This report includes the combined filing of DPL Inc. (DPL)and The Dayton Power and Light Company (DP&L). DP&L is the principal subsidiary of DPL providing approximately 98% of DPL's total consolidated revenue and approximately 93% of DPL's total consolidated asset base. Throughout this report 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 that apply only to DPL or DP&Lwill clearly be noted in the section.

Certain statements contained in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management's expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are based on management's beliefs, assumptions and expectations of future economic performance, taking into account the information currently available to management. These statements are not statements of historical 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 subject to risks and uncertainties, and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond our control, including but not limited to: abnormal or severe weather and catastrophic weather-related damage; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, natural gas and other commodity prices; volatility and changes in markets for electricity and other energy-related commodities; performance of our suppliers; increased competition and deregulation in the electric utility industry; increased competition in the retail generation market; changes in interest rates; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, emission levels, rate structures or tax laws; changes in federal and/or state environmental laws and regulations to which DPL and its subsidiaries are subject; the development and operation of Regional Transmission 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 supplier performance and availability; significant delays associated with large construction projects; growth in our service territory and changes in demand and demographic patterns; changes in accounting rules and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; financial market conditions; the outcomes of litigation and regulatory investigations, proceedings or inquiries; general economic conditions; and the risks and other factors discussed in this report and other DPLand DP&L filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement 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 discussion should be read in conjunction with the accompanying financials and related footnotes included in Item 8 - Financial Statements and Supplementary Data.

DPL is a regional electric energy and utility company and through its principal subsidiary, DP&L, is primarily engaged in the generation, transmission and distribution of electricity in West Central Ohio. DPL and DP&Lstrive to achieve disciplined growth in energy margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth through efficient operations and strong customer and regulatory relations. More specifically, DPL and DP&L's strategy is to match energy supply with load or customer demand, maximizing profits while effectively managing exposure to movements in energy and fuel prices and utilizing the transmission and distribution assets that transfer electricity at the most efficient cost while maintaining the highest level of customer service and reliability.

We operate and manage generation assets and are exposed to a number of risks. These risks include but are not limited to electricity wholesale price risk, fuel supply and price risk and power plant performance. We attempt to manage these risks through various means. For instance, we operate a portfolio of wholly-owned and jointly-owned generation assets that is diversified as to coal source, cost structure and operating characteristics. We are focused on the operating efficiency of these power plants and maintaining their availability.

We operate and manage transmission and distribution assets in a rate-regulated environment. Accordingly, this subjects us to regulatory risk in terms of the costs that we may recover and the investment returns that we may collect in customer rates. We are focused on delivering electricity and maintaining high standards of customer service and reliability in a cost-effective manner.

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

CREDIT MARKETS

The current global credit crisis may adversely affect our business and financial results. Since mid-2007, and particularly during the second half of 2008, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. Liquidity and credit concerns 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 was negatively impacted. Disruptions in the credit markets make it harder and more expensive to obtain funding for our business. We issue debt to cover the costs of certain of our operations and expenditures and the inability to issue such debt on reasonable terms, or at all, could negatively affect our business and financial results. If our available funding 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 increase our cost of funding, both of which could reduce our profitability.

REGULATORY ENVIRONMENT

† 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 issued a decision that vacated the United States Environmental Protection Agency's (USEPA) CAIR and its associated Federal Implementation Plan. This decision remanded these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in 2010. The court's decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program, and created uncertainty regarding future NOx and SO2 emission reduction requirements and their timing. On December 23, 2008, the court reversed part of its decision that vacated CAIR. Thus, CAIR currently remains in effect, but the USEPA remains subject to the court's order to revise the program.

In the fourth quarter of 2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&Lrecognized gains from the sale of excess emission allowances to third parties. The court's CAIR decision has affected the trading market for excess allowances and impacted DP&L's program for selling additional excess allowances. The overall impact of the court's decision, and of the actions the USEPA or others will take in response to this decision, on DPL and DP&L is not fully known at this time and could have an adverse effect on us. 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 the Governor 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 management plan; and 3) an alternative energy plan. The standard offer plan stated that DP&Lintends to maintain its current rate plan through December 31, 2010, and addressed compliance issues related to the PUCO rules. On February 24, 2009, DP&L filed a Stipulation and Recommendation (the Stipulation) 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 under Ohio Retail Rates in Item 1 - COMPETITION AND REGULATION. A final decision from the PUCO regarding the Stipulation is expected by the end of the second quarter of 2009.

† Greenhouse Gases

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

In addition to the requirements related to emissions of SO2, NOX and mercury noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases, including most significantly, carbon dioxide (CO2). This concern has led to increased interest in legislation at the federal level and actions at the state level as well as litigation 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 Clean Air Act (CAA). Increased pressure for carbon dioxide emissions reduction is also coming from investor organizations and the international community. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of CO2 and other greenhouse gases on generation facilities, the cost to DPL and DP&L of such reductions could be material.

† Storm Costs

On September 14, 2008, the Midwest region was severely affected by hurricane-force winds which resulted in significant property damage and disruptions to the supply of electric energy to retail customers. Through December 31, 2008, we deferred approximately $13 million of incremental operation and maintenance costs associated with storm restoration efforts related to this storm and other major storms in 2008. On December 31, 2008, DP&L filed a request for an accounting order with the PUCO 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 PJM Interconnection, L.L.C. (PJM), DP&L is subject to charges associated with PJM operations as approved by the Federal Energy Regulatory Commission (FERC). On November 7, 2008, DP&L filed a request at the PUCO for authority to defer costs associated with transmission, capacity, ancillary service and other PJM related charges incurred as a member of PJM. DP&L sought deferral until such time as it files to seek recovery of these costs from retail ratepayers. On February 19, 2009, the PUCO approved DP&L'srequest to defer these costs. DP&L anticipates filing a request with the PUCO before the end of April 2009 seeking to recover these costs.

FUEL AND RELATED COSTS

† Fuel and Commodity Prices

Recently, the coal market has experienced significant price volatility. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Coal exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. Our approach is to hedge the fuel costs for our anticipated electric sales. For the years ending December 31, 2009 and 2010, we have hedged our coal requirements with coal mine operators and financial institutions to meet our committed sales. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent our suppliers do not meet their contractual commitments or we are not hedged against price volatility, our results of operations, financial position or cash flows could be materially affected. As part of its electric security plan filing, DP&Lrequested regulatory authority to defer fuel and fuel related costs that exceed the amount that is in current rates. On February 24, 2009, DP&L filed a Stipulation and Recommendation (the Stipulation) signed by the Staff of the PUCO, the Office of the Ohio Consumers' Counsel and various intervening parties. The Stipulation is further discussed under Ohio Retail Rates in Item 1 - COMPETITION AND REGULATION. The Stipulation includes the implementation of a fuel and purchased power recovery mechanism beginning January 1, 2010 which will track and adjust fuel costs on a quarterly basis. The PUCO has the authority to approve, modify or reject the Stipulation. A final decision from the PUCO regarding the Stipulation is expected by the end of the second quarter of 2009.

† Sales of Coal and Excess Emission Allowances

During 2008, DP&L sold coal and excess emission allowances to various counterparties realizing total net gains of $83.4 million and $34.8 million, respectively. These gains are recorded as a component of DP&L's fuel costs and reflected in operating income. Coal sales are impacted by a range of factors but can be largely attributed to the following: variation in power demand, the market price of power compared to the cost to produce power; as well as optimization opportunities in the coal market. Sales of excess emission allowances are impacted, among other factors, by: general economic conditions; fluctuations in market demand and pricing; availability of excess inventory available for sale; and changes to the regulatory environment in which we operate. The combined impact of these factors on our ability to sell coal and emission allowances in 2009 and beyond is not fully known at this time and could materially impact the amount of gains that will be recognized in the future.

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

† For the year ended December 31, 2008, DPL's basic and diluted earnings per share (EPS) of $2.22 and $2.12, respectively, increased over the basic and dilutive EPS for the same period in 2007 by $0.16 and $0.24, respectively.

† Revenues for DPL and DP&Lincreased by 6% and 4%, respectively, over 2007 primarily due to increased RTO capacity and other RTO revenues, and increased retail prices, partially offset by decreased retail and wholesale sales volume.

† Fuel costs 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 gains from the sale of coal (see below).

† During the year ended December 31, 2008, DP&L sold excess emission allowances to various counterparties realizing total net gains of $34.8 million compared to net gains of $1.2 million realized in 2007.

† During 2008, DP&L also realized total net gains of $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 similar sales amounted to $0.6 million.

Net gains realized from both emission allowance and coal sales are recorded as a component of fuel costs and reflected in operating income.

† Purchased power costs for DPL and DP&L increased by 31% and 27%, respectively, over 2007 mainly due to increased RTO capacity and 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.

† On June 27, 2008, DPL entered into a $42.0 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and appeals, including uncertain tax positions for tax years 1998 through 2006. The $42.0 million payment was made to the ODT in July 2008. Due to this settlement agreement, the balance of the unrecognized state tax liabilities recorded at March 31, 2008, in the amount of $56.3 million, was reversed, resulting in a recorded income tax benefit in 2008 of $8.5 million, net of federal tax impact.

† On September 18, 2008, Lehman Brothers Inc. exercised 12 million DPL warrants under a cashless exercise transaction. Each warrant was exercisable for one common share, 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 2.3 million shares of DPL common stock from DPL's shares held in treasury.

† On November 15, 2007, The Ohio Air Quality Development Authority (OAQDA) issued $90 million of collateralized, variable rate OAQDA Revenue Bonds, 2007 Series A due November 1, 2040. In turn, DP&L borrowed these funds from the OAQDA. The payment of principal and interest on the bonds when due was insured by an insurance policy issued by Financial Guaranty Insurance Company (FGIC). During the first quarter of 2008, all three credit 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 interest rates in succeeding auctions and incurring failed auctions. On April 4, 2008, DP&L converted the 2007 Series A Bonds from Auction Rate Securities to Variable Rate Demand Notes. At that time, DP&Lpurchased these notes out of the market and placed them with the Trustee to be held until the capital markets corrected. These notes were redeemed in December 2008 as discussed in the following paragraph.

On December 4, 2008, the OAQDA issued $100 million of collateralized, variable rate Revenue Refunding Bonds Series A and B due November 1, 2040. In turn, DP&Lborrowed these funds from the OAQDA. The payment of principal and interest on the bonds when due is backed by a standby letter of credit issued by a syndicated bank group credit facility. DP&L is using $10 million of these bonds to finance its portion of the costs of acquiring, constructing and installing certain solid waste disposal and air quality facilities at the Conesville generation station. The remaining $90 million was used to redeem the 2007 Series A Bonds. The above transactions are further discussed in Note 7 of Notes to Consolidated Financial Statements.

† On December 10, 2008, DPL'sBoard of Directors authorized a quarterly dividend rate increase of approximately 4%, increasing the quarterly dividend per DPL common share from $.275 to $.285. If this increase were maintained, the annualized dividend rate would increase from $1.10 per share to $1.14 per share.

† The four FGD units were completed, tested and are fully operational at the Stuart station. The increased operating costs and depreciation in 2008 are mainly associated with these units.

DPL's results of operations include the results of its subsidiaries, including the consolidated results of its principal subsidiary DP&L and all of DP&L'sconsolidated subsidiaries. DP&L provides approximately 98% of the total revenues of DPL. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for DP&Lis presented elsewhere in this report.

Income Statement 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

DPL Inc. - Revenues

Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, DPL's retail sales volume is impacted by the number of heating and cooling degree days occurring during a year. Since DPLplans to utilize its internal generating capacity to supply its retail customers' needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa.

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DPL's wholesale sales volume each hour of the year include wholesale market prices; DPL's retail demand; retail demand elsewhere throughout the entire wholesale market area; and DPL and non-DPL plants' availability to sell into the wholesale market and weather conditions across the multi-state region. DPL's plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities not being utilized to meet its retail demand.

The following table provides 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 the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales and an increase in RTO capacity and other RTO revenues, partially offset by lower retail and wholesale sales volume.

† The net increase in retail revenues results primarily from a 4% increase in average retail rates due largely to the second phase of an environmental investment rider, partially offset by a 2% decrease in sales volume.

† The decrease in retail sales volume is primarily a result of milder weather which caused cooling degree days to decrease 26% and a 6% decrease in . . .