 67                |
| ** **                                                                                                                                  |       |              |
| **DP&L -  Consolidated Statement of Shareholder’s Equity for each of the three years in  the period ended December 31, 2008** |       | 69                |
|                                                                                                                                        |       |              |
| Notes to Consolidated Financial Statements                                                                                                  |       | 70                |
| ** **                                                                                                                                  |       |              |
| **DPL Inc. - Report of  Independent Registered Public Accounting Firm**                                                                     |       | 114               |
| ** **                                                                                                                                  |       |              |
| **DP&L - Report of  Independent Registered Public Accounting Firm**                                                                     |       | 116               |
|                                                                                                                                        |       |              |
| 2.**            ****Financial Statement Schedule**                              | ** ** | ** **        |
|                                                                                                                                        |       |              |
| For each of the three  years in the period ended December 31, 2008:                                                                    |       |              |
|                                                                                                                                        |       |              |
| Schedule II -  Valuation and Qualifying Accounts                                                                                            |       | 134               |

 

Theinformation required to be submitted in Schedules I, III, IV and V isomitted as not applicable or not required under rules of Regulation S-X.

 

 

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3.               **Exhibits**

 

 

 
| DPL and DP&L exhibits are incorporated by  reference as described unless otherwise filed as                   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| set forth herein.                                                                                                 |   |   |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |   |   |   |   |
| The exhibits filed as part of DPL’s and DP&L’s  Annual Report on Form 10-K, respectively, are: |   |
|                                                                                                                   |        |  |  |  |  |  |  |  |  |

 
| **DPL** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                              | ** ** | **Location(1)**                                                                                                        |
|---------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|
| X       |       | X            |       | 2(a)                |       | Asset Purchase Agreement, dated December 14,  1999, between The Dayton Power and Light Company, Indiana Energy, Inc., and  Number-3CHK, Inc.                                                   |       | Exhibit 2 to Report on Form 10-Q for the  quarter ended September 30, 2000 (File No. 1-9052)       |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
| X       |       |         |       | 3(a)                |       | Amended Articles of Incorporation of DPL Inc., as of  September 25, 2001                                                                                                                            |       | Exhibit 3 to Report on Form 10-K/A for the  year ended December 31, 2001 (File No. 1-9052)         |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
| X       |       |         |       | 3(b)                |       | Amended Regulations of DPL Inc., as of  April 27, 2007                                                                                                                                              |       | Exhibit 3(b) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052)   |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
|    |       | X            |       | 3(c)                |       | Amended Articles of Incorporation of The Dayton  Power and Light Company, as of January 4, 1991                                                                                                     |       | Exhibit 3(b) to Report on Form 10-K/A  for the year ended December 31, 1991 (File No. 1-2385) |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
|    |       | X            |       | 3(d)                |       | Regulations of The Dayton Power and Light Company,  as of April 9, 1981                                                                                                                             |       | Exhibit 3(a) to Report on Form 8-K  filed on May 3, 2004 (File No. 1-2385)                    |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
| X       |       | X            |       | 4(a)                |       | Composite Indenture dated as of October 1,  1935, between The Dayton Power and Light Company and Irving Trust Company, Trustee  with all amendments through the Twenty-Ninth Supplemental Indenture |       | Exhibit 4(a) to Report on Form 10-K  for the year ended December 31, 1985 (File No. 1-2385)   |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
| X       |       | X            |       | 4(b)                |       | Forty-First Supplemental Indenture dated as of  February 1, 1999, between The Dayton Power and Light Company and The  Bank of New York, Trustee                                                     |       | Exhibit 4(m) to Report on Form 10-K  for the year ended December 31, 1998 (File No. 1-2385)   |
|    |       |         |       |                |       |                                                                                                                                                                                                     |       |                                                                                                                   |
| X       |       | X            |       | 4(c)                |       | Forty-Second Supplemental Indenture dated as of  September 1, 2003, between The Dayton Power and Light Company and The  Bank of New York, Trustee                                                   |       | Exhibit 4(r) to Report on Form 10-K  for the year ended December 31, 2003 (File No. 1-9052)   |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                  | ** ** | **Location(1)**                                                                                                      |
|---------------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|
| X             |       | X            |       | 4(d)                |       | Forty-Third Supplemental Indenture dated as of  August 1, 2005, between The Dayton Power and Light Company and The Bank  of New York, Trustee                                           |       | Exhibit 4.4 to Report on Form 8-K filed  August 24, 2005 (File No. 1-2385)                       |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       | X            |       | 4(e)                |       | Rights Agreement dated September 25, 2001 between  DPL Inc. and Equiserve Trust Company, N.A.                                                                                                |       | Exhibit 4 to Report on Form 8-K filed  September 28, 2001 (File No. 1-9052)                      |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(f)                |       | Securities Purchase Agreement dated as of  February 1, 2000 by and among DPL Inc., and DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc. and certain exhibits thereto |       | Exhibit 99(b) to Schedule TO-I filed  February 4, 2000 (File No. 1-9052)                         |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(g)                |       | Amendment to Securities Purchase Agreement dated as  of February 24, 2000 among DPL Inc., DPL Capital Trust I, Dayton  Ventures LLC and Dayton Ventures, Inc.                      |       | Exhibit 4(g) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(h)                |       | Form of Warrant to Purchase Common Shares of DPL  Inc.                                                                                                                                       |       | Exhibit 4(h) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(i)                |       | Securityholders and Registration Rights Agreement  dated as of March 13, 2000 among DPL Inc., DPL Capital Trust I, Dayton Ventures  LLC and Dayton Ventures, Inc.                  |       | Exhibit 4(i) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(j)                |       | Amendment to Securityholders and Registration Rights  Agreement, dated August 24, 2001 among DPL Inc., DPL Capital Trust I,  Dayton Ventures LLC and Dayton Ventures, Inc.         |       | Exhibit 4(j) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(k)                |       | Amendment to Securityholders and Registration Rights  Agreement, dated December 6, 2004 among DPL Inc., DPL Capital Trust I,  Dayton Ventures LLC and Dayton Ventures, Inc.        |       | Exhibit 4(k) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                         |       |                                                                                                                 |
| X             |       |         |       | 4(l)                |       | Amendment to Securityholders and Registration Rights  Agreement, dated as of January 12, 2005 among DPL Inc., DPL Capital  Trust I, Dayton Ventures LLC and Dayton Ventures, Inc        |       | Exhibit 4(j) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                      | ** ** | **Location(1)**                                                                         |
|---------------|------------|--------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| X             |       |         |       | 4(m)                |       | Officer’s Certificate of DPL Inc. establishing $175  million Senior Note due 2009, dated March 25, 2004                                                                                                                                |       | Exhibit 4.1 to Form 8-K, filed on  March 30, 2004 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(n)                |       | Exchange and Registration Rights Agreement dated as  of March 25, 2004 between DPL Inc. and certain purchasers                                                                                                                              |       | Exhibit 4.2 to Form 8-K, filed on  March 30, 2004 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(o)                |       | Indenture dated as of March 1, 2000 between DPL  Inc. and Bank One Trust Company, National Association                                                                                                                                      |       | Exhibit 4(b) to Registration Statement  No. 333-37972                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(p)                |       | Officer’s Certificate of DPL Inc. establishing  exchange notes, dated March 1, 2000                                                                                                                                                    |       | Exhibit 4(c) to Registration Statement  No. 333-37972                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(q)                |       | Exchange and Registration Rights Agreement dated as  of August 24, 2001 between DPL Inc., Morgan Stanley & Co.  Incorporated, Bank One Capital Markets, Inc., Fleet  Securities, Inc. and NatCity Investments, Inc. |       | Exhibit 4(a) to Registration Statement  No. 333-74568                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(r)                |       | Officer’s Certificate of DPL Inc. establishing  exchange notes, dated August 31, 2001                                                                                                                                                  |       | Exhibit 4(c) to Registration Statement  No. 333-74568                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(s)                |       | Indenture dated as of August 31, 2001 between DPL  Inc. and The Bank of New York, Trustee                                                                                                                                                   |       | Exhibit 4(a) to Registration Statement  No. 333-74630                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(t)                |       | First Supplemental Indenture dated as of  August 31, 2001 between DPL Inc. and The Bank of New York, as Trustee                                                                                                                             |       | Exhibit 4(b) to Registration Statement  No. 333-74630                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                             |       |                                                                                    |
| X             |       |         |       | 4(u)                |       | Amended and Restated Trust Agreement dated as of  August 31, 2001 among DPL Inc., The Bank of New York, The Bank of New  York (Delaware), the administrative trustees named therein, and several  Holders as defined therein                |       | Exhibit 4(c) to Registration Statement  No. 333-74630                    |

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                            | ** ** | **Location(1)**                                                                                                       |
|---------------|------------|--------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|          |       | X            |       | 4(v)                |       | Forty-Fourth Supplemental Indenture dated as of  September 1, 2006 between the Bank of New York, Trustee and The Dayton  Power and Light Company                  |       | Exhibit 4.2 to Form 8-K filed on  September 19, 2006 (File No. 1-2385)                            |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       |         |       | 4(w)                |       | Exchange and Registration Rights Agreement dated as  of August 24, 2001 among DPL Inc., DPL Capital Trust II and Morgan  Stanley & Co. Incorporated |       | Exhibit 4(d) to Registration Statement  No. 333-74630                                                  |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 4(x)                |       | Forty-Sixth Supplemental Indenture dated as of  December 1, 2008 between The Bank of New York Mellon, Trustee and The Dayton  Power and Light Company                  |       | Filed herewith as Exhibit 4(x)                                                                                        |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 10(a)*              |       | The Dayton Power and Light Company Directors’  Deferred Stock Compensation Plan, as amended through December 31, 2000                                        |       | Exhibit 10(a) to Report on Form 10-K  for the year ended December 31, 2000 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 10(b)*              |       | The Dayton Power and Light Company 1991 Amended  Directors’ Deferred Compensation Plan, as amended and restated through  December 31, 2007                   |       | Exhibit 10(b) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 10(c)*              |       | The Dayton Power and Light Company Management Stock  Incentive Plan as amended and restated through December 31, 2007                                             |       | Exhibit 10(c) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 10(d)*              |       | The Dayton Power and Light Company Key Employees  Deferred Compensation Plan, as amended through December 31, 2000                                                |       | Exhibit 10(d) to Report on Form 10-K  for the year ended December 31, 2000 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                   |       |                                                                                                                  |
| X             |       | X            |       | 10(e)*              |       | Amendment No. 1 to The Dayton Power and Light  Company Key Employees Deferred Compensation Plan, as amended through December  31, 2000, dated as of December 7, 2004   |       | Exhibit 10(g) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                         | ** ** | **Location(1)**                                                                                                       |
|---------------|------------|--------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| X             |       | X            |       | 10(f)*              |       | The Dayton Power and Light Company Supplemental  Executive Retirement Plan, as amended February 1, 2000                                                                        |       | Exhibit 10(e) to Report on Form 10-K  for the year ended December 31, 2003 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       | X            |       | 10(g)*              |       | Amendment No. 1 to The Dayton Power and Light  Company Supplemental Executive Retirement Plan, as amended through February 1,  2000 and dated as of December 7, 2004 |       | Exhibit 10(i) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(h)*              |       | DPL Inc. Stock Option Plan                                                                                                                                                          |       | Exhibit 10(f) to Report on Form 10-K  for the year ended December 31, 2000 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(i)*              |       | 2003 Long-Term Incentive Plan of DPL Inc.                                                                                                                                           |       | Exhibit 10(aa) to Report on Form 10-K for  the year ended December 31, 2003 (File No. 1-9052)     |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       | X            |       | 10(j)*              |       | Summary of Executive Medical Insurance Plan                                                                                                                                         |       | Exhibit 10(m) to Report on Form 10-K  for the year ended December 31, 2005 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(k)*              |       | DPL Inc. Executive Incentive Compensation Plan, as  amended and restated through December 31, 2007                                                                             |       | Exhibit 10(l) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(l)*              |       | DPL Inc. 2006 Equity and Performance Incentive Plan  as amended and restated through December 31, 2007                                                                         |       | Exhibit 10(m) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(m)*              |       | Form of DPL Inc. Amended and Restated Long-Term  Incentive Plan - Performance Shares Agreement                                                                                      |       | Exhibit 10(n) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                |       |                                                                                                                  |
| X             |       |         |       | 10(n)*              |       | DPL Inc. Severance Pay and Change of Control Plan,  as amended and restated through December 31, 2007                                                                          |       | Exhibit 10(o) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                      | ** ** | **Location(1)**                                                                                                       |
|---------------|------------|--------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| X             |       |         |       | 10(o)*              |       | DPL Inc. Supplemental Executive Defined Contribution  Retirement Plan, as amended and restated through December 31, 2007                    |       | Exhibit 10(p) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       |         |       | 10(p)*              |       | DPL Inc. 2006 Deferred Compensation Plan For  Executives, as amended and restated through December 31, 2007                                 |       | Exhibit 10(q) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       |         |       | 10(q)*              |       | DPL Inc. Pension Restoration Plan, as amended and  restated through December 31, 2007                                                       |       | Exhibit 10(r) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10(r)*              |       | Participation Agreement dated August 2, 2007  among DPL Inc., The Dayton Power and Light Company and Teresa F.  Marrinan               |       | Exhibit 10(s) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10 (s)*             |       | Participation Agreement dated March 27, 2007 among  DPL Inc., The Dayton Power and Light Company and Scott J. Kelly                    |       | Exhibit 10(t) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10(t)*              |       | Participation Agreement and Waiver dated  February 27, 2006 among DPL Inc., The Dayton Power and Light Company  and Gary G. Stephenson |       | Exhibit 10(u) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10(u)*              |       | Participation Agreement and Waiver dated  February 23, 2006 among DPL Inc., The Dayton Power and Light  Company and Miggie E. Cramblit |       | Exhibit 10(v) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10(v)*              |       | Participation Agreement and Waiver dated  February 24, 2006 among DPL Inc., The Dayton Power and Light  Company and Joseph R. Boni III |       | Exhibit 10(w) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       | X            |       | 10 (w)*             |       | Participation Agreement dated January 13, 2007 among  DPL Inc., The Dayton Power and Light Company and Daniel J. McCabe                     |       | Exhibit 10(x) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                             |       |                                                                                                                  |
| X             |       |         |       | 10(x)*              |       | Management Stock Option Agreement dated as of  December 29, 2004 between DPL Inc. and John J. Gillen                                        |       | Exhibit 10(u) to Report on Form 10-K  for the year ended December 31, 2007 (File No. 1-9052) |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                             | ** ** | **Location(1)**                                                                                                       |
|---------------|------------|--------------|------------|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| X             |       | X            |       | 10(y)*              |       | Participation Agreement and Waiver dated June 29,  2006 among DPL Inc., The Dayton Power and Light Company and John J. Gillen                                                                                                                      |       | Exhibit 10.2 to Form 8-K filed on  July 3, 2006 (File No. 1-9052)                                 |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(z)*              |       | Participation Agreement and Waiver dated February  24, 2006 among DPL Inc., The Dayton Power and Light Company and W. Steven  Wolff                                                                                                                     |       | Exhibit 10.7 to Form 8-K filed March 2,  2006 (File No. 1-9052)                                   |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(aa)*             |       | Change of Control Agreement dated as of July 1,  2004 between DPL Inc., The Dayton Power and Light Company and Patricia K.  Swanke and Management Stock Option Agreement dated as of January 1, 2001  between DPL Inc. and Patricia K. Swanke |       | Exhibit 10(s) to Report on Form 10-K  for the year ended December 31, 2004 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(bb)*             |       | Participation Agreement and Waiver dated  February 28, 2006 among DPL Inc., The Dayton Power and Light Company and  Patricia K. Swanke                                                                                                             |       | Exhibit 10.6 to Form 8-K filed on  March 2, 2006 (File No. 1-9052)                                |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       |         |       | 10(cc)*             |       | Management Stock Option Agreement dated as of  January 1, 2001 between DPL Inc. and Arthur G. Meyer                                                                                                                                                |       | Exhibit 10(cc) to Report on Form 10-K for  the year ended December 31, 2005 (File No. 1-9052)     |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(dd)*             |       | Participation Agreement and Waiver dated  March 6, 2006 among DPL Inc., The Dayton Power and Light Company and  Arthur G. Meyer, dated March 6, 2006                                                                                          |       | Exhibit 10.2 to Form 8-K filed  March 10, 2006 (File No. 1-9052)                                  |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(ee)*             |       | Participation Agreement dated September 8, 2006  among DPL Inc., The Dayton Power and Light Company and Paul M. Barbas                                                                                                                             |       | Exhibit 10.2 to Form 8-K filed September 8,  2006 (File No. 1-9052)                               |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       | X            |       | 10(ff)*             |       | Participation Agreement dated June 30, 2006 among  DPL Inc., The Dayton Power and Light Company and Frederick J. Boyle                                                                                                                             |       | Exhibit 10.1 to Form 8-K filed July 3,  2006 (File No. 1-9052)                                    |
|          |       |         |       |                |       |                                                                                                                                                                                                                                                    |       |                                                                                                                  |
| X             |       |         |       | 10(gg)*             |       | Letter Agreement between DPL Inc. and Glenn E.  Harder, dated June 20, 2006                                                                                                                                                                        |       | Exhibit 10.1 to Form 8-K filed June 21,  2006 (File No. 1-9052)                                   |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                    | ** ** | **Location(1)**                                                                                                    |
|---------------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| X             |       |         |       | 10(hh)              |       | Purchase and Sale Agreement dated as of February 13,  2005 between MVE, Inc., and Miami Valley Insurance Company and  AlpInvest/Lexington 2005, LLC  |       | Exhibit 10.1 to Form 8-K filed February 18,  2005 (File No. 1-9052)                            |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       |         |       | 10(ii)              |       | Asset Purchase Agreement dated December 21,  2006 between DPL Energy, LLC and Buckeye Power, Inc.                                                    |       | Exhibit 10(w w) to Report on Form 10-K for  the year ended December 31, 2006 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       |         |       | 10(jj)              |       | Asset Purchase Agreement dated November 28,  2006 between DPL Energy, LLC and Columbus Southern Power Company                                             |       | Exhibit 10(xx) to Report on Form 10-K for  the year ended December 31, 2006 (File No. 1-9052)  |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       | X            |       | 10(kk)              |       | Credit Agreement, dated as of November 21, 2006  among The Dayton Power and Light Company, KeyBank National Association and  certain lending institutions |       | Exhibit 10.1 to Form 8-K filed November 28,  2006 (File No. 1-2385)                            |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       |         |       | 10(ll)*             |       | Form of DPL Inc. Amended and Restated  Non-Employee Director Restricted Stock Units Agreement                                                             |       | Exhibit 10(uu) to Report on Form 10-K for  the year ended December 31, 2007 (File No. 1-9052)  |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       |         |       | 10(mm)*             |       | DPL Inc. 2006 Deferred Compensation Plan for  Non-Employee Directors, as amended and restated through December 31,  2007                                  |       | Exhibit 10(v v) to Report on Form 10-K for  the year ended December 31, 2007 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       | X            |       | 10(nn)*             |       | Participation Agreement dated January 3, 2008 among  DPL Inc., The Dayton Power and Light Company and Douglas C. Taylor                                   |       | Exhibit 10(a) to Form 10-Q for the quarter  ended March 31, 2008 (File No. 1-9052)                  |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       |         |       | 10(oo)*             |       | Restricted Stock Agreement dated May 6, 2008 by  and between DPL Inc. and Paul M. Barbas                                                                  |       | Exhibit 99.1 to Form 8-K filed May 8,  2008 (File No. 1-9052)                                  |
|          |       |         |       |                |       |                                                                                                                                                           |       |                                                                                                               |
| X             |       | X            |       | 10(pp)*             |       | Separation Agreement dated as of November 30,  2008 between DPL Inc. and The Dayton Power and Light Company and John J.  Gillen                           |       | Filed herewith as Exhibit 10(qq)                                                                              |

 

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                              | ** ** | **Location(1)**                      |
|---------------|------------|--------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------|
| X             |       | X            |       | 21                  |       | List of Subsidiaries of DPL Inc. and The Dayton  Power and Light Company                                 |       | Filed herewith as Exhibit 21    |
|          |       |         |       |                |       |                                                                                                     |       |                                 |
| X             |       |         |       | 23(a)               |       | Consent of KPMG LLP                                                                                      |       | Filed herewith as Exhibit 23(a) |
|          |       |         |       |                |       |                                                                                                     |       |                                 |
| 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) |

----

* Management contract orcompensatory plan

(1) Exhibits referencing File No. 1-9052have been filed by DPL Inc. and those referencing File No. 1-2385 havebeen filed by The Dayton Power and Light Company

 

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| **DPL  Inc.** | ** ** | **DP&L** | ** ** | **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                    | ** ** | **Location(1)**                                                                                                       |
|---------------|------------|--------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| X             |       | X            |       | 99(b)               |       | Supplement to the April 26, 2004 Report of  Taft, Stettinius & Hollister LLP, dated May 15, 2004                                                                                                                            |       | Exhibit 99(b) to Report on Form 10-K  for the year ended December 31, 2003 (File No. 1-9052) |
|          |       |         |       |                |       |                                                                                                                                                                                                                                           |       |                                                                                                                  |
| X             |       | X            |       | 99(c)               |       | Complaint filed in Montgomery County Court of  Common Pleas, Montgomery County, Ohio — DPL  Inc., The Dayton Power and Light Company and MVE, Inc. v. Peter H.  Forster, Caroline E. Muhlenkamp and Stephen F. Koziar, Jr. |       | Exhibit 99(d) to Report on Form 10-K  for the year ended December 31, 2003 (File No. 1-9052) |

----

* Management contract orcompensatory plan

(1) Exhibits referencing File No. 1-9052have been filed by DPL Inc. and those referencing File No. 1-2385 havebeen filed by The Dayton Power and Light Company

 

 

Pursuant to paragraph (b) (4) (iii) (A) ofItem 601 of Regulation S-K, we have not filed as an exhibit to this Form 10-Kcertain instruments with respect to long-term debt if the total amount ofsecurities authorized thereunder does not exceed 10% of the total assets of usand our subsidiaries on a consolidated basis, but we hereby agree to furnish tothe SEC on request any such instruments.

 

 

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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 dulycaused this report to be signed on their behalf by the undersigned, thereuntoduly authorized.

 
| ** **             | ** ** | **DPL Inc.**                                                                         |
|------------------------|------------|--------------------------------------------------------------------------------------|
|                   |       |                                                                                 |
| February 26, 2009 | By:        |                                                                                 |
|                   |       | /s/ Paul M. Barbas                                                                   |
|                   |       | Paul M. Barbas  President and Chief Executive Officer  (principal executive officer) |
|                   |       |                                                                                 |
| ** **             | ** ** | **The Dayton Power and Light  Company**                                              |
| ** **             | ** ** | ** **                                                                           |
| February 26, 2009 | By:        | ** **                                                                           |
|                   |       | /s/ Paul M. Barbas                                                                   |
|                   |       | Paul M. Barbas  President and Chief Executive Officer  (principal executive officer) |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of **DPL Inc.** and**The Dayton Power andLight Company** and in the capacities and on the dates indicated.

 
| /s/ P.M.  Barbas |   | Director, President and  Chief                                                                             |   | February 25, 2009 |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------|--------|------------------------|
| (P.M. Barbas)         |   | Executive Officer  (principal executive officer)                                                           |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ R. D. Biggs       |   | Director                                                                                                   |   | February 25, 2009 |
| (R. D. Biggs)         |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ P. R. Bishop      |   | Director and  Vice-Chairman                                                                                |   | February 25, 2009 |
| (P. R. Bishop)        |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ F.F.  Gallaher    |   | Director                                                                                                   |   | February 25, 2009 |
| (F.F. Gallaher)       |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ B. S. Graham      |   | Director                                                                                                   |   | February 25, 2009 |
| (B. S. Graham)        |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ G.E. Harder       |   | Director and Chairman                                                                                      |   | February 25, 2009 |
| (G.E. Harder)         |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ L.L. Lyles        |   | Director                                                                                                   |   | February 25, 2009 |
| (L.L. Lyles)          |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ P.B. Morris       |   | Director                                                                                                   |   | February 25, 2009 |
| (P.B. Morris)         |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ N.J.  Sifferlen   |   | Director                                                                                                   |   | February 25, 2009 |
| (N.J. Sifferlen)      |   |                                                                                                       |   |                   |
|                  |   |                                                                                                       |   |                   |
| /s/ F.J. Boyle        |   | Senior Vice President,                                                                                     |   | February 25, 2009 |
| (F.J. Boyle)          |   | Chief Financial Officer  (principal financial and principal accounting officer), Treasurer and  Controller |   |                   |

 

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 **Schedule II**

 

DPL Inc.

VALUATION AND QUALIFYINGACCOUNTS

 

For the years ended December 31,2006 - 2008

 
| **$ in thousands**                   | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                    | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|---------------|------------|---------------------|------------|-------------------------------|------------|
| **Description**                           | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions** | ** ** | **Deductions  (1)** | ** ** | **Balance at  End of Period** | ** ** |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2008:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,518      |          | $          | 4,277               |       | $                             | 4,711      |   | $ | 1,084 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | 12,429     |          | $          | 1,482               |       | $                             | 3,226      |   | $ | 10,685 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2007:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,430      |          | $          | 5,678               |       | $                             | 5,590      |   | $ | 1,518 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | 10,132     |          | $          | 2,676               |       | $                             | 379        |   | $ | 12,429 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2006:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,044      |          | $          | 4,835               |       | $                             | 4,449      |   | $ | 1,430 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | 6,776      |          | $          | 3,356               |       | $                             | —     |   | $ | 10,132 |   |

 

----

*(1) Amountswritten off, net of recoveries of accounts previously written off.*

 

The Dayton Power andLight Company

VALUATION AND QUALIFYINGACCOUNTS

 

For the years ended December 31,2006 - 2008

 
| **$ in thousands**                   | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **          | ** ** | ** **                    | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|---------------|------------|---------------------|------------|-------------------------------|------------|
| **Description**                           | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions** | ** ** | **Deductions  (1)** | ** ** | **Balance at  End of Period** | ** ** |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2008:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,518      |          | $          | 4,277               |       | $                             | 4,711      |   | $ | 1,084 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | 348        |          | $          | —              |       | $                             | 348        |   | $ | — |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2007:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,430      |          | $          | 5,678               |       | $                             | 5,590      |   | $ | 1,518 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | 277        |          | $          | 71                  |       | $                             | —     |   | $ | 348 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| 2006:                                     |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  accounts receivable — |       |                                 |       |          |       |                |       |                          |       |
| Provision for  uncollectible accounts     |       | $                                    | 1,044      |          | $          | 4,835               |       | $                             | 4,449      |   | $ | 1,430 |   |
|                                      |       |                                 |       |          |       |                |       |                          |       |
| Deducted from  deferred tax assets — |       |                                 |       |          |       |                |       |                          |       |
| Allowance for  deferred tax assets        |       | $                                    | —     |          | $          | 277                 |       | $                             | —     |   | $ | 277 |   |

 

----

*(1) Amountswritten off, net of recoveries of accounts previously written off.*

 

134

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