**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D. C. 20549**
 
 **FORM
        10-Q**
 **(Mark
        One)**
 **[X]
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
        the
        quarterly period ended June 30, 2005**
 
 **OR**
 
 **[
        ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 **For
                  the transition period from**
              
              **to**
 
 **Commission**
              **Registrant;
                  State of Incorporation;**
              **I.R.S.
                  Employer****File
                  Number**
              **Address;
                  and Telephone Number**
              **Identification
                  No.****333-21011**
              **FIRSTENERGY
                  CORP.**
              **34-1843785****(An
                  Ohio Corporation)****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-2578**
              **OHIO
                  EDISON COMPANY**
              **34-0437786****(An
                  Ohio Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-2323**
              **THE
                  CLEVELAND ELECTRIC ILLUMINATING COMPANY**
              **34-0150020****(An
                  Ohio Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-3583**
              **THE
                  TOLEDO EDISON COMPANY**
              **34-4375005****(An
                  Ohio Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-3491**
              **PENNSYLVANIA
                  POWER COMPANY**
              **25-0718810****(A
                  Pennsylvania Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-3141**
              **JERSEY
                  CENTRAL POWER & LIGHT COMPANY**
              **21-0485010****(A
                  New Jersey Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-446**
              **METROPOLITAN
                  EDISON COMPANY**
              **23-0870160****(A
                  Pennsylvania Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402****1-3522**
              **PENNSYLVANIA
                  ELECTRIC COMPANY**
              **25-0718085****(A
                  Pennsylvania Corporation)****c/o
                  FirstEnergy Corp.****76
                  South Main Street****Akron,
                  OH 44308****Telephone
                  (800)736**-**3402**
  
 
  Indicate
        by check
        mark whether each of the registrants (1) has filed all reports required
        to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of
        1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject
        to
        such filing requirements for the past 90 days.
 
 Yes X  No
 
 Indicate
        by check
        mark whether each registrant is an accelerated filer (as defined in Rule
        12b-2
        of the Act):
 
 YesX
              No
              FirstEnergy
                  Corp.Yes
              NoX
              Ohio
                  Edison
                  Company, Pennsylvania Power Company, The Cleveland Electric Illuminating
                  Company, The Toledo Edison Company, Jersey Central Power & Light
                  Company, Metropolitan Edison Company, and Pennsylvania Electric
                  Company
 
 Indicate
        the number
        of shares outstanding of each of the issuer's classes of common stock, as
        of the
        latest practicable date:
 
 **OUTSTANDING****CLASS**
              **AS
                  OF AUGUST 1, 2005**FirstEnergy
                  Corp., $.10 par value
              329,836,276Ohio
                  Edison
                  Company, no par value
              100The
                  Cleveland
                  Electric Illuminating Company, no par value
              79,590,689The
                  Toledo
                  Edison Company, $5 par value
              39,133,887Pennsylvania
                  Power Company, $30 par value
              6,290,000Jersey
                  Central Power & Light Company, $10 par value
              15,371,270Metropolitan
                  Edison Company, no par value
              859,500Pennsylvania
                  Electric Company, $20 par value
              5,290,596
  FirstEnergy
        Corp.
        is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating
        Company, The Toledo Edison Company, Jersey Central Power & Light Company,
        Metropolitan Edison Company and Pennsylvania Electric Company common stock.
        Ohio
        Edison Company is the sole holder of Pennsylvania Power Company common stock.
 
 This
        combined Form
        10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania
        Power Company, The Cleveland Electric Illuminating Company, The Toledo Edison
        Company, Jersey Central Power & Light Company, Metropolitan Edison Company
        and Pennsylvania Electric Company. Information contained herein relating
        to any
        individual registrant is filed by such registrant on its own behalf. No
        registrant makes any representation as to information relating to any other
        registrant, except that information relating to any of the FirstEnergy
        subsidiary registrants is also attributed to FirstEnergy Corp.
 
 This
        Form 10-Q
        includes forward-looking statements based on information currently available
        to
        management. Such statements are subject to certain risks and uncertainties.
        These statements typically contain, but are not limited to, the terms
        "anticipate", "potential", "expect", "believe", "estimate" and similar words.
        Actual results may differ materially due to the speed and nature of increased
        competition and deregulation in the electric utility industry, economic or
        weather conditions affecting future sales and margins, changes in markets
        for
        energy services, changing energy and commodity market prices, replacement
        power
        costs being higher than anticipated or inadequately hedged, the continued
        ability of our regulated utilities to collect transition and other charges,
        maintenance costs being higher than anticipated, legislative and regulatory
        changes (including revised environmental requirements), the uncertainty of
        the
        timing and amounts of the capital expenditures (including that such amounts
        could be higher than anticipated) or levels of emission reductions related
        to
        the settlement agreement resolving the New Source Review litigation, adverse
        regulatory or legal decisions and outcomes (including revocation of necessary
        licenses or operating permits, fines or other enforcement actions and remedies)
        of government investigations and oversight, including by the Securities and
        Exchange Commission, the United States Attorney’s Office and the Nuclear
        Regulatory Commission as disclosed in the registrants’ Securities and Exchange
        Commission filings, generally, and with respect to the Davis-Besse Nuclear
        Power
        Station outage and heightened scrutiny at the Perry Nuclear Power Plant in
        particular, the availability and cost of capital, the continuing availability
        and operation of generating units, the inability to accomplish or realize
        anticipated benefits of strategic goals, the ability to improve electric
        commodity margins and to experience growth in the distribution business,
        the
        ability to access the public securities and other capital markets, the outcome,
        cost and other effects of present and potential legal and administrative
        proceedings and claims related to the August 14, 2003 regional power outage,
        the
        final outcome in the proceeding related to FirstEnergy's Application for
        a Rate
        Stabilization Plan in Ohio, the risks and other factors discussed from time
        to
        time in the registrants' Securities and Exchange Commission filings, including
        their annual report on Form 10-K for the year ended December 31, 2004,
        and
        other similar factors. The registrants expressly disclaim any current intention
        to update any forward-looking statements contained in this document as a
        result
        of new information, future events, or otherwise.
  
 
  **TABLE
        OF
        CONTENTS**
 
 
 **Pages****Glossary
                  of Terms**
              iii-iv**Part
                  I.****Financial
                  Information****Items
                  1. and 2. - Financial Statements and Management’s Discussion and Analysis
                  of**
                **Results of Operation and Financial Condition**Notes
                  to
                  Consolidated Financial Statements
              1-23**FirstEnergy
                  Corp.**Consolidated
                  Statements of Income
              24Consolidated
                  Statements of Comprehensive Income
              25Consolidated
                  Balance Sheets
              26Consolidated
                  Statements of Cash Flows
              27Report
                  of
                  Independent Registered Public Accounting Firm
              28Management's
                  Discussion and Analysis of Results of Operations and
              29-60Financial
                  Condition**Ohio
                  Edison Company**Consolidated
                  Statements of Income and Comprehensive Income
              61Consolidated
                  Balance Sheets
              62Consolidated
                  Statements of Cash Flows
              63Report
                  of
                  Independent Registered Public Accounting Firm
              64Management's
                  Discussion and Analysis of Results of Operations and
              65-75Financial
                  Condition**The
                  Cleveland Electric Illuminating Company**Consolidated
                  Statements of Income and Comprehensive Income
              76Consolidated
                  Balance Sheets
              77Consolidated
                  Statements of Cash Flows
              78Report
                  of
                  Independent Registered Public Accounting Firm
              79Management's
                  Discussion and Analysis of Results of Operations and
              80-90Financial
                  Condition**The
                  Toledo Edison Company**Consolidated
                  Statements of Income and Comprehensive Income
              91Consolidated
                  Balance Sheets
              92Consolidated
                  Statements of Cash Flows
              93Report
                  of
                  Independent Registered Public Accounting Firm
              94Management's
                  Discussion and Analysis of Results of Operations and
              95-104Financial
                  Condition**Pennsylvania
                  Power Company**ConsolidatedStatements
                  of Income and Comprehensive Income
              105ConsolidatedBalance
                  Sheets
              106ConsolidatedStatements
                  of Cash Flows
              107Report
                  of
                  Independent Registered Public Accounting Firm
              108Management's
                  Discussion and Analysis of Results of Operations and
              109-116Financial
                  Condition
 
 
  i
   **TABLE
        OF
        CONTENTS (Cont'd)**
 
 
 **Pages****Jersey
                  Central Power & Light Company**Consolidated
                  Statements of Income and Comprehensive Income
              117Consolidated
                  Balance Sheets
              118Consolidated
                  Statements of Cash Flows
              119Report
                  of
                  Independent Registered Public Accounting Firm
              120Management's
                  Discussion and Analysis of Results of Operations and
              121-128Financial
                  Condition**Metropolitan
                  Edison Company**Consolidated
                  Statements of Income and Comprehensive Income
              129Consolidated
                  Balance Sheets
              130Consolidated
                  Statements of Cash Flows
              131Report
                  of
                  Independent Registered Public Accounting Firm
              132Management's
                  Discussion and Analysis of Results of Operations and
              133-139Financial
                  Condition**Pennsylvania
                  Electric Company**Consolidated
                  Statements of Income and Comprehensive Income
              140Consolidated
                  Balance Sheets
              141Consolidated
                  Statements of Cash Flows
              142Report
                  of
                  Independent Registered Public Accounting Firm
              143Management's
                  Discussion and Analysis of Results of Operations and
              144-150Financial
                  Condition**Item
                  3.****Quantitative
                  and Qualitative Disclosures About Market Risk**
              151**Item
                  4.****Controls
                  and Procedures**
              151**Part
                  II.****Other
                  Information****Item
                  1.****Legal
                  Proceedings**
              152**Item
                  2.****Changes
                  in Securities, Use of Proceeds and Issuer Purchases of Equity
                  Securities**
              152**Item 4.****Submission
                  of Matters to a Vote of Security Holders**
              152**Item
                  6.****Exhibits**
              153-168
 
 
  ii
   **GLOSSARY
        OF
        TERMS**
 
 The
        following
        abbreviations and acronyms are used in this report to identify FirstEnergy
        Corp.
        and its current and former subsidiaries:
 
 ATSI
              American
                  Transmission Systems, Incorporated, owns and operates transmission
                  facilitiesCEI
              The
                  Cleveland
                  Electric Illuminating Company, an Ohio electric utility operating
                  subsidiaryCFC
              Centerior
                  Funding Corporation, a wholly owned finance subsidiary of
                  CEICompanies
              OE,
                  CEI, TE,
                  Penn, JCP&L, Met-Ed and PenelecEUOC
              Electric
                  Utility Operating Companies (OE, CEI, TE, Penn, JCP&L, Met-Ed,
                  Penelec, and ATSI)FENOC
              FirstEnergy
                  Nuclear Operating Company, operates nuclear generating
                  facilitiesFES
              FirstEnergy
                  Solutions Corp., provides energy-related products and
                  servicesFESC
              FirstEnergy
                  Service Company, provides legal, financial, and other corporate
                  support
                  servicesFGCO
              FirstEnergy
                  Generation Corp., operates nonnuclear generating
                  facilitiesFirstCom
              First
                  Communications, LLC, provides local and long-distance telephone
                  serviceFirstEnergy
              FirstEnergy
                  Corp., a registered public utility holding companyFSG
              FirstEnergy
                  Facilities Services Group, LLC, the parent company of several heating,
                  ventilation,air
                  conditioning and energy management companiesGPU
              GPU,
                  Inc.,
                  former parent of JCP&L, Met-Ed and Penelec, which merged with
                  FirstEnergy onNovember 7,
                  2001JCP&L
              Jersey
                  Central Power & Light Company, a New Jersey electric utility operating
                  subsidiaryJCP&L
                  Transition
              JCP&L
                  Transition Funding LLC, a Delaware limited liability company and
                  issuer of
                  transition
                bondsMet-Ed
              Metropolitan
                  Edison Company, a Pennsylvania electric utility operating
                  subsidiaryMYR
              MYR
                  Group,
                  Inc., a utility infrastructure construction service
                  companyNGC
              FirstEnergy
                  Nuclear Generation Corp.OE
              Ohio
                  Edison
                  Company, an Ohio electric utility operating subsidiaryOE
                  Companies
              OE
                  and PennOhio
                  Companies
              CEI,
                  OE and
                  TEPenelec
              Pennsylvania
                  Electric Company, a Pennsylvania electric utility operating
                  subsidiaryPenn
              Pennsylvania
                  Power Company, a Pennsylvania electric utility operating subsidiary
                  of
                  OEPNBV
              PNBV
                  Capital
                  Trust, a special purpose entity created by OE in 1996Shippingport
              Shippingport
                  Capital Trust, a special purpose entity created by CEI and TE in
                  1997TE
              The
                  Toledo
                  Edison Company, an Ohio electric utility operating
                  subsidiaryTEBSA
              Termobarranguilla
                  S. A., Empresa de Servicios
                  Publicos
 
 The
        following
        abbreviations and acronyms are used to identify frequently used terms in
        this
        report:
 
 AOCL
              Accumulated
                  Other Comprehensive LossAPB
              Accounting
                  Principles BoardAPB
                  25
              APB
                  Opinion
                  No. 25, "Accounting for Stock Issued to Employees"APB
                  29
              APB
                  Opinion
                  No. 29, "Accounting for Nonmonetary Transactions"ARO
              Asset
                  Retirement ObligationBGS
              Basic
                  Generation ServiceCAIR
              Clean
                  Air
                  Interstate RuleCO2
              Carbon
                  DioxideCTC
              Competitive
                  Transition ChargeECAR
              East
                  Central
                  Area Reliability Coordination AgreementEITF
              Emerging
                  Issues Task ForceEITF
                  03-1
              EITF
                  Issue
                  No. 03-1, "The Meaning of Other-Than-Temporary and Its Application
                  to
                  CertainInvestments"EITF
                  04-13
              EITF
                  Issue
                  No. 04-13, "Accounting for Purchases and Sales of Inventory with
                  the
                  Same
                Counterparty"EITF
                  99-19
              EITF
                  Issue
                  No. 99-19, "Reporting Revenue Gross as a Principal versus Net as
                  an
                  Agent"EPA
              Environmental
                  Protection AgencyFASB
              Financial
                  Accounting Standards BoardFERC
              Federal
                  Energy Regulatory CommissionFIN
              FASB
                  InterpretationFIN
                  46R
              FIN
                  46
                  (revised December 2003), "Consolidation of Variable Interest
                  Entities"FIN
                  47
              FASB
                  Interpretation 47, "Accounting for Conditional Asset Retirement
                  Obligations - an
                interpretation
                  of FASB Statement No. 143"FMB
              First
                  Mortgage BondsFSP
              FASB
                  Staff
                  Position
 
 
  iii
   FSP
                  EITF
                  03-1-1
              FASB
                  Staff
                  Position No. EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20
                  of
                  EITF IssueNo.
                  03-1,*The
                  Meaning of Other-Than-Temporary Impairment and Its Application
                  to Certain**Investments"*FSP
                  109-1
              FASB
                  Staff
                  Position No. 109-1, "Application of FASB Statement No. 109, Accounting
                  for
                  IncomeTaxes, to the Tax Deduction on Qualified Production Activities Provided
                by
                the American JobsCreation Act of 2004"GAAP
              Accounting
                  Principles Generally Accepted in the United StatesHVAC
              Heating,
                  Ventilation and Air-conditioningKWH
              Kilowatt-hoursLOC
              Letter
                  of
                  CreditMISO
              Midwest
                  Independent Transmission System Operator, Inc.MSG
              Market
                  Support GenerationMTC
              Market
                  Transition ChargeMW
              MegawattsNAAQS
              National
                  Ambient Air Quality StandardsNERC
              North
                  American Electric Reliability CouncilNJBPU
              New
                  Jersey
                  Board of Public UtilitiesNOAC
              Northwest
                  Ohio Aggregation CoalitionNOV
              Notices
                  of
                  ViolationNOX
              Nitrogen
                  OxideNRC
              Nuclear
                  Regulatory CommissionNUG
              Non-Utility
                  GenerationOCC
              Ohio
                  Consumers' CounselOCI
              Other
                  Comprehensive IncomeOPAE
              Ohio
                  Partners
                  for Affordable EnergyOPEB
              Other
                  Post-Employment BenefitsPCAOB
              Public
                  Company Accounting Oversight Board (United States)PCRBs
              Pollution
                  Control Revenue BondsPJM
              PJM
                  Interconnection L.L.C.PLR
              Provider
                  of
                  Last ResortPPUC
              Pennsylvania
                  Public Utility CommissionPRP
              Potentially
                  Responsible PartyPSA
              Purchase
                  and
                  Sale AgreementPUCO
              Public
                  Utilities Commission of OhioPUHCA
              Public
                  Utility Holding Company ActRTC
              Regulatory
                  Transition ChargeS&P
              Standard
                  & Poor’s Ratings ServiceSBC
              Societal
                  Benefits ChargeSEC
              United
                  States
                  Securities and Exchange CommissionSFAS
              Statement
                  of
                  Financial Accounting StandardsSFAS
                  71
              SFAS
                  No. 71,
                  "Accounting for the Effects of Certain Types of
                  Regulation"SFAS
                  123
              SFAS
                  No. 123,
                  "Accounting for Stock-Based Compensation"SFAS
                  123(R)
              SFAS
                  No. 123
                  (revised 2004), "Share-Based Payment"SFAS
                  131
              SFAS
                  No. 131,
                  "Disclosures about Segments of an Enterprise and Related
                  Information"SFAS
                  133
              SFAS
                  No. 133,
                  "Accounting for Derivative Instruments and Hedging
                  Activities"SFAS
                  140
              SFAS
                  No. 140,
                  "Accounting for Transfers and Servicing of Financial Assets andExtinguishment
                  of Liabilities"SFAS
                  144
              SFAS
                  No. 144,
                  "Accounting for the Impairment or Disposal of Long-Lived
                  Assets"SFAS
                  153
              SFAS
                  No. 153,
                  "Exchanges of Nonmonetary Assets - an amendment of APB Opinion
                  No.
                  29"SFAS
                  154
              SFAS
                  No. 154,
                  "Accounting Changes and Error Corrections - a replacement of APB
                  Opinion
                  No.
                20
                  and FASB
                  Statement No. 3"SO2
              Sulfur
                  DioxideTBC
              Transition
                  Bond ChargeTMI-2
              Three
                  Mile
                  Island Unit 2VIE
              Variable
                  Interest Entity
 
 
 
  iv
   **PART
        I.
        FINANCIAL INFORMATION**
 
 **FIRSTENERGY
        CORP. AND SUBSIDIARIES**
 **OHIO
        EDISON
        COMPANY AND SUBSIDIARIES**
 **THE
        CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARIES**
 **THE
        TOLEDO
        EDISON COMPANY AND SUBSIDIARY**
 **PENNSYLVANIA
        POWER COMPANY AND SUBSIDIARY**
 **JERSEY
        CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARIES**
 **METROPOLITAN
        EDISON COMPANY AND SUBSIDIARIES**
 **PENNSYLVANIA
        ELECTRIC COMPANY AND SUBSIDIARIES**
 
 **NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 
 **1
        -
        ORGANIZATION AND BASIS OF PRESENTATION:**
  FirstEnergy’s
        principal business is the holding, directly or indirectly, of all of the
        outstanding common stock of its eight principal electric utility operating
        subsidiaries: OE, CEI, TE, Penn, ATSI, JCP&L, Met-Ed and Penelec. Penn is a
        wholly owned subsidiary of OE. FirstEnergy's consolidated financial statements
        also include its other principal subsidiaries: FENOC, FES and its subsidiary
        FGCO, FESC, FSG and MYR.
 
 FirstEnergy
        and its
        subsidiaries follow GAAP and comply with the regulations, orders, policies
        and
        practices prescribed by the SEC, FERC and, as applicable, PUCO, PPUC and
        NJBPU.
        The preparation of financial statements in conformity with GAAP requires
        management to make periodic estimates and assumptions that affect the reported
        amounts of assets, liabilities, revenues and expenses and disclosure of
        contingent assets and liabilities. Actual results could differ from these
        estimates. The reported results of operations are not indicative of results
        of
        operations for any future period.
 
 These
        statements
        should be read in conjunction with the financial statements and notes included
        in the combined Annual Report on Form 10-K for the year ended December 31,
        2004 for FirstEnergy and the Companies. The consolidated unaudited financial
        statements of FirstEnergy and each of the Companies reflect all normal recurring
        adjustments that, in the opinion of management, are necessary to fairly present
        results of operations for the interim periods. Certain businesses divested
        in
        the first six months of 2005 have been classified as discontinued operations
        on
        the Consolidated Statements of Income (see Note 6). As discussed in Note
        16,
        interim period segment reporting in 2004 was reclassified to conform with
        the
        current year business segment organizations and operations.
 
 FirstEnergy
        and its
        subsidiaries consolidate all majority-owned subsidiaries over which they
        exercise control and, when applicable, entities for which they have a
        controlling financial interest. Intercompany transactions and balances are
        eliminated in consolidation. FirstEnergy consolidates a VIE (see Note 11)
        when
        it anticipates absorbing a majority of the VIE’s gains or losses. If no entity
        absorbs a majority of the VIE’s gains or losses, FirstEnergy consolidates a VIE
        when it expects to receive a majority of the VIE’s residual return. Investments
        in nonconsolidated affiliates which are not deemed to be VIEs over which
        FirstEnergy and its subsidiaries have the ability to exercise significant
        influence, but not control, (20-50 percent owned companies, joint ventures
        and
        partnerships) are accounted for under the equity method. Under the equity
        method, the interest in the entity is reported as an investment in the
        Consolidated Balance Sheet and the percentage share of the entity’s earnings is
        reported in the Consolidated Statement of Income.
 
 FirstEnergy's
        and
        the Companies' independent registered public accounting firm has performed
        reviews of, and issued reports on, these consolidated interim financial
        statements in accordance with standards established by the PCAOB. Pursuant
        to
        Rule 436(c) under the Securities Act of 1933, their reports of those reviews
        should not be considered a report within the meaning of Section 7 and 11
        of that
        Act, and the independent registered public accounting firm’s liability under
        Section 11 does not extend to them.
 
 **2
        -
        ACCOUNTING FOR CERTAIN WHOLESALE ENERGY TRANSACTIONS**
 
 FES
        engages in
        purchase and sale transactions in the PJM Market to support the supply of
        end-use customers, including PLR requirements in Pennsylvania. In conjunction
        with FirstEnergy's dedication of its Beaver Valley Plant to PJM on
        January 1, 2005, FES
        began
        accounting for purchase and sale transactions in the PJM Market based on
        its net
        hourly position -- recording each hour as either an energy purchase in Fuel
        and
        purchased power or energy sale in Unregulated businesses, respectively, in
        the
        Consolidated Statements of Income. Hourly energy positions are aggregated
        to
        recognize gross purchases and sales for the month.
   1


This
        revised method
        of accounting, which has no impact on net income, is consistent with the
        practice of other energy companies that have dedicated generating capacity
        to
        PJM and correlates with PJM's scheduling and reporting of hourly energy
        transactions. In addition, FES applies this methodology to purchase and sale
        transactions in MISO's energy market, which became active April 1,
        2005.





For
      periods prior
      to January 1, 2005, FirstEnergy did not have dedicated generating capacity
      in PJM and as such, FES recognized purchases and sales in the PJM Market by
      recording each discrete transaction. Under these transactions, FES would often
      buy a specific quantity of energy at a certain location in PJM and
      simultaneously sell a specific quantity of energy at a different location.
      Physical delivery occurred and the risks and rewards of ownership transferred
      with each transaction. FES
      accounted for
      those transactions on a gross basis in accordance with EITF 99-19.





The
      FASB's Emerging
      Issues Task Force is currently considering EITF 04-13, which relates to the
      accounting for purchases and sales of inventory with the same counterparty.
      The
      Task Force will address under what circumstances two or more transactions with
      the same counterparty should be viewed as a single nonmonetary transaction
      within the scope of APB 29. At its June 2005 meeting, the Task Force agreed
      to
      propose for public comment a framework for evaluating transactions within the
      scope of EITF 04-13. The proposed framework is based on the principle that
      two
      or more transactions with the same counterparty should be viewed as a single
      transaction when the transactions are entered into in contemplation of one
      another. If the EITF were to determine that transactions such as FES' purchases
      and sales in the PJM Market should be accounted for as single nonmonetary
      transactions, the transition provisions for the EITF may require or permit
      FES
      to report the transactions prior to January 1, 2005 on a net basis.
      This
      requirement would have no impact on net income, but would reduce both wholesale
      revenue and purchased power expense by $283 million and $564 million for the
      three months and six months ended June 30, 2004, respectively.





**3
      -
      DEPRECIATION**





During
      the second
      half of 2004, FirstEnergy engaged an independent third party to assist in
      reviewing the service lives of its fossil generation units. This study was
      completed in the first quarter of 2005. As a result of the analysis, FirstEnergy
      extended the estimated service lives of its fossil generation units for periods
      ranging from 11 to 33 years during the first quarter of 2005. Extension of
      the
      service lives will provide improved matching of depreciation expense with the
      expected economic lives of those generation units. The change in estimate
      resulted in increases of $3.1 million (CEI - $1.9 million, OE - $0.6 million,
      Penn - $0.1 million, TE - $0.3 million, FGCO - $0.2 million) and $9.0 million
      (CEI - $4.0 million, OE - $3.9 million, Penn - $0.2 million, TE - $0.8 million,
      FGCO - $0.1 million) in income before discontinued operations and net income
      ($0.01and $0.03 per share of common stock) during the three and six months
      ended
      June 30, 2005, respectively.





**4
      -
      EARNINGS PER SHARE**





Basic
      earnings per
      share are computed using the weighted average of actual common shares
      outstanding during the respective period as the denominator. The denominator
      for
      diluted earnings per share reflects the weighted average of common shares
      outstanding plus the potential additional common shares that could result if
      dilutive securities and other agreements to issue common stock were exercised.
      Stock-based awards to purchase shares of common stock totaling 3.3 million
      in
      the three months and six months ended June 30, 2004, were excluded from
      the
      calculation of diluted earnings per share of common stock because their exercise
      prices were greater than the average market price of common shares during the
      period. No stock-based awards were excluded from the calculation in the three
      months and six months ended June 30, 2005. The following table reconciles
      the denominators for basic and diluted earnings per share from Income Before
      Discontinued Operations:





**Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****Reconciliation
                      of Basic and Diluted Earnings per Share**
                  
                  **2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004*****(In
                      thousands, except per share amounts)***Income
                      Before
                      Discontinued Operations
                  
                  $
                  178,765
                  
                  $
                  201,860
                  
                  $
                  319,795
                  
                  $
                  374,209Average
                      Shares of Common Stock Outstanding:Denominator
                      for basic earnings per share(weighted
                      average shares outstanding)
                  
                  
                  328,063
                  
                  
                  327,284
                  
                  
                  327,986
                  
                  
                  327,171Assumed
                      exercise of dilutive stock options and awards
                  
                  
                  1,816
                  
                  
                  1,819
                  
                  
                  1,693
                  
                  
                  1,890Denominator
                      for diluted earnings per share
                  
                  
                  329,879
                  
                  
                  329,103
                  
                  
                  329,679
                  
                  
                  329,061Income
                      Before
                      Discontinued Operations per Common Share:Basic
                  
                  
                  $0.54
                  
                  
                  $0.61
                  
                  
                  $0.98
                  
                  
                  $1.15Diluted
                  
                  
                  $0.54
                  
                  
                  $0.61
                  
                  
                  $0.97
                  
                  
                  $1.14








2





**5
      -
      GOODWILL**





FirstEnergy's
      goodwill primarily relates to its regulated services segment. In the three
      and
      six months ended June 30, 2005, FirstEnergy adjusted goodwill related
      to
      the divestiture of non-core operations (FES' natural gas business, MYR
      subsidiary, Power Piping Company, and a portion of its interest in FirstCom)
      as
      further discussed in Note 6. In addition, the adjustment of the former GPU
      companies' goodwill was due to the reversal of pre-merger tax reserves as a
      result of property tax settlements. FirstEnergy estimates that completion of
      transition cost recovery (see Note 14) will not result in an impairment of
      goodwill relating to its regulated business segment. A summary of the changes
      in
      goodwill for the three months and six months ended June 30, 2005 is
      shown
      below.





**Three Months
                    Ended**
                
                **FirstEnergy**
                
                **CEI**
                
                **TE**
                
                **JCP&L**
                
                **Met-Ed**
                
                **Penelec*****(In
                    millions)***Balance
                    as of
                    April 1, 2005
                
                $
                6,034
                
                $
                1,694
                
                $
                505
                
                $
                1,984
                
                $
                868
                
                $
                887Non-core
                    asset sales
                
                
                (1
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Balance
                    as of
                    June 30, 2005
                
                $
                6,033
                
                $
                1,694
                
                $
                505
                
                $
                1,984
                
                $
                868
                
                $
                887








**Six
                Months Ended**
            
            **FirstEnergy**
            
            **CEI**
            
            **TE**
            
            **JCP&L**
            
            **Met-Ed**
            
            **Penelec*****(In
                millions)***Balance
                as of
                January 1, 2005
            
            $
            6,050
            
            $
            1,694
            
            $
            505
            
            $
            1,985
            
            $
            870
            
            $
            888Non-core
                asset sales
            
            
            (13
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Adjustments
                related to GPU acquisition
            
            
            (4
            )
            
            -
            
            
            -
            
            
            (1
            )
            
            (2
            )
            
            (1
            )Balance
                as of
                June 30, 2005
            
            $
            6,033
            
            $
            1,694
            
            $
            505
            
            $
            1,984
            
            $
            868
            
            $
            887





**6
      -
      DIVESTITURES AND DISCONTINUED OPERATIONS**





In
      December 2004,
      FES' natural gas business qualified as assets held for sale in accordance with
      SFAS 144. On March 31, 2005, FES completed the sale for an after-tax
      gain
      of $5 million. In March 2005, FirstEnergy sold 51% of its interest in FirstCom,
      resulting in an after-tax gain of $4 million. FirstEnergy accounts for its
      remaining 31.85% interest in FirstCom on the equity basis.





During
      the first
      six months of 2005, FirstEnergy sold certain of its FSG subsidiaries,
      Elliott-Lewis, Spectrum and Cranston, and MYR’s Power Piping Company subsidiary,
      resulting in an after-tax gain of $12 million. FSG's remaining subsidiaries
      qualify as assets held for sale in accordance with SFAS 144 and are expected
      to
      be recognized as completed sales before the end of 2005. The assets and
      liabilities of these remaining FSG subsidiaries are not material to
      FirstEnergy’s Consolidated Balance Sheet as of June 30, 2005, and therefore
      have not been separately classified as assets held for sale.





Net
      results
      (including the gains on sales of assets discussed above) for Elliott-Lewis,
      Cranston, Power Piping and FES' natural gas business of $(1) million and $18
      million for the three and six months ended June 30, 2005, respectively,
      and
      $2 million and $4 million for the three and six months ended June 30,
      2004,
      respectively, are reported as discontinued operations on FirstEnergy's
      Consolidated Statements of Income. Pre-tax operating results for these entities
      were $(2) million and $2 million for the three and six months ended
      June 30, 2005, respectively, and $4 million and $7 million for the three
      and six months ended June 30, 2004, respectively. Revenues associated
      with
      discontinued operations for the three and six months ended June 30,
      2005
      were $11 million and $206 million, respectively, and for the three and six
      months ended June 30, 2004 were $158 million and $357 million,
      respectively. As of June 30, 2005, the remaining FSG businesses do not
      meet
      the criteria for discontinued operations; therefore, the net results ($(3)
      million and $(4) million for the three and six months ended June 30,
      2005,
      respectively, and $0.3 million and $(1) million for the three and six months
      ended June 30, 2004, respectively) from these subsidiaries have been
      included in continuing operations. See Note 16 for FSG's segment financial
      information.








3





The
      following table
      summarizes the sources of income (loss) from discontinued
      operations.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Discontinued
                operations (net of tax)Gain
                on
                sale:Natural
                gas
                business
            
            $
            -
            
            $
            -
            
            $
            5
            
            $
            -FSG
                and MYR
                subsidiaries
            
            
            -
            
            
            -
            
            
            12
            
            
            -Reclassification
                of operating income
            
            
            (1
            )
            
            2
            
            
            1
            
            
            4Total
            
            $
            (1
            )
            $
            2
            
            $
            18
            
            $
            4





**7
      -
      DERIVATIVE INSTRUMENTS**





FirstEnergy
      is
      exposed to financial risks resulting from the fluctuation of interest rates
      and
      commodity prices, including prices for electricity, natural gas, coal and energy
      transmission. To manage the volatility relating to these exposures, FirstEnergy
      uses a variety of non-derivative and derivative instruments, including forward
      contracts, options, futures contracts and swaps. The derivatives are used
      principally for hedging purposes, and to a lesser extent, for trading purposes.
      FirstEnergy’s Risk Policy Committee, comprised of members of senior management,
      provides general management oversight to risk management activities throughout
      the Company.





FirstEnergy
      accounts for derivative instruments on its Consolidated Balance Sheet at their
      fair value unless they meet the normal purchase and normal sales criteria.
      The
      changes in the fair value of a derivative instrument are recorded in current
      earnings, in other comprehensive income, or as part of the value of the hedged
      item depending on whether or not it is designated as part of a hedge transaction
      and on the nature of the hedge transaction.





FirstEnergy
      has
      entered into fair value hedges of fixed-rate, long-term debt issues to protect
      against the risk of changes in the fair value of fixed-rate debt instruments
      due
      to lower interest rates. Swap
      maturities,
      call options, fixed interest rates received, and interest payment dates match
      those of the underlying debt obligations. During
      the second
      quarter, FirstEnergy unwound swaps with a total notional amount of $350 million
      from which it received $17 million in cash gains. The gains will be recognized
      over the remaining maturity of each respective hedged security as reduced
      interest expense. As of June 30, 2005, the aggregate notional value
      of
      interest rate swap agreements outstanding was $1.4 billion.




FirstEnergy
      engages
      in hedging of anticipated transactions using cash flow hedges. Such transactions
      include hedges of anticipated electricity and natural gas purchases and
      anticipated interest payments associated with future debt issues. The effective
      portion of such hedges are initially recorded in equity as other comprehensive
      income or loss and are subsequently included in net income as the underlying
      hedged commodities are delivered or interest payments are made. Gains and losses
      from any ineffective portion of cash flow hedges are included directly in
      earnings. The impact of ineffectiveness on earnings during the three and six
      months ended June 30, 2005 was not material. The net deferred loss of
      $93
      million included in AOCL as of June 30, 2005, for derivative hedging
      activity, as compared to the December 31, 2004 balance of $92 million
      of
      net deferred losses, resulted from a $4 million increase related to current
      hedging activity, a $4 million increase due to the sale of gas business
      contracts and a $7 million decrease due to net hedge losses included in earnings
      during the six months ended June 30, 2005. Approximately $16 million
      of the
      net deferred loss on derivative instruments in AOCL as of June 30, 2005
      is
      expected to be reclassified to earnings during the next twelve months as hedged
      transactions occur. The fair value of these derivative instruments will
      fluctuate from period to period based on various market factors.





FirstEnergy
      engages
      in the trading of commodity derivatives and periodically experiences net open
      positions. FirstEnergy’s risk management policies limit the exposure to market
      risk from open positions and require daily reporting to management of potential
      financial exposures. During the three and six months ended June 30,
      2005,
      the effect of discretionary trading on earnings was not material.





**8
      - STOCK
      BASED COMPENSATION**




FirstEnergy
      applies
      the recognition and measurement principles of APB 25 and related interpretations
      in accounting for its stock-based compensation plans. No material stock-based
      employee compensation expense is reflected in net income for options as all
      options granted under those plans have exercise prices equal to the market
      value
      of the underlying common stock on the respective grant dates, resulting in
      substantially no intrinsic value.








4





In
      December 2004,
      the FASB issued SFAS 123(R), a revision to SFAS 123 which requires expensing
      the
      fair value of stock options (see Note 15). In April 2005, the SEC delayed the
      effective date of SFAS 123(R) to annual, rather than interim, periods that
      begin
      after June 15, 2005. FirstEnergy will be required to adopt this standard
      beginning January 1, 2006. The table below summarizes the effects on
      FirstEnergy’s net income and earnings per share had FirstEnergy applied the fair
      value recognition provisions of SFAS 123(R) to stock-based employee compensation
      in the current reporting periods.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                thousands, except per share amounts)***Net
                income,
                as reported
            
            
            
            
            $
            177,992
            
            $
            204,045
            
            $
            337,718
            
            $
            378,044Add
                back
                compensation expensereported
                in
                net income, net of tax(based
                on APB
                25)*
            
            
            
            
            
            14,413
            
            
            9,112
            
            
            22,381
            
            
            15,806Deduct
                compensation expense basedupon
                estimated fair value, net of tax
            
            
            
            
            
            (15,656
            )
            
            (13,882
            )
            
            (26,493
            )
            
            (24,829
            )Pro
                forma Net
                income
            
            
            
            
            $
            176,749
            
            $
            199,275
            
            $
            333,606
            
            $
            369,021Earnings
                Per
                Share of Common Stock -BasicAs
                reported
            
            
            
            
            
            $0.54
            
            
            $0.62
            
            
            $1.03
            
            
            $1.16Pro
                forma
            
            
            
            
            
            $0.54
            
            
            $0.61
            
            
            $1.02
            
            
            $1.13DilutedAs
                reported
            
            
            
            
            
            $0.54
            
            
            $0.62
            
            
            $1.02
            
            
            $1.15Pro
                forma
            
            
            
            
            
            $0.54
            
            
            $0.61
            
            
            $1.01
            
            
            $1.12*Includes
                restricted stock, restricted stock units, stock options, performance
                shares, Employee Stock
              Ownership
                Plan,Executive
                Deferred Compensation Plan
              and
                Deferred Compensation Plan for OutsideDirectors.




FirstEnergy
      reduced
      the use of stock options and increased the use of performance-based, restricted
      stock units. Therefore, the pro forma effects of applying SFAS 123(R) may not
      be
      representative of its future effect. FirstEnergy does not expect to accelerate
      out-of-the-money options in anticipation of implementing SFAS 123(R) on
      January 1, 2006 (see Note 15).





**9
      - ASSET
      RETIREMENT OBLIGATIONS**




FirstEnergy
      has
      identified applicable legal obligations for nuclear power plant decommissioning,
      reclamation of a sludge disposal pond related to the Bruce Mansfield Plant
      and
      closure of two coal ash disposal sites. The ARO liability of $1.1 billion as
      of
      June 30, 2005 included $1.1 billion for nuclear decommissioning of the
      Beaver Valley, Davis-Besse, Perry and TMI-2 nuclear generating facilities.
      The
      Companies' share of the obligation to decommission these units was developed
      based on site specific studies performed by an independent engineer. FirstEnergy
      utilized an expected cash flow approach to measure the fair value of the nuclear
      decommissioning ARO.





The
      Companies
      maintain nuclear decommissioning trust funds that are legally restricted for
      purposes of settling the nuclear decommissioning ARO. As of June 30,
      2005,
      the fair value of the decommissioning trust assets was $1.6
      billion.








5





The
      following
      tables provide the beginning and ending aggregate carrying amount of the ARO
      and
      the changes to the balance during the three and six months ended June 30,
      2005 and 2004, respectively.





**Three
                Months Ended**
            
            **FirstEnergy**
            
            **OE**
            
            **CEI**
            
            **TE**
            
            **Penn**
            
            **JCP&L**
            
            **Met-Ed**
            
            **Penelec*****(In
                millions)*****ARO
                Reconciliation**Balance,
                April 1, 2005
            
            $
            1,095
            
            $
            204
            
            $
            276
            
            $
            198
            
            $
            141
            
            $
            74
            
            $
            135
            
            $
            67Liabilities
                incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
                settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            18
            
            
            4
            
            
            5
            
            
            3
            
            
            2
            
            
            1
            
            
            2
            
            
            1Revisions
                in
                estimatedcash
                flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                June
                30, 2005
            
            $
            1,113
            
            $
            208
            
            $
            281
            
            $
            201
            
            $
            143
            
            $
            75
            
            $
            137
            
            $
            68Balance,
                April 1, 2004
            
            $
            1,198
            
            $
            191
            
            $
            259
            
            $
            185
            
            $
            132
            
            $
            111
            
            $
            213
            
            $
            107Liabilities
                incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
                settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            19
            
            
            3
            
            
            4
            
            
            3
            
            
            2
            
            
            2
            
            
            3
            
            
            2Revisions
                in
                estimatedcash
                flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                June
                30, 2004
            
            $
            1,217
            
            $
            194
            
            $
            263
            
            $
            188
            
            $
            134
            
            $
            113
            
            $
            216
            
            $
            109








**Six
                Months Ended**
            
            **FirstEnergy**
            
            **OE**
            
            **CEI**
            
            **TE**
            
            **Penn**
            
            **JCP&L**
            
            **Met-Ed**
            
            **Penelec*****(In
                millions)*****ARO
                Reconciliation**Balance,
                January 1, 2005
            
            $
            1,078
            
            $
            201
            
            $
            272
            
            $
            195
            
            $
            138
            
            $
            72
            
            $
            133
            
            $
            67Liabilities
                incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
                settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            35
            
            
            7
            
            
            9
            
            
            6
            
            
            5
            
            
            3
            
            
            4
            
            
            1Revisions
                in
                estimatedcash
                flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                June
                30, 2005
            
            $
            1,113
            
            $
            208
            
            $
            281
            
            $
            201
            
            $
            143
            
            $
            75
            
            $
            137
            
            $
            68Balance,
                January 1, 2004
            
            $
            1,179
            
            $
            188
            
            $
            255
            
            $
            182
            
            $
            130
            
            $
            109
            
            $
            210
            
            $
            105Liabilities
                incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
                settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            38
            
            
            6
            
            
            8
            
            
            6
            
            
            4
            
            
            4
            
            
            6
            
            
            4Revisions
                in
                estimatedcash
                flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                June
                30, 2004
            
            $
            1,217
            
            $
            194
            
            $
            263
            
            $
            188
            
            $
            134
            
            $
            113
            
            $
            216
            
            $
            109





**10
      -
      PENSION AND OTHER POSTRETIREMENT BENEFITS:**




The
      components of
      FirstEnergy's net periodic pension cost and other postretirement benefit cost
      (including amounts capitalized) for the three and six months ended June 30,
      2005 and 2004, consisted of the following:





**Three
                Months Ended**
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Pension
                Benefits**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Service
                cost
            
            $
            19
            
            $
            19
            
            $
            38
            
            $
            39Interest
                cost
            
            
            64
            
            
            63
            
            
            128
            
            
            126Expected
                return on plan assets
            
            
            (86
            )
            
            (71
            )
            
            (173
            )
            
            (143
            )Amortization
                of prior service cost
            
            
            2
            
            
            2
            
            
            4
            
            
            4Recognized
                net actuarial loss
            
            
            9
            
            
            10
            
            
            18
            
            
            20Net
                periodic
                cost
            
            $
            8
            
            $
            23
            
            $
            15
            
            $
            46














6





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Other
                Postretirement Benefits**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Service
                cost
            
            $
            10
            
            $
            8
            
            $
            20
            
            $
            19Interest
                cost
            
            
            27
            
            
            25
            
            
            55
            
            
            56Expected
                return on plan assets
            
            
            (11
            )
            
            (10
            )
            
            (22
            )
            
            (22
            )Amortization
                of prior service cost
            
            
            (11
            )
            
            (8
            )
            
            (22
            )
            
            (19
            )Recognized
                net actuarial loss
            
            
            10
            
            
            9
            
            
            20
            
            
            20Net
                periodic
                cost
            
            $
            25
            
            $
            24
            
            $
            51
            
            $
            54








Pension
      and
      postretirement benefit obligations are allocated to FirstEnergy’s subsidiaries
      employing the plan participants. The Companies capitalize employee benefits
      related to construction projects. The net periodic pension costs (credits)
      and
      net periodic postretirement benefit costs (including amounts capitalized)
      recognized by each of the Companies in the three and six months ended
      June 30, 2005 and 2004 were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Pension
                Benefit Cost (Credit)**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***OE
            
            $
            0.2
            
            $
            1.8
            
            $
            0.4
            
            $
            3.5Penn
            
            
            (0.2
            )
            
            0.1
            
            
            (0.4
            )
            
            0.2CEI
            
            
            0.3
            
            
            1.6
            
            
            0.7
            
            
            3.2TE
            
            
            0.3
            
            
            0.8
            
            
            0.6
            
            
            1.6JCP&L
            
            
            (0.3
            )
            
            1.9
            
            
            (0.5
            )
            
            3.7Met-Ed
            
            
            (1.1
            )
            
            -
            
            
            (2.2
            )
            
            0.1Penelec
            
            
            (1.3
            )
            
            0.1
            
            
            (2.7
            )
            
            0.2








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Other
                Postretirement Benefit Cost**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***OE
            
            $
            5.8
            
            $
            4.9
            
            $
            11.5
            
            $
            12.0Penn
            
            
            1.2
            
            
            1.0
            
            
            2.4
            
            
            2.5CEI
            
            
            3.8
            
            
            3.6
            
            
            7.6
            
            
            9.2TE
            
            
            2.2
            
            
            1.3
            
            
            4.3
            
            
            3.4JCP&L
            
            
            1.5
            
            
            0.9
            
            
            4.2
            
            
            2.5Met-Ed
            
            
            0.4
            
            
            0.5
            
            
            0.8
            
            
            1.8Penelec
            
            
            2.0
            
            
            0.4
            
            
            4.0
            
            
            1.8





**11
      -
      VARIABLE INTEREST ENTITIES**





**Leases**





Included
      in
      FirstEnergy’s consolidated financial statements are PNBV and Shippingport, two
      VIEs created in 1996 and 1997, respectively, to refinance debt originally issued
      in connection with sale and leaseback transactions. PNBV and Shippingport
      financial data are included in the consolidated financial statements of OE
      and
      CEI, respectively.





PNBV
      was
      established to purchase a portion of the lease obligation bonds issued in
      connection with OE’s 1987 sale and leaseback of its interests in the Perry Plant
      and Beaver Valley Unit 2. OE used debt and available funds to purchase the
      notes
      issued by PNBV. Ownership of PNBV includes a three-percent equity interest
      by a
      nonaffiliated third party and a three-percent equity interest held by OES
      Ventures, a wholly owned subsidiary of OE. Shippingport was established to
      purchase all of the lease obligation bonds issued in connection with CEI’s and
      TE’s Bruce Mansfield Plant sale and leaseback transaction in 1987. CEI and TE
      used debt and available funds to purchase the notes issued by
      Shippingport.





OE,
      CEI and TE are
      exposed to losses under the applicable sale-leaseback agreements upon the
      occurrence of certain contingent events that each company considers unlikely
      to
      occur. OE, CEI and TE each have a maximum exposure to loss under these
      provisions of approximately $1 billion, which represents the net amount of
      casualty value payments upon the occurrence of specified casualty events that
      render the applicable plant worthless. Under the applicable sale and leaseback
      agreements, OE, CEI and TE have net minimum discounted lease payments of $663
      million, $101 million and $531 million, respectively, that would not be payable
      if the casualty value payments are made.






7




**Power
      Purchase Agreements**




In
      accordance with
      FIN 46R, FirstEnergy evaluated its power purchase agreements and determined
      that
      certain NUG entities may be VIEs to the extent they own a plant that sells
      substantially all of its output to the Companies and the contract price for
      power is correlated with the plant’s variable costs of production. FirstEnergy,
      through its subsidiaries JCP&L, Met-Ed and Penelec, maintains approximately
      30 long-term power purchase agreements with NUG entities. The agreements were
      structured pursuant to the Public Utility Regulatory Policies Act of 1978.
      FirstEnergy was not involved in the creation of, and has no equity or debt
      invested in, these entities.





FirstEnergy
      has
      determined that for all but nine of these entities, neither JCP&L, Met-Ed
      nor Penelec have variable interests in the entities or the entities are
      governmental or not-for-profit organizations not within the scope of FIN 46R.
      JCP&L, Met-Ed or Penelec may hold variable interests in the remaining nine
      entities, which sell their output at variable prices that correlate to some
      extent with the operating costs of the plants.





As
      required by FIN
      46R, FirstEnergy periodically requests from these nine entities the information
      necessary to determine whether they are VIEs or whether JCP&L, Met-Ed or
      Penelec is the primary beneficiary. FirstEnergy has been unable to obtain the
      requested information, which in most cases was deemed by the requested entity
      to
      be proprietary. As such, FirstEnergy applied the scope exception that exempts
      enterprises unable to obtain the necessary information to evaluate entities
      under FIN 46R. The maximum exposure to loss from these entities results from
      increases in the variable pricing component under the contract terms and cannot
      be determined without the requested data. Purchased power costs from these
      entities during the three and six months ended June 30, 2005 and 2004
      are
      shown in the table below:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***JCP&L
            
            $
            29
            
            $
            35
            
            $
            56
            
            $
            63Met-Ed
            
            
            14
            
            
            9
            
            
            30
            
            
            25Penelec
            
            
            7
            
            
            6
            
            
            14
            
            
            13Total
            
            $
            50
            
            $
            50
            
            $
            100
            
            $
            101





**Securitized
      Transition Bonds**





The
      consolidated
      financial statements of FirstEnergy and JCP&L include the results of
      JCP&L Transition, a wholly owned limited liability company of JCP&L. In
      June 2002, JCP&L Transition sold $320 million of transition bonds to
      securitize the recovery of JCP&L's bondable stranded costs associated with
      the previously divested Oyster Creek Nuclear Generating Station.





JCP&L
      did not
      purchase and does not own any of the transition bonds, which are included as
      long-term debt on FirstEnergy's and JCP&L's Consolidated Balance Sheets. The
      transition bonds are obligations of JCP&L Transition only and are
      collateralized solely by the equity and assets of JCP&L Transition, which
      consist primarily of bondable transition property. The bondable transition
      property is solely the property of JCP&L Transition.





Bondable
      transition
      property represents the irrevocable right under New Jersey law of a utility
      company to charge, collect and receive from its customers, through a
      non-bypassable TBC, the principal amount and interest on the transition bonds
      and other fees and expenses associated with their issuance. JCP&L sold the
      bondable transition property to JCP&L Transition and, as servicer, manages
      and administers the bondable transition property, including the billing,
      collection and remittance of the TBC, pursuant to a servicing agreement with
      JCP&L Transition. JCP&L is entitled to a quarterly servicing fee of
      $100,000 that is payable from TBC collections.




**12
          - OHIO
          TAX LEGISLATION**
  On
          June 30,
          2005, the State of Ohio enacted new tax legislation that creates a new
          Commercial Activity Tax (CAT), which is based on qualifying "taxable gross
          receipts" and will not consider any expenses or costs incurred to generate
          such
          receipts, except for items such as cash discounts, returns and allowances,
          and
          bad debts. The CAT tax is effective July 1, 2005, and replaces the
          Ohio
          income-based franchise tax and the Ohio personal property tax. The CAT
          tax is
          phased-in while the current income-based franchise tax is phased-out over
          a
          five-year period at a rate of 20% annually, beginning with the year ended
          2005,
          and the personal property tax is phased-out over a four-year period at
          a rate of
          approximately 25% annually, beginning with the year ended 2005. For example,
          during the phase-out period the Ohio income-based franchise tax will be
          computed
          consistently with the prior tax law, except that the tax liability as computed
          will be multiplied by 4/5 in 2005; 3/5 in 2006; 2/5 in 2007 and 1/5 in
          2008,
          therefore eliminating the current income-based franchise tax over a five-year
          period. As a result of the new tax structure, all net deferred tax benefits
          that
          are not expected to reverse during the five-year phase-in period were
          written-off as of June 30, 2005.





8






The
      increase to income taxes
      associated with the adjustment to net deferred taxes for the three and six
      months ended June 30, 2005 is summarized below *(in
      millions)* :





OE
            
            $
            36.0CEI
            
            
            7.5TE
            
            
            17.5Other
                FirstEnergy subsidiaries
            
            
            10.7Total
                FirstEnergy
            
            $
            71.7





Income
      tax expenses
      were reduced during the three and six months ended June 30, 2005 by the initial
      phase-out of the Ohio income-based franchise tax as summarized below *(in
      millions):*





OE
            
            $
            4.9CEI
            
            
            1.4TE
            
            
            0.5Other
                FirstEnergy subsidiaries
            
            
            0.8Total
                FirstEnergy
            
            $
            7.6





**13
      -
      COMMITMENTS, GUARANTEES AND CONTINGENCIES:**





**(A)**  **GUARANTEES
      AND OTHER ASSURANCES**





As
      part of normal
      business activities, FirstEnergy enters into various agreements on behalf of
      its
      subsidiaries to provide financial or performance assurances to third parties.
      Such agreements include contract guarantees, surety bonds and ratings contingent
      collateralization provisions. As of June 30, 2005, outstanding guarantees
      and other assurances aggregated approximately $2.4 billion and included contract
      guarantees ($1.1 billion), surety bonds ($0.3 billion) and LOCs ($1.0
      billion).





FirstEnergy
      guarantees energy and energy-related payments of its subsidiaries involved
      in
      energy commodity activities - principally to facilitate normal physical
      transactions involving electricity, gas, emission allowances and coal.
      FirstEnergy also provides guarantees to various providers of subsidiary
      financing principally for the acquisition of property, plant and equipment.
      These agreements legally obligate FirstEnergy to fulfill the obligations of
      those subsidiaries directly involved in energy and energy-related transactions
      or financing where the law might otherwise limit the counterparties' claims.
      If
      demands of a counterparty were to exceed the ability of a subsidiary to satisfy
      existing obligations, FirstEnergy's guarantee enables the counterparty's legal
      claim to be satisfied by other FirstEnergy assets. Such parental guarantees
      amount to $0.9 billion (included in the $1.1 billion discussed above) as of
      June 30, 2005 and the likelihood is remote that such guarantees will
      increase amounts otherwise to be paid by FirstEnergy to meet its obligations
      incurred in connection with financings and ongoing energy and energy-related
      contracts.




While
        these types
        of guarantees are normally parental commitments for the future payment of
        subsidiary obligations, subsequent to the occurrence of a credit
        rating-downgrade or "material adverse event" the immediate posting of cash
        collateral or provision of a LOC may be required of the subsidiary. The
        following table summarizes collateral provisions in effect as of June 30,
        2005:
  **Total**
                
                **Collateral
                    Paid**
                
                **Remaining****Collateral
                    Provisions**
                
                
                
                **Exposure**
                
                **Cash**
                
                **LOC**
                
                **Exposure*****(In
                    millions)***Credit
                    rating
                    downgrade
                
                
                
                
                $
                367
                
                $
                141
                
                $
                18
                
                $
                208Adverse
                    event
                
                
                
                
                
                50
                
                
                -
                
                
                7
                
                
                43Total
                
                
                
                
                $
                417
                
                $
                141
                
                $
                25
                
                $
                251





9


Most
      of
      FirstEnergy's surety bonds are backed by various indemnities common within
      the
      insurance industry. Surety bonds and related FirstEnergy guarantees of $296
      million provide additional assurance to outside parties that contractual and
      statutory obligations will be met in a number of areas including construction
      jobs, environmental commitments and various retail transactions.





The
      Companies, with
      the exception of TE and JCP&L, each have a wholly owned subsidiary whose
      borrowings are secured by customer accounts receivable purchased from its
      respective parent company. Each subsidiary company has its own receivables
      financing arrangement and, as a separate legal entity with separate creditors,
      would have to satisfy its obligations to creditors before any of its remaining
      assets could be available to its parent company. The following table includes
      information regarding the subsidiary companies and their respective financing
      arrangement.





**Financing
                Arrangement****Subsidiary
                Company**
            
            **Parent
                Company**
            
            **Borrowing
                Capacity*****(In
                millions)***OES
                Capital,
                Incorporated
            
            
            OE
            
            $
            170CFC
            
            
            CEI
            
            
            200Penn
                Power
                Funding LLC
            
            
            Penn
            
            
            25Met-Ed
                Funding LLC
            
            
            Met-Ed
            
            
            80Penelec
                Funding LLC
            
            
            Penelec
            
            
            75$
            550





FirstEnergy
      has
      guaranteed the obligations of the operators of the TEBSA project, up to a
      maximum of $6 million (subject to escalation) under the project's operations
      and
      maintenance agreement. In connection with the sale of TEBSA in January 2004,
      the
      purchaser indemnified FirstEnergy against any loss under this guarantee.
      FirstEnergy has also provided an LOC ($47 million as of June 30, 2005),
      which is renewable and declines yearly based upon the senior outstanding debt
      of
      TEBSA.





**(B)**  **ENVIRONMENTAL
      MATTERS**





Various
      federal,
      state and local authorities regulate the Companies with regard to air and water
      quality and other environmental matters. The effects of compliance on the
      Companies with regard to environmental matters could have a material adverse
      effect on FirstEnergy's earnings and competitive position. These environmental
      regulations affect FirstEnergy's earnings and competitive position to the extent
      that it competes with companies that are not subject to such regulations and
      therefore do not bear the risk of costs associated with compliance, or failure
      to comply, with such regulations. Overall, FirstEnergy believes it is in
      compliance with existing regulations but is unable to predict future change
      in
      regulatory policies and what, if any, the effects of such changes would be.
      FirstEnergy estimates additional capital expenditures for environmental
      compliance of approximately $430 million for 2005 through 2007.




The
      Companies
      accrue environmental liabilities only when they conclude that it is probable
      that they have an obligation for such costs and can reasonably determine the
      amount of such costs. Unasserted claims are reflected in the Companies’
      determination of environmental liabilities and are accrued in the period that
      they are both probable and reasonably estimable.




FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .




*Clean
          Air Act
          Compliance*
  The
          Companies are
          required to meet federally approved SO 2 regulations.
          Violations of such regulations can result in shutdown of the generating
          unit
          involved and/or civil or criminal penalties of up to $32,500 for each day
          the
          unit is in violation. The EPA has an interim enforcement policy for
          SO 2 regulations in
          Ohio that allows for compliance based on a 30-day averaging period. The
          Companies cannot predict what action the EPA may take in the future with
          respect
          to the interim enforcement policy.
 
 The
          Companies
          believe they are complying with SO 2 reduction
          requirements under the Clean Air Act Amendments of 1990 by burning lower-sulfur
          fuel, generating more electricity from lower-emitting plants, and/or using
          emission allowances. NO x reductions
          required by the 1990 Amendments are being achieved through combustion controls
          and the generation of more electricity at lower-emitting plants. In September
          1998, the EPA finalized regulations requiring additional NO x reductions from
          the Companies' facilities. The EPA's NO x Transport Rule
          imposes uniform reductions of NO x emissions (an
          approximate 85 percent reduction in utility plant NO x emissions from
          projected 2007 emissions) across a region of nineteen states (including
          Michigan, New Jersey, Ohio and Pennsylvania) and the District of Columbia
          based
          on a conclusion that such NO x emissions are
          contributing significantly to ozone levels in the eastern United States.
          The
          Companies believe their facilities are also complying with the NO x budgets
          established under State Implementation Plans through combustion controls
          and
          post-combustion controls, including Selective Catalytic Reduction and Selective
          Non-Catalytic Reduction systems, and/or using emission
          allowances.





10


*National
        Ambient Air Quality Standards*


In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Michigan, New Jersey,
      Ohio and Pennsylvania) and the District of Columbia based on proposed findings
      that air emissions from 28 eastern states and the District of Columbia
      significantly contribute to nonattainment of the NAAQS for fine particles and/or
      the "8-hour" ozone NAAQS in other states. CAIR will require additional
      reductions of NO x and SO 2 emissions in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      The Companies’
      Michigan, Ohio and Pennsylvania fossil-fired generation facilities will be
      subject to the caps on SO 2 and NO x emissions, whereas
      our New Jersey fossil-fired generation facilities will be subject to a cap
      on
      NO x emissions only.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these regulations may be
      substantial and will depend on how they are ultimately implemented by the states
      in which the Companies operate affected facilities.





*Mercury
      Emissions*




In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission
      caps under
      the EPA's CAIR program. Phase II of the mercury cap-and-trade program will
      cap
      nationwide mercury emissions from coal-fired power plants at 15 tons per year
      by
      2018. The future cost of compliance with these regulations may be
      substantial.





*W.
        H. Sammis
        Plant*
 In
          1999 and 2000,
          the EPA issued NOV or Compliance Orders to nine utilities covering 44 power
          plants, including the W. H. Sammis Plant, which is owned by OE and Penn.
          In
          addition, the U.S. Department of Justice (DOJ) filed eight civil complaints
          against various investor-owned utilities, including a complaint against
          OE and
          Penn in the U.S. District Court for the Southern District of Ohio. These
          cases
          are referred to as New Source Review cases. The NOV and complaint allege
          violations of the Clean Air Act based on operation and maintenance of the
          W. H.
          Sammis Plant dating back to 1984. The complaint requests permanent injunctive
          relief to require the installation of "best available control technology"
          and
          civil penalties of up to $27,500 per day of violation. On August 7,
          2003,
          the United States District Court for the Southern District of Ohio ruled
          that 11
          projects undertaken at the W. H. Sammis Plant between 1984 and 1998 required
          pre-construction permits under the Clean Air Act. On March 18, 2005,
          OE and
          Penn announced that they had reached a settlement with the EPA, the DOJ
          and
          three states (Connecticut, New Jersey, and New York) that resolved all
          issues
          related to the W. H. Sammis Plant New Source Review litigation. This settlement
          agreement, which is in the form of a Consent Decree that was approved by
          the
          Court on July 11, 2005, requires OE and Penn to reduce emissions
          from the
          W. H. Sammis Plant and other plants through the installation of pollution
          control devices requiring capital expenditures currently estimated to be
          $1.1
          billion (primarily in the 2008 to 2011 time period). The settlement agreement
          also requires OE and Penn to spend up to $25 million toward environmentally
          beneficial projects, which include wind energy purchase power agreements
          over a
          20-year term. OE and Penn agreed to pay a civil penalty of $8.5 million.
          Results
          for the first quarter of 2005 included the penalties payable by OE and
          Penn of
          $7.8 million and $0.7 million, respectively. OE and Penn also recognized
          liabilities of $9.2 million and $0.8 million, respectively, for probable
          future
          cash contributions toward environmentally beneficial projects during the
          first
          quarter of 2005.
 
 *Climate
        Change*
 
 In
        December 1997,
        delegates to the United Nations' climate summit in Japan adopted an agreement,
        the Kyoto Protocol (Protocol), to address global warming by reducing the
        amount
        of man-made greenhouse gases emitted by developed countries by 5.2% from
        1990
        levels between 2008 and 2012. The United States signed the Protocol in 1998
        but
        it failed to receive the two-thirds vote of the United States Senate required
        for ratification. However, the Bush administration has committed the United
        States to a voluntary climate change strategy to reduce domestic greenhouse
        gas
        intensity - the ratio of emissions to economic output - by 18 percent through
        2012.




11




The
          Companies
          cannot currently estimate the financial impact of climate change policies,
          although the potential restrictions on CO 2 emissions could
          require significant capital and other expenditures. However, the CO 2 emissions per
          kilowatt-hour of electricity generated by the Companies is lower than many
          regional competitors due to the Companies' diversified generation sources
          which
          include low or non-CO 2 emitting gas-fired
          and nuclear generators.
  *Clean
        Water
        Act*




Various
      water
      quality regulations, the majority of which are the result of the federal Clean
      Water Act and its amendments, apply to the Companies' plants. In addition,
      Ohio,
      New Jersey and Pennsylvania have water quality standards applicable to the
      Companies' operations. As provided in the Clean Water Act, authority to grant
      federal National Pollutant Discharge Elimination System water discharge permits
      can be assumed by a state. Ohio, New Jersey and Pennsylvania have assumed such
      authority.





On
      September 7, 2004, the EPA established new performance standards under
      Section 316(b) of the Clean Water Act for reducing impacts on fish and shellfish
      from cooling water intake structures at certain existing large electric
      generating plants. The regulations call for reductions in impingement mortality,
      when aquatic organisms are pinned against screens or other parts of a cooling
      water intake system and entrainment, which occurs when aquatic species are
      drawn
      into a facility's cooling water system. The Companies are conducting
      comprehensive demonstration studies, due in 2008, to determine the operational
      measures, equipment or restoration activities, if any, necessary for compliance
      by their facilities with the performance standards. FirstEnergy is unable to
      predict the outcome of such studies. Depending on the outcome of such studies,
      the future cost of compliance with these standards may require material capital
      expenditures.





*Regulation
      of
      Hazardous Waste*




As
      a result of the
      Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
      Substances Control Act of 1976, federal and state hazardous waste regulations
      have been promulgated. Certain fossil-fuel combustion waste products, such
      as
      coal ash, were exempted from hazardous waste disposal requirements pending
      the
      EPA's evaluation of the need for future regulation. The EPA subsequently
      determined that regulation of coal ash as a hazardous waste is unnecessary.
      In
      April 2000, the EPA announced that it will develop national standards regulating
      disposal of coal ash under its authority to regulate nonhazardous
      waste.





The Companies have been named as PRPs at waste disposal sites, which may require
      cleanup under the Comprehensive Environmental Response, Compensation, and
      Liability Act of 1980. Allegations of disposal of hazardous substances at
      historical sites and the liability involved are often unsubstantiated and
      subject to dispute; however, federal law provides that all PRPs for a particular
      site are liable on a joint and several basis. Therefore, environmental
      liabilities that are considered probable have been recognized on the
      Consolidated Balance Sheet as of June 30, 2005, based on estimates of
      the
      total costs of cleanup, the Companies' proportionate responsibility for such
      costs and the financial ability of other nonaffiliated entities to pay. In
      addition, JCP&L has accrued liabilities for environmental remediation of
      former manufactured gas plants in New Jersey; those costs are being recovered
      by
      JCP&L through a non-bypassable SBC. Included in Current Liabilities and
      Other Noncurrent Liabilities are accrued liabilities aggregating approximately
      $64 million (JCP&L - $46.8 million, CEI - $2.3 million, TE - $0.2 million,
      Met-Ed - $47,000 and other - $15.0 million) as of June 30, 2005.


**(C)**  **OTHER
          LEGAL
          PROCEEDINGS**
 
 *Power
          Outages
          and Related Litigation*
  In
          July 1999, the
          Mid-Atlantic States experienced a severe heat wave, which resulted in power
          outages throughout the service territories of many electric utilities,
          including
          JCP&L's territory. In an investigation into the causes of the outages and
          the reliability of the transmission and distribution systems of all four
          of New
          Jersey’s electric utilities, the NJBPU concluded that there was not a prima
          facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or
          improper service to its customers. Two class action lawsuits (subsequently
          consolidated into a single proceeding) were filed in New Jersey Superior
          Court
          in July 1999 against JCP&L, GPU and other GPU companies, seeking
          compensatory and punitive damages arising from the July 1999 service
          interruptions in the JCP&L territory.
 
 In
          August 2002, the
          trial court granted partial summary judgment to JCP&L and dismissed the
          plaintiffs' claims for consumer fraud, common law fraud, negligent
          misrepresentation, and strict product liability. In November 2003, the
          trial
          court granted JCP&L's motion to decertify the class and denied plaintiffs'
          motion to permit into evidence their class-wide damage model indicating
          damages
          in excess of $50 million. These class decertification and damage rulings
          were
          appealed to the Appellate Division. The Appellate Division issued a decision
          on
          July 8, 2004, affirming the decertification of the originally certified
          class, but remanding for certification of a class limited to those customers
          directly impacted by the outages of JCP&L transformers in Red Bank, New
          Jersey. On September 8, 2004, the New Jersey Supreme Court denied
          the
          motions filed by plaintiffs and JCP&L for leave to appeal the decision of
          the Appellate Division. JCP&L has filed a motion for summary judgment.
          FirstEnergy is unable to predict the outcome of these matters and no liability
          has been accrued as of June 30, 2005.


12




On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. The FERC or other applicable government agencies and reliability
      coordinators may, however take a different view as to recommended enhancements
      or may recommend additional enhancements in the future that could require
      additional, material expenditures. Finally, the PUCO is continuing to review
      FirstEnergy’s filing that addressed upgrades to control room computer hardware
      and software and enhancements to the training of control room operators, before
      determining the next steps, if any, in the proceeding.





Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.





One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





*Nuclear
      Plant
      Matters*




FENOC
      received a
      subpoena in late 2003 from a grand jury sitting in the United States District
      Court for the Northern District of Ohio, Eastern Division requesting the
      production of certain documents and records relating to the inspection and
      maintenance of the reactor vessel head at the Davis-Besse Nuclear Power Station.
      On December 10, 2004, FirstEnergy received a letter from the United
      States
      Attorney's Office stating that FENOC is a target of the federal grand jury
      investigation into alleged false statements made to the NRC in the Fall of
      2001
      in response to NRC Bulletin 2001-01. The letter also said that the designation
      of FENOC as a target indicates that, in the view of the prosecutors assigned
      to
      the matter, it is likely that federal charges will be returned against FENOC
      by
      the grand jury. On February 10, 2005, FENOC received an additional subpoena
      for documents related to root cause reports regarding reactor head degradation
      and the assessment of reactor head management issues at Davis-Besse. On
      May 11, 2005, FENOC received a subpoena for documents related to outside
      meetings attended by Davis-Besse personnel on corrosion and cracking of control
      rod drive mechanisms and additional root cause evaluations.







13


On
      April 21,
      2005, the NRC issued a NOV and proposed a $5.45 million civil penalty related
      to
      the degradation of the Davis-Besse reactor vessel head described above. On
      July
      8, 2005, FENOC requested an additional 120 days to respond to the NOV.
      FirstEnergy accrued $2.0 million for the proposed fine in 2004 and accrued
      the
      remaining liability for the proposed fine during the first quarter of
      2005.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      based on the events surrounding Davis-Besse, it could have a material adverse
      effect on FirstEnergy's or its subsidiaries' financial condition and results
      of
      operations.





Effective
      July 1, 2005, the NRC oversight panel for Davis-Besse was terminated
      and
      Davis-Besse returned to the standard NRC reactor oversight process. At that
      time, NRC inspections were augmented to include inspections to support the
      NRC's
      Confirmatory Order dated March 8, 2004 that was issued at the time of
      startup and to address an NRC White Finding related to the performance of the
      emergency sirens.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, which is currently owned and/or leased by OE, CEI, TE and Penn (however,
      see Note 17 regarding FirstEnergy’s pending intra-system generation asset
      transfers, which will include owned portions of the plant). On
      April 4,
      2005, the NRC held a public forum to discuss FENOC’s performance at the Perry
      Nuclear Power Plant as identified in the NRC's annual assessment letter to
      FENOC. Similar public meetings are held with all nuclear power plant licensees
      following issuance by the NRC of their annual assessments. According to the
      NRC,
      overall the Perry Plant operated "in a manner that preserved public health
      and
      safety" and met all cornerstone objectives although it remained under the
      heightened NRC oversight since August 2004. During the public forum and in
      the
      annual assessment, the NRC indicated that additional inspections will continue
      and that the plant must improve performance to be removed from the
      Multiple/Repetitive Degraded Cornerstone Column of the Action Matrix. On
      May 26, 2005, the NRC held a public meeting to discuss its oversight
      of the
      Perry Plant. While the NRC stated that the plant continued to operate safely,
      the NRC also stated that the overall performance had not substantially improved
      since the heightened inspection was initiated. If performance does not improve,
      the NRC has a range of options under the Reactor Oversight Process, from
      increased oversight to possible impact to the plant’s operating authority. As a
      result, these matters could have a material adverse effect on FirstEnergy's
      or
      its subsidiaries' financial condition.





*Other
      Legal
      Matters*




There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to FirstEnergy's normal business operations pending against FirstEnergy
      and its subsidiaries. The most significant not otherwise discussed above are
      described below.





On
      October 20,
      2004, FirstEnergy was notified by the SEC that the previously disclosed informal
      inquiry initiated by the SEC's Division of Enforcement in September 2003
      relating to the restatements in August 2003 of previously reported results
      by
      FirstEnergy and the Ohio Companies, and the Davis-Besse extended outage, have
      become the subject of a formal order of investigation. The SEC's formal order
      of
      investigation also encompasses issues raised during the SEC's examination of
      FirstEnergy and the Companies under the PUHCA. Concurrent with this
      notification, FirstEnergy received a subpoena asking for background documents
      and documents related to the restatements and Davis-Besse issues. On
      December 30, 2004, FirstEnergy received a subpoena asking for documents
      relating to issues raised during the SEC's PUHCA examination. FirstEnergy has
      cooperated fully with the informal inquiry and will continue to do so with
      the
      formal investigation.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      or are otherwise made subject to liability based on the above matters, it could
      have a material adverse effect on FirstEnergy's or its subsidiaries' financial
      condition and results of operations.





**14
      -
      REGULATORY MATTERS:**





**Reliability
      Initiatives**




In
      late 2003 and
      early 2004, a series of letters, reports and recommendations were issued from
      various entities, including governmental, industry and ad hoc reliability
      entities (PUCO, FERC, NERC and the U.S. - Canada Power System Outage Task Force)
      regarding enhancements to regional reliability. In 2004, FirstEnergy completed
      implementation of all actions and initiatives related to enhancing area
      reliability, improving voltage and reactive management, operator readiness
      and
      training and emergency response preparedness recommended for completion in
      2004.
      On July 14, 2004, NERC independently verified that FirstEnergy had
      implemented the various initiatives to be completed by June 30 or summer
      2004, with minor exceptions noted by FirstEnergy, which exceptions are now
      essentially complete. FirstEnergy is proceeding with the implementation of
      the
      recommendations that were to be completed subsequent to 2004 and will continue
      to periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades to existing
      equipment. The FERC or other applicable government agencies and reliability
      coordinators may, however, take a different view as to recommended enhancements
      or may recommend additional enhancements in the future that could require
      additional, material expenditures. Finally, the PUCO is continuing to review
      the
      FirstEnergy filing that addressed upgrades to control room computer hardware
      and
      software and enhancements to the training of control room operators, before
      determining the next steps, if any, in the proceeding.







14


As
      a result of
      outages experienced in JCP&L's service area in 2002 and 2003, the NJBPU had
      implemented reviews into JCP&L's service reliability. On March 29,
      2004, the NJBPU adopted a Memorandum of Understanding (MOU) that set out
      specific tasks related to service reliability to be performed by JCP&L and a
      timetable for completion and endorsed JCP&L's ongoing actions to implement
      the MOU. On June 9, 2004, the NJBPU approved a Stipulation that
      incorporates the final report of a Special Reliability Master who made
      recommendations on appropriate courses of action necessary to ensure system-wide
      reliability. The Stipulation also incorporates the Executive Summary and
      Recommendation portions of the final report of a focused audit of JCP&L's
      Planning and Operations and Maintenance programs and practices (Focused Audit).
      A final order in the Focused Audit docket was issued by the NJBPU on
      July 23, 2004. On February 11, 2005, JCP&L met with the Ratepayer
      Advocate to discuss reliability improvements. JCP&L continues to file
      compliance reports reflecting activities associated with the MOU and
      Stipulation.





In
      May 2004, the
      PPUC issued an order approving revised reliability benchmarks and standards,
      including revised benchmarks and standards for Met-Ed, Penelec and Penn. Met-Ed,
      Penelec and Penn filed a Petition for Amendment of Benchmarks with the PPUC
      on
      May 26, 2004, due to their implementation of automated outage management
      systems following restructuring. Evidentiary hearings have been scheduled for
      November 2005. FirstEnergy is unable to predict the outcome of this
      proceeding.





In
      November 2004,
      the PPUC approved a settlement agreement filed by Met-Ed, Penelec and Penn
      that
      addressed issues related to a PPUC investigation into Met-Ed's, Penelec's and
      Penn's service reliability performance. As part of the settlement, Met-Ed,
      Penelec and Penn agreed to enhance service reliability, ongoing periodic
      performance reporting and communications with customers, and to collectively
      maintain their current spending levels of at least $255 million annually on
      combined capital and operation and maintenance expenditures for transmission
      and
      distribution for the years 2005 through 2007. The settlement also outlines
      an
      expedited remediation process to address any alleged non-compliance with terms
      of the settlement and an expedited PPUC hearing process if remediation is
      unsuccessful.





**Ohio**





On
      August 5,
      2004, the Ohio Companies accepted the Rate Stabilization Plan as modified and
      approved by the PUCO on August 4, 2004, subject to a competitive bid
      process. The Rate Stabilization Plan was filed by the Ohio Companies to
      establish generation service rates beginning January 1, 2006, in response
      to PUCO concerns about price and supply uncertainty following the end of the
      Ohio Companies' transition plan market development period. In the second quarter
      of 2004, the Ohio Companies implemented the accounting modifications related
      to
      the extended amortization periods and interest costs deferral on the deferred
      customer shopping incentive balances. On October 1 and October 4,
      2004, the OCC and NOAC, respectively, filed appeals with the Supreme Court
      of
      Ohio to overturn the June 9, 2004 PUCO order and associated entries
      on
      rehearing.





The
      Rate
      Stabilization Plan extends current generation prices through 2008, ensuring
      adequate generation supply at stabilized prices, and continues the Ohio
      Companies' support of energy efficiency and economic development efforts. Other
      key components of the Rate Stabilization Plan include the
      following:





·
            Amortization
                period for transition costs being recovered through the RTC extends
                for OE
                to as late as 2007; CEI to as late as mid-2009 and TE to as late
                as
                mid-2008;





·
            Deferral
                of
                interest costs on the accumulated customer shopping incentives as
                new
                regulatory assets; and





·
            Ability
                to
                request increases in generation charges during 2006 through 2008,
                under
                certain limited conditions, for increases in fuel costs and
                taxes.







15


On
      May 27,
      2005, the Ohio Companies filed an application with the PUCO to establish a
      generation rate adjustment rider under the Rate Stabilization Plan. The
      application seeks to implement recovery of increased fuel costs from 2006
      through 2008 applicable to the Ohio Companies' retail customers through a tariff
      rider to be implemented January 1, 2006. The application reflects projected
      increases in fuel costs in 2006 compared to 2002 baseline costs. The new rider
      is seeking to recover all costs above the baseline (approximately $93 million
      in
      2006). Various parties including the OCC have intervened in this case. The
      Ohio
      Companies have received discovery requests from the OCC and the PUCO staff.
      A
      procedural schedule has been established by the PUCO, with a hearing scheduled
      for October 4, 2005.





On
      December 9,
      2004, the PUCO rejected the auction price results from a required competitive
      bid process and issued an entry stating that the pricing under the approved
      Rate
      Stabilization Plan will take effect on January 1, 2006. The PUCO may
      require the Ohio Companies to undertake, no more often than annually, a similar
      competitive bid process to secure generation for the years 2007 and 2008. On
      July 22, 2005, FirstEnergy filed a competitive bid process for the period
      beginning in 2007 that is similar to the competitive bid process approved by
      the
      PUCO for the Ohio Companies in 2004. Any acceptance of future competitive bid
      results would terminate the Rate Stabilization Plan pricing, but not the related
      approved accounting, and not until twelve months after the PUCO authorizes
      such
      termination.





**New
      Jersey**





JCP&L
      is
      permitted to defer for future collection from customers the amounts by which
      its
      costs of supplying BGS to non-shopping customers and costs incurred under NUG
      agreements exceed amounts collected through BGS and MTC rates. As of
      June 30, 2005, the accumulated deferred cost balance totaled approximately
      $518 million. New Jersey law allows for securitization of JCP&L's deferred
      balance upon application by JCP&L and a determination by the NJBPU that the
      conditions of the New Jersey restructuring legislation are met. On
      February 14, 2003, JCP&L filed for approval of the securitization of
      the deferred balance. JCP&L is in discussions with the NJBPU staff as a
      result of the stipulated settlement agreements (as further discussed below)
      which recommended that the NJBPU issue an order regarding JCP&L's
      application.





The
       2003
      NJBPU decision on JCP&L's base electric rate proceeding disallowed certain
      regulatory assets and provided for an interim return on equity of 9.5% on
      JCP&L's rate base. The decision ordered a Phase II proceeding in which the
      NJBPU would review whether JCP&L is in compliance with current service
      reliability and quality standards and determine whether the expenditures and
      projects undertaken by JCP&L to increase its system's reliability are
      prudent and reasonable for rate recovery. Depending on its assessment of
      JCP&L's service reliability, the NJBPU could have increased JCP&L’s
      return on equity to 9.75% or decreased it to 9.25%. On August 15, 2003
      and
      June 1, 2004, JCP&L filed with the NJBPU an interim motion and a
      supplemental and amended motion for rehearing and reconsideration of the 2003
      NJBPU decision, respectively. On July 7, 2004, the NJBPU granted limited
      reconsideration and rehearing on the following issues: (1) deferred cost
      disallowances; (2) the capital structure including the rate of return; (3)
      merger savings, including amortization of costs to achieve merger savings;
      and
      (4) decommissioning costs.





On
      July 16,
      2004, JCP&L filed the Phase II petition and testimony with the NJBPU,
      requesting an increase in base rates of $36 million for the recovery of system
      reliability costs and a 9.75% return on equity. The filing also requested an
      increase to the MTC deferred balance recovery of approximately $20 million
      annually.





On
      May 25,
      2005, the NJBPU approved two stipulated settlement agreements. The first
      stipulation between JCP&L and the NJBPU staff resolves all of the issues
      associated with JCP&L's motion for reconsideration of the 2003 NJBPU order
      (Phase I Order). The second stipulation between JCP&L, the NJBPU staff and
      the Ratepayer Advocate resolves all of the issues associated with JCP&L's
      Phase II proceeding. The
      stipulated
      settlements provide for, among other things, the following:





·
            An
                annual
                increase in distribution revenues of $23 million effective June 1,
                2005, associated with the Phase I Order
                reconsideration;





·
            An
                annual
                increase in distribution revenues of $36 million effective June 1,
                2005, related to JCP&L's Phase II
                Petition;





·
            An
                annual
                reduction in both rates and amortization expense of $8 million, effective
                June 1, 2005, in anticipation of an NJBPU order regarding
                JCP&L's
                request to securitize up to $277 million of its deferred cost
                balance;





·
            An
                increase
                in JCP&L's authorized return on common equity from 9.5% to 9.75%;
                and








16





·
            A
                commitment
                by JCP&L to maintain a target level of customer service reliability
                with a reduction in JCP&L's authorized return on common equity to its
                previous level of 9.5% after the target is not met for two consecutive
                quarters. The authorized return on common equity would then be restored
                to
                9.75% when the target is met for two consecutive
                quarters.





The
      Phase II
      stipulation included an agreement that the distribution revenues increase
      reflects a three-year amortization of JCP&L's service reliability
      improvement costs incurred in 2003-2005. This resulted in the creation of a
      regulatory asset associated with the accelerated tree trimming costs which
      were
      expensed in 2003 and 2004. The establishment of the new regulatory asset of
      approximately $28 million resulted in an increase to net income of approximately
      $16 million ($0.05 per share of common stock) in the second quarter of
      2005.





JCP&L
      sells all
      self-supplied energy (NUGs and owned generation) to the wholesale market with
      offsetting credits to its deferred energy balance with the exception of 300
      MW
      from JCP&L's NUG committed supply currently being used to serve BGS
      customers pursuant to NJBPU order. New BGS tariffs reflecting the results of
      a
      February 2005 auction for the BGS supply became effective June 1, 2005.
      On
      May 5, 2005, the NJBPU issued an order that BGS procurement proposals
      for
      post transition year four be filed by July 1, 2005. The NJBPU requested
      that the filings address transmission rate issues and rate design alternatives.
      JCP&L filed its proposal on July 1, 2005. The auction is scheduled to
      take place in February 2006 for the supply period beginning June 1,
      2006.





In
      accordance with
      an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
      2004 supporting a continuation of the current level and duration of the funding
      of TMI-2 decommissioning costs by New Jersey customers without a reduction,
      termination or capping of the funding. On September 30, 2004, JCP&L
      filed an updated TMI-2 decommissioning study. This study resulted in an updated
      total decommissioning cost estimate of $729 million (in 2003 dollars) compared
      to the estimated $528 million (in 2003 dollars) from the prior 1995
      decommissioning study. The Ratepayer Advocate filed comments on
      February 28, 2005. On March 18, 2005, JCP&L filed a response to
      those comments. A schedule for further proceedings has not yet been
      set.





**Pennsylvania**





A
      February 2002
      Commonwealth Court of Pennsylvania decision affirmed the June 2001 PPUC decision
      regarding approval of the FirstEnergy/GPU merger, remanded the issues of
      quantification and allocation of merger savings to the PPUC and denied Met-Ed
      and Penelec the rate relief initially approved in the PPUC decision. On
      October 2, 2003, the PPUC issued an order concluding that the Commonwealth
      Court reversed the PPUC’s June 2001 order in its entirety. In accordance
      with the PPUC's direction, Met-Ed and Penelec filed supplements to their tariffs
      that were effective October 2003 and that reflected the CTC rates and shopping
      credits in effect prior to the June 2001 order.





In
      accordance with
      PPUC directives, Met-Ed and Penelec have been negotiating with interested
      parties in an attempt to resolve the merger savings issues that are the subject
      of remand from the Commonwealth Court. Met-Ed’s and Penelec’s combined portion
      of total merger savings is estimated to be approximately $31.5 million. On
      April 13, 2005, the Commonwealth Court issued an interim order in the
      remand proceeding that the parties should report the status of the negotiations
      to the PPUC with a copy to the ALJ. The parties exchanged settlement proposals
      in May and June 2005 and continue to have settlement discussions.





In
      an
      October 16, 2003 order, the PPUC approved June 30, 2004 as the
      date
      for Met-Ed's and Penelec's NUG trust fund refunds. The PPUC order also denied
      their accounting treatment request regarding the CTC rate/shopping credit swap
      by requiring Met-Ed and Penelec to treat the stipulated CTC rates that were
      in
      effect from January 1, 2002 on a retroactive basis. On October 22,
      2003, Met-Ed and Penelec filed an Objection with the Commonwealth Court asking
      that the Court reverse this PPUC finding; a Commonwealth Court judge
      subsequently denied their Objection on October 27, 2003 without
      explanation. On October 31, 2003, Met-Ed and Penelec filed an Application
      for Clarification of the Court order with the judge, a Petition for Review
      of
      the PPUC's October 2 and October 16 Orders, and an application
      for
      reargument, if the judge, in his clarification order, indicates that Met-Ed's
      and Penelec's Objection was intended to be denied on the merits. The Reargument
      Brief before the Commonwealth Court was filed on January 28, 2005.




Met-Ed
      and Penelec
      purchase a portion of their PLR requirements from FES through a wholesale power
      sales agreement. The PLR sale is automatically extended for each successive
      calendar year unless any party elects to cancel the agreement by November 1
      of the preceding year. Under the terms of the wholesale agreement, FES retains
      the supply obligation and the supply profit and loss risk, for the portion
      of
      power supply requirements not self-supplied by Met-Ed and Penelec under their
      NUG contracts and other power contracts with nonaffiliated third party
      suppliers. This arrangement reduces Met-Ed's and Penelec's exposure to high
      wholesale power prices by providing power at a fixed price for their uncommitted
      PLR energy costs during the term of the agreement with FES. Met-Ed and Penelec
      are authorized to defer differences between NUG contract costs and current
      market prices.







17


**Transmission**





On
      November 1,
      2004, ATSI requested authority from the FERC to defer approximately $54 million
      of vegetation management costs ($17 million deferred as of June 30,
      2005)
      estimated to be incurred from 2004 through 2007. On March 4, 2005, the
      FERC
      approved ATSI's request to defer those costs. ATSI expects to file an
      application with FERC in the first quarter of 2006 for recovery of the deferred
      costs.





On
      December 30, 2004, the Ohio Companies filed with the PUCO two applications
      related to the recovery of transmission and ancillary service related costs.
      The
      first application seeks recovery of these costs beginning January 1, 2006.
      At
      the time of filing the application, these costs were estimated to be
      approximately $30 million per year; however, the Ohio Companies anticipate
      that
      this amount will increase. The Ohio Companies requested that these costs be
      recovered through a rider that would be effective on January 1, 2006 and
      adjusted thereafter each July 1. The Ohio Companies reached a settlement with
      OCC, PUCO staff, Industrial Energy Users - Ohio and OPAE. The only other party
      in this proceeding, Dominion Retail, Inc., agreed not to oppose the settlement.
      This settlement, which was filed with the PUCO on July 22, 2005, provides for
      the rider recovery requested by the Ohio Companies, with carrying charges
      applied in the subsequent year’s rider for any over or under collection while
      the then-current rider is in effect. If the settlement stipulation is approved
      by the PUCO, the actual amounts to be recovered through the January 1, 2006
      rider will be submitted to the PUCO on or before November 1, 2005.





The
      second
      application seeks authority to defer costs associated with transmission and
      ancillary service related costs incurred during the period from October 1,
      2003 through December 31, 2005. On May 18, 2005, the PUCO granted
      the
      accounting authority for the Ohio Companies to defer incremental transmission
      and ancillary service-related charges incurred as a participant in the MISO,
      but
      only for those costs incurred during the period December 30, 2004, through
      December 31, 2005. Deferral of all costs incurred prior to December 31, 2004
      was
      denied. The PUCO also authorized the Ohio Companies to accrue carrying charges
      on the deferred balances. An application filed with the PUCO to recover these
      deferred charges over a five-year period through the rider, beginning in 2006,
      is pending. The OCC, OPAE and the Ohio Companies each filed applications for
      rehearing. The Ohio Companies sought authority to defer the transmission and
      ancillary service related costs incurred during the period October 1, 2003
      through December 29, 2004, while both OCC and OPAE sought to have the PUCO
      deny
      deferral of all costs. On
      July 6,
      2005, the PUCO denied the Ohio Companies and OCC’s applications and, at the
      request of the Ohio Companies, struck as untimely OPAE’s application. The Ohio
      Companies and the OCC have sixty days from that date to file a notice of appeal
      with the Ohio Supreme Court.





On
      January 12,
      2005, Met-Ed and Penelec filed a request with the PPUC for deferral of
      transmission-related costs beginning January 1, 2005, estimated to be
      approximately $8 million per month.





Various
      parties
      have intervened in each of the cases above, and the Companies have not yet
      implemented deferral accounting for these costs.





On
      September 16, 2004, the FERC issued an order that imposed additional
      obligations on CEI under certain pre-Open Access transmission contracts among
      CEI and the cities of Cleveland and Painesville, Ohio. Under the FERC's original
      decision, CEI would have been responsible for a portion of new energy market
      charges imposed by MISO when its energy markets began in the spring of 2005.
      CEI
      filed for rehearing of the order from the FERC on October 18, 2004.
      On
      April 15, 2005, the FERC issued an order on rehearing that "carves out"
      these contracts from the MISO Day 2 market, which became effecitve April 1,
      2005. While the order on rehearing is favorable to CEI, the impact of the FERC
      decision on CEI is dependent upon many factors, including the arrangements
      made
      by the cities for transmission service and MISO's ability to administer the
      contracts. Accordingly, the impact of this decision cannot be determined at
      this
      time.





On
      January 31,
      2005, certain PJM transmission owners made three filings pursuant to a
      settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
      Penelec were parties to that proceeding and joined in two of the filings. In
      the
      first filing, the settling transmission owners submitted a filing justifying
      continuation of their existing rate design within the PJM RTO. In the second
      filing, the settling transmission owners proposed a revised Schedule 12 to
      the
      PJM tariff designed to harmonize the rate treatment of new and existing
      transmission facilities. Interventions and protests were filed on
      February 22, 2005. In the third filing, Baltimore Gas and Electric Company
      and Pepco Holdings, Inc. requested a formula rate for transmission service
      provided within their respective zones. On May 31, 2005, the FERC issued
      an
      order on these cases. First, it set for hearing the existing rate design and
      indicated that it will issue a final order within six months. Second, the FERC
      approved the proposed Schedule 12 rate harmonization. Third, the FERC accepted
      the proposed formula rate, subject to referral and hearing procedures. On
      June 30, 2005, the PJM transmission owners filed a request for rehearing
      of
      the May 31, 2005 order.





**Regulatory
      Assets**





The
      EUOC recognize,
      as regulatory assets, costs which the FERC, PUCO, PPUC and NJBPU have authorized
      for recovery from customers in future periods. Without the probability of such
      authorization, costs currently recorded as regulatory assets would have been
      charged to income as incurred. All regulatory assets are expected to be
      recovered from customers under the Companies' respective transition and
      regulatory plans. Based on those plans, the Companies continue to bill and
      collect cost-based rates for their transmission and distribution services,
      which
      remain regulated; accordingly, it is appropriate that the Companies continue
      the
      application of SFAS 71 to those operations.






18





The
      Ohio Companies
      are deferring customer shopping incentives and interest costs as new regulatory
      assets in accordance with the transition and rate stabilization plans. These
      regulatory assets (OE - $274 million, CEI - $354 million, TE - $108 million,
      as
      of June 30, 2005) will be recovered through a surcharge rate equal to
      the
      RTC rate in effect when the transition costs have been fully recovered. Recovery
      of the new regulatory assets will begin at that time and amortization of the
      regulatory assets for each accounting period will be equal to the surcharge
      revenue recognized during that period. OE, TE and CEI expect to recover these
      deferred customer shopping incentives by August 31, 2008,
      September 30, 2008 and August 31, 2010, respectively.





Regulatory
      transition costs as of June 30, 2005 for JCP&L, Met-Ed and Penelec are
      approximately $2.2 billion, $0.7 billion and $0.1 billion, respectively.
      Deferral of above-market costs from power supplied by NUGs to JCP&L are
      approximately $1.1 billion and are being recovered through BGS and MTC revenues.
      Met-Ed and Penelec have deferred above-market NUG costs totaling approximately
      $0.5 billion and $0.1 billion, respectively. These costs are being recovered
      through CTC revenues. The regulatory asset for above-market NUG costs and the
      corresponding liability are adjusted to fair value at the end of each quarter.
      Recovery of the remaining regulatory transition costs is expected to continue
      under the provisions of the various regulatory proceedings in New Jersey and
      Pennsylvania.





**15
      - NEW
      ACCOUNTING STANDARDS AND INTERPRETATIONS**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in the Consolidated Statements of Income. This Statement also requires that
      a
      change in depreciation, amortization, or depletion method for long-lived,
      nonfinancial assets be accounted for as a change in accounting estimate effected
      by a change in accounting principle. The provisions of this Statement are
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. FirstEnergy and the Companies will
      adopt
      this Statement effective January 1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, FirstEnergy will adopt this
      Interpretation in the fourth quarter of 2005. FirstEnergy and the Companies
      are
      currently evaluating the effect this Interpretation will have on their financial
      statements.





*SFAS
                153,
                "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
                29"*





In
      December 2004,
      the FASB issued SFAS 153 amending APB 29, which was based on the principle
      that
      nonmonetary assets should be measured based on the fair value of the assets
      exchanged. The guidance in APB 29 included certain exceptions to that principle.
      SFAS 153 eliminates the exception from fair value measurement for nonmonetary
      exchanges of similar productive assets and replaces it with an exception for
      exchanges that do not have commercial substance. This Statement specifies that
      a
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. The
      provisions of this Statement are effective for nonmonetary exchanges occurring
      in fiscal periods beginning after June 15, 2005 and are to be applied
      prospectively. As a result, FirstEnergy will adopt this Statement effective
      January 1, 2006, and does not expect it to have a material impact on
      its
      financial statements.








19




*SFAS
      123(R),
      "Share-Based Payment"*





In
      December 2004,
      the FASB issued SFAS 123(R), a revision to SFAS 123, which requires expensing
      stock options in the financial statements. Important to applying the new
      standard is understanding how to (1) measure the fair value of stock-based
      compensation awards and (2) recognize the related compensation cost for those
      awards. For an award to qualify for equity classification, it must meet certain
      criteria in SFAS 123(R). An award that does not meet those criteria will be
      classified as a liability and remeasured each period. SFAS 123(R) retains SFAS
      123's requirements on accounting for income tax effects of stock-based
      compensation. In April 2005, the SEC delayed the effective date of SFAS 123(R)
      to annual, rather than interim, periods that begin after June 15, 2005.
      The
      SEC’s new rule results in a six-month deferral for companies with a fiscal year
      beginning January 1. Therefore, FirstEnergy will adopt this Statement effective
      January 1, 2006. The Company will be applying modified prospective
      application, without restatement of prior interim periods. Any potential
      cumulative adjustments have not been determined. FirstEnergy uses the
      Black-Scholes option-pricing model to value options and will continue to do
      so
      upon adoption of SFAS 123(R).





*SFAS
                151,
                "Inventory Costs - an amendment of ARB No. 43, Chapter
                4"*





In
      November 2004,
      the FASB issued SFAS 151 to clarify the accounting for abnormal amounts of
      idle
      facility expense, freight, handling costs and wasted material (spoilage).
      Previous guidance stated that in some circumstances these costs may be "so
      abnormal" that they would require treatment as current period costs. SFAS 151
      requires abnormal amounts for these items to always be recorded as current
      period costs. In addition, this Statement requires that allocation of fixed
      production overheads to the cost of conversion be based on the normal capacity
      of the production facilities. The provisions of this statement are effective
      for
      inventory costs incurred by FirstEnergy beginning January 1, 2006.
      FirstEnergy is currently evaluating this Standard and does not expect it to
      have
      a material impact on the financial statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, FirstEnergy
      continues to evaluate its investments as required by existing authoritative
      guidance.





*FSP
                109-1, "Application of FASB Statement No. 109, Accounting for Income
                Taxes, to the Tax Deduction and Qualified Production Activities Provided
                by the American Jobs Creation Act of
                2004"*




Issued
      in December
      2004, FSP 109-1 provides guidance related to the provision within the American
      Jobs Creation Act of 2004 (Act) that provides a tax deduction on qualified
      production activities. The Act includes a tax deduction of up to nine percent
      (when fully phased-in) of the lesser of (a) "qualified production activities
      income," as defined in the Act, or (b) taxable income (after the deduction
      for
      the utilization of any net operating loss carryforwards). This tax deduction
      is
      limited to 50 percent of W-2 wages paid by the taxpayer. The FASB believes
      that
      the deduction should be accounted for as a special deduction in accordance
      with
      SFAS 109, "Accounting for Income Taxes." FirstEnergy is currently evaluating
      this FSP and does not expect it to have a material impact on the Company's
      financial statements.





**16
      -
      SEGMENT INFORMATION:**





FirstEnergy
      has
      three reportable segments: regulated services, power supply management services
      and facilities (HVAC) services. The aggregate "Other" segments do not
      individually meet the criteria to be considered a reportable segment.
      FirstEnergy's primary segment is its regulated services segment, whose
      operations include the regulated sale of electricity and distribution and
      transmission services by its eight EUOCs in Ohio, Pennsylvania and New Jersey.
      The power supply management services segment primarily consists of the
      subsidiaries (FES, FGCO and FENOC) that sell electricity in deregulated markets
      and operate the generation facilities of OE, CEI, TE and Penn resulting from
      the
      deregulation of the Companies' electric generation business. "Other" consists
      of
      MYR (a construction service company), natural gas operations (recently sold
      -
      see Note 6) and telecommunications services. The assets and revenues for the
      other business operations are below the quantifiable threshold for operating
      segments for separate disclosure as "reportable segments."





The
      regulated
      services segment designs, constructs, operates and maintains FirstEnergy's
      regulated transmission and distribution systems. Its revenues are primarily
      derived from electricity delivery and transition cost recovery. Assets of the
      regulated services segment include generating units that are leased to the
      power
      supply management services. The regulated services segment’s internal revenues
      represent the rental revenues for the generating unit leases.





20


The
      power supply
      management services segment has responsibility for FirstEnergy’s generation
      operations. Its net income is primarily derived from all electric generation
      sales revenues, which consist of generation services to regulated franchise
      customers who have not chosen an alternative generation supplier, retail sales
      in deregulated markets and all domestic unregulated electricity sales in the
      retail and wholesale markets, less the related costs of electricity generation
      and sourcing of commodity requirements. Its net income also reflects the expense
      of the intersegment generating unit leases discussed above and property taxes
      related to those generating units.





Segment
      reporting
      for interim periods in 2004 was reclassified to conform with the current year
      business segment organization and operations that were reported in the 2004
      Form
      10-K, emphasizing FirstEnergy's regulated electric businesses and power supply
      management operations and the reclassification of discontinued operations (see
      Note 6). FSG is being disclosed as a reporting segment due to the subsidiaries
      qualifying as held for sale (see Note 6 for discussion of the divestiture of
      three of its subsidiaries in 2005). Interest expense on holding company debt
      and
      corporate support services revenues and expenses are included in "Reconciling
      Items."














21





**Segment
                  Financial Information****Power****Supply****Regulated**
              
              **Management**
              
              **Facilities**
              
              
              
              **Reconciling****Services**
              
              **Services**
              
              **Services**
              
              **Other**
              
              **Adjustments**
              
              **Consolidated*****(In
                  millions)*****Three
                  Months Ended:****June
                  30, 2005**External
                  revenues
              
              $
              1,351
              
              $
              1,379
              
              $
              56
              
              $
              137
              
              $
              6
              
              $
              2,929Internal
                  revenues
              
              
              80
              
              
              -
              
              
              -
              
              
              -
              
              
              (80
              )
              
              -Total
                  revenues
              
              
              1,431
              
              
              1,379
              
              
              56
              
              
              137
              
              
              (74
              )
              
              2,929Depreciation
                  and amortization
              
              
              322
              
              
              7
              
              
              -
              
              
              -
              
              
              6
              
              
              335Net
                  interest
                  charges
              
              
              99
              
              
              8
              
              
              1
              
              
              2
              
              
              51
              
              
              161Income
                  taxes
              
              
              186
              
              
              7
              
              
              3
              
              
              4
              
              
              41
              
              
              241Income
                  before
                  discontinued operations
              
              
              267
              
              
              11
              
              
              (3
              )
              
              6
              
              
              (102
              )
              
              179Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              -
              
              
              (1
              )
              
              -
              
              
              (1
              )Net
                  income
              
              
              267
              
              
              11
              
              
              (3
              )
              
              5
              
              
              (102
              )
              
              178Total
                  assets
              
              
              28,454
              
              
              1,601
              
              
              78
              
              
              512
              
              
              566
              
              
              31,211Total
                  goodwill
              
              
              5,946
              
              
              24
              
              
              -
              
              
              63
              
              
              -
              
              
              6,033Property
                  additions
              
              
              158
              
              
              66
              
              
              -
              
              
              2
              
              
              7
              
              
              233**June
                  30, 2004**External
                  revenues
              
              $
              1,278
              
              $
              1,550
              
              $
              50
              
              $
              119
              
              $
              (5
              )
              $
              2,992Internal
                  revenues
              
              
              80
              
              
              -
              
              
              -
              
              
              -
              
              
              (80
              )
              
              -Total
                  revenues
              
              
              1,358
              
              
              1,550
              
              
              50
              
              
              119
              
              
              (85
              )
              
              2,992Depreciation
                  and amortization
              
              
              330
              
              
              9
              
              
              -
              
              
              -
              
              
              10
              
              
              349Net
                  interest
                  charges
              
              
              113
              
              
              10
              
              
              -
              
              
              1
              
              
              56
              
              
              180Income
                  taxes
              
              
              171
              
              
              26
              
              
              -
              
              
              (22
              )
              
              2
              
              
              177Income
                  before
                  discontinued operations
              
              
              234
              
              
              37
              
              
              -
              
              
              36
              
              
              (105
              )
              
              202Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              1
              
              
              1
              
              
              -
              
              
              2Net
                  income
              
              
              234
              
              
              37
              
              
              1
              
              
              37
              
              
              (105
              )
              
              204Total
                  assets
              
              
              29,101
              
              
              1,475
              
              
              174
              
              
              604
              
              
              656
              
              
              32,010Total
                  goodwill
              
              
              5,965
              
              
              24
              
              
              37
              
              
              75
              
              
              -
              
              
              6,101Property
                  additions
              
              
              129
              
              
              58
              
              
              1
              
              
              1
              
              
              7
              
              
              196**Six
                  Months Ended:****June
                  30, 2005**External
                  revenues
              
              $
              2,690
              
              $
              2,673
              
              $
              102
              
              $
              247
              
              $
              18
              
              $
              5,730Internal
                  revenues
              
              
              158
              
              
              -
              
              
              -
              
              
              -
              
              
              (158
              )
              
              -Total
                  revenues
              
              
              2,848
              
              
              2,673
              
              
              102
              
              
              247
              
              
              (140
              )
              
              5,730Depreciation
                  and amortization
              
              
              698
              
              
              17
              
              
              -
              
              
              1
              
              
              13
              
              
              729Net
                  interest
                  charges
              
              
              197
              
              
              18
              
              
              1
              
              
              3
              
              
              113
              
              
              332Income
                  taxes
              
              
              341
              
              
              (17
              )
              
              2
              
              
              11
              
              
              26
              
              
              363Income
                  before
                  discontinued operations
              
              
              490
              
              
              (25
              )
              
              (5
              )
              
              11
              
              
              (151
              )
              
              320Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              13
              
              
              5
              
              
              -
              
              
              18Net
                  income
              
              
              490
              
              
              (25
              )
              
              8
              
              
              16
              
              
              (151
              )
              
              338Total
                  assets
              
              
              28,454
              
              
              1,601
              
              
              78
              
              
              512
              
              
              566
              
              
              31,211Total
                  goodwill
              
              
              5,946
              
              
              24
              
              
              -
              
              
              63
              
              
              -
              
              
              6,033Property
                  additions
              
              
              299
              
              
              147
              
              
              1
              
              
              4
              
              
              11
              
              
              462**June
                  30, 2004**External
                  revenues
              
              $
              2,568
              
              $
              3,072
              
              $
              95
              
              $
              234
              
              $
              6
              
              $
              5,975Internal
                  revenues
              
              
              159
              
              
              -
              
              
              -
              
              
              -
              
              
              (159
              )
              
              -Total
                  revenues
              
              
              2,727
              
              
              3,072
              
              
              95
              
              
              234
              
              
              (153
              )
              
              5,975Depreciation
                  and amortization
              
              
              722
              
              
              17
              
              
              1
              
              
              -
              
              
              20
              
              
              760Net
                  interest
                  charges
              
              
              219
              
              
              21
              
              
              -
              
              
              2
              
              
              109
              
              
              351Income
                  taxes
              
              
              316
              
              
              25
              
              
              (1
              )
              
              (18
              )
              
              (30
              )
              
              292Income
                  before
                  discontinued operations
              
              
              446
              
              
              36
              
              
              (2
              )
              
              41
              
              
              (147
              )
              
              374Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              2
              
              
              2
              
              
              -
              
              
              4Net
                  income
              
              
              446
              
              
              36
              
              
              -
              
              
              43
              
              
              (147
              )
              
              378Total
                  assets
              
              
              29,101
              
              
              1,475
              
              
              174
              
              
              604
              
              
              656
              
              
              32,010Total
                  goodwill
              
              
              5,965
              
              
              24
              
              
              37
              
              
              75
              
              
              -
              
              
              6,101Property
                  additions
              
              
              220
              
              
              102
              
              
              2
              
              
              -
              
              
              11
              
              
              335Reconciling
                  adjustments to segment operating results from internal management
                  reporting to consolidated external financial reporting primarily
                  consist
                  ofinterest
                  expense related to holding company debt, corporate support services
                  revenues and expenses, fuel marketing revenues, which are reflected
                  as
                  reductionsto
                  expenses
                  for internal management reporting purposes, the impact from the
                  phase-out
                  of the State of Ohio income tax and elimination of intersegment
                  transactions.

















22





**17
      -
      FIRSTENERGY INTRA-SYSTEM GENERATION ASSET TRANSFERS**




On
      May 13,
      2005, Penn, and on May 18, 2005, OE, CEI and TE, entered into certain
      agreements described below (Agreements) implementing a series of intra-system
      generation asset transfers. When concluded, the asset transfers will result
      in
      the respective undivided ownership interests of the Ohio Companies and Penn
      in
      FirstEnergy’s nuclear, fossil and hydroelectric plants being owned by NGC, and
      FGCO, respectively. The generating plant interests that are being transferred
      do
      not include leasehold interests of CEI, TE and OE in certain of the plants
      that
      are currently subject to sale and leaseback arrangements with
      non-affiliates.





These
      transactions
      are being undertaken in connection with the Ohio Companies’ and Penn’s
      restructuring plans that were approved by the PUCO and the PPUC, respectively,
      under applicable Ohio and Pennsylvania electric utility restructuring
      legislation. Consistent with the restructuring plans, generation assets that
      had
      been owned by the Ohio Companies and Penn were required to be separated from
      the
      regulated delivery business of those companies through transfer to a separate
      corporate entity. FENOC, a subsidiary of FirstEnergy, currently operates and
      maintains the nuclear generation assets to be transferred. FGCO, as lessee
      under
      a master facility lease, leases the non-nuclear generation assets to be
      transferred and operates and maintains those assets. The transactions will
      essentially complete the divestitures contemplated by the restructuring plans
      by
      transferring the ownership interests to NGC and FGCO, respectively, without
      impacting the operation of the plants.





As
      contemplated by
      the Agreements, the Ohio Companies and Penn intend to transfer their respective
      interests in the nuclear generation assets to NGC through, in the case of OE
      and
      Penn, a spin-off by way of dividend and, in the case of CEI and TE, a sale
      at
      net book value. FGCO intends to exercise a purchase option under the Master
      Lease to acquire the non-nuclear generation assets to be transferred by the
      Ohio
      Companies and Penn at the values approved in the Ohio Transition
      Case.





Consummation
      of the
      transactions contemplated by each of the Agreements is subject to receipt of
      all
      necessary regulatory authorizations and other consents and approvals.
      FirstEnergy currently expects to complete the various asset transfers in the
      second half of 2005.














23





**FIRSTENERGY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF INCOME****(Unaudited)****Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  thousands, except per share amounts)*****REVENUES:**Electric
                  utilities
              
              $
              2,329,795
              
              $
              2,170,570
              
              $
              4,638,311
              
              $
              4,347,603Unregulated
                  businesses (Note 2)
              
              
              599,483
              
              
              821,592
              
              
              1,091,686
              
              
              1,627,462Total
                  revenues
              
              
              2,929,278
              
              
              2,992,162
              
              
              5,729,997
              
              
              5,975,065**EXPENSES:**Fuel
                  and
                  purchased power (Note 2)
              
              
              932,596
              
              
              1,095,135
              
              
              1,827,928
              
              
              2,229,461Other
                  operating expenses
              
              
              912,592
              
              
              832,398
              
              
              1,805,587
              
              
              1,631,742Provision
                  for
                  depreciation
              
              
              149,025
              
              
              146,155
              
              
              291,657
              
              
              291,965Amortization
                  of regulatory assets
              
              
              306,572
              
              
              270,986
              
              
              617,413
              
              
              581,188Deferral
                  of
                  new regulatory assets
              
              
              (120,162
              )
              
              (68,315
              )
              
              (179,669
              )
              
              (112,720
              )General
                  taxes
              
              
              167,865
              
              
              157,732
              
              
              353,044
              
              
              336,722Total
                  expenses
              
              
              2,348,488
              
              
              2,434,091
              
              
              4,715,960
              
              
              4,958,358**INCOME
                  BEFORE INTEREST AND INCOME TAXES**
              
              
              580,790
              
              
              558,071
              
              
              1,014,037
              
              
              1,016,707**NET
                  INTEREST CHARGES:**Interest
                  expense
              
              
              161,714
              
              
              179,542
              
              
              326,358
              
              
              352,048Capitalized
                  interest
              
              
              (4,697
              )
              
              (5,280
              )
              
              (4,952
              )
              
              (11,750
              )Subsidiaries’
                  preferred stock dividends
              
              
              3,733
              
              
              5,389
              
              
              10,286
              
              
              10,670Net
                  interest
                  charges
              
              
              160,750
              
              
              179,651
              
              
              331,692
              
              
              350,968**INCOME
                  TAXES**
              
              
              241,275
              
              
              176,560
              
              
              362,550
              
              
              291,530**INCOME
                  BEFORE DISCONTINUED OPERATIONS**
              
              
              178,765
              
              
              201,860
              
              
              319,795
              
              
              374,209Discontinued
                  operations (net of income taxes (benefit) of$(1,282,000)
                  and $993,000 in the three months endedJune
                  30, and
                  $(9,051,000) and $2,137,000 in the sixmonths
                  ended
                  June 30, of 2005 and 2004, respectively)(Note
                  6)
              
              
              (773
              )
              
              2,185
              
              
              17,923
              
              
              3,835**NET
                  INCOME**
              
              $
              177,992
              
              $
              204,045
              
              $
              337,718
              
              $
              378,044**BASIC
                  EARNINGS PER SHARE OF COMMON STOCK:**Earnings
                  before discontinued operations
              
              $
              0.54
              
              $
              0.61
              
              $
              0.98
              
              $
              1.15Discontinued
                  operations (Note 6)
              
              
              -
              
              
              0.01
              
              
              0.05
              
              
              0.01Net
                  earnings
                  per basic share
              
              $
              0.54
              
              $
              0.62
              
              $
              1.03
              
              $
              1.16**WEIGHTED
                  AVERAGE NUMBER OF BASIC SHARES****OUTSTANDING**
              
              
              328,063
              
              
              327,284
              
              
              327,986
              
              
              327,171**DILUTED
                  EARNINGS PER SHARE OF COMMON STOCK:**Earnings
                  before discontinued operations
              
              $
              0.54
              
              $
              0.61
              
              $
              0.97
              
              $
              1.14Discontinued
                  operations (Note 6)
              
              
              -
              
              
              0.01
              
              
              0.05
              
              
              0.01Net
                  earnings
                  per diluted share
              
              $
              0.54
              
              $
              0.62
              
              $
              1.02
              
              $
              1.15**WEIGHTED
                  AVERAGE NUMBER OF DILUTED SHARES****OUTSTANDING**
              
              
              329,879
              
              
              329,103
              
              
              329,679
              
              
              329,061**DIVIDENDS
                  DECLARED PER SHARE OF COMMON STOCK**
              
              $
              0.4125
              
              $
              0.375
              
              $
              0.825
              
              $
              0.75The
                  preceding
                  Notes to Consolidated Financial Statements as they relate to FirstEnergy
                  Corp. are an integral part of these statements.






24






**FIRSTENERGY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME****(Unaudited)****Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  thousands)*****NET
                  INCOME**
              
              $
              177,992
              
              $
              204,045
              
              $
              337,718
              
              $
              378,044**OTHER
                  COMPREHENSIVE (LOSS) INCOME:**Unrealized
                  gain (loss) on derivative hedges
              
              
              (6,023
              )
              
              19,244
              
              
              1,300
              
              
              20,609Unrealized
                  loss on available for sale securities
              
              
              (16,137
              )
              
              (19,122
              )
              
              (24,123
              )
              
              (2,193
              )Other
                  comprehensive (loss) income
              
              
              (22,160
              )
              
              122
              
              
              (22,823
              )
              
              18,416Income
                  tax
                  expense (benefit) related to othercomprehensive
                  income
              
              
              5,778
              
              
              (314
              )
              
              5,907
              
              
              (9,785
              )Other
                  comprehensive (loss) income, net of tax
              
              
              (16,382
              )
              
              (192
              )
              
              (16,916
              )
              
              8,631**COMPREHENSIVE
                  INCOME**
              
              $
              161,610
              
              $
              203,853
              
              $
              320,802
              
              $
              386,675The
                  preceding
                  Notes to Consolidated Financial Statements as they relate to FirstEnergy
                  Corp. are an integral part of thesestatements.






25




**FIRSTENERGY
                  CORP.****CONSOLIDATED
                  BALANCE SHEETS****(Unaudited)****June
                  30,**
              
              **December
                  31,****2005**
              
              **2004*****(In
                  thousands)*****ASSETS****CURRENT
                  ASSETS:**Cash
                  and cash
                  equivalents
              
              $
              49,748
              
              $
              52,941Receivables
                  -Customers
                  (less accumulated provisions of $35,174,000 and$34,476,000,
                  respectively, for uncollectible accounts)
              
              
              1,281,688
              
              
              979,242Other
                  (less
                  accumulated provisions of $27,276,000 and$26,070,000,
                  respectively, for uncollectible accounts)
              
              
              162,864
              
              
              377,195Materials
                  and
                  supplies, at average cost -Owned
              
              
              393,999
              
              
              363,547Under
                  consignment
              
              
              114,179
              
              
              94,226Prepayments
                  and other
              
              
              301,557
              
              
              145,1962,304,035
              
              
              2,012,347**PROPERTY,
                  PLANT AND EQUIPMENT:**In
                  service
              
              
              22,654,302
              
              
              22,213,218Less
                  -
                  Accumulated provision for depreciation
              
              
              9,576,245
              
              
              9,413,73013,078,057
              
              
              12,799,488Construction
                  work in progress
              
              
              574,178
              
              
              678,86813,652,235
              
              
              13,478,356**INVESTMENTS:**Nuclear
                  plant
                  decommissioning trusts
              
              
              1,635,315
              
              
              1,582,588Investments
                  in
                  lease obligation bonds
              
              
              905,754
              
              
              951,352Other
              
              
              772,999
              
              
              740,0263,314,068
              
              
              3,273,966**DEFERRED
                  CHARGES:**Regulatory
                  assets
              
              
              5,178,218
              
              
              5,532,087Goodwill
              
              
              6,032,539
              
              
              6,050,277Other
              
              
              730,148
              
              
              720,91111,940,905
              
              
              12,303,275$
              31,211,243
              
              $
              31,067,944**LIABILITIES
                  AND CAPITALIZATION****CURRENT
                  LIABILITIES:**Currently
                  payable long-term debt
              
              $
              943,740
              
              $
              940,944Short-term
                  borrowings
              
              
              554,824
              
              
              170,489Accounts
                  payable
              
              
              696,310
              
              
              610,589Accrued
                  taxes
              
              
              684,259
              
              
              657,219Other
              
              
              874,839
              
              
              929,1943,753,972
              
              
              3,308,435**CAPITALIZATION:**Common
                  stockholders’ equity -Common
                  stock,
                  $0.10 par value, authorized 375,000,000 shares -329,836,276
                  shares outstanding
              
              
              32,984
              
              
              32,984Other
                  paid-in
                  capital
              
              
              7,047,469
              
              
              7,055,676Accumulated
                  other comprehensive loss
              
              
              (330,028
              )
              
              (313,112
              )Retained
                  earnings
              
              
              1,924,097
              
              
              1,856,863Unallocated
                  employee stock ownership plan common stock -1,830,883
                  and
                  2,032,800 shares, respectively
              
              
              (34,126
              )
              
              (43,117
              )Total
                  common
                  stockholders' equity
              
              
              8,640,396
              
              
              8,589,294Preferred
                  stock of consolidated subsidiaries
              
              
              213,719
              
              
              335,123Long-term
                  debt
                  and other long-term obligations
              
              
              9,568,954
              
              
              10,013,34918,423,069
              
              
              18,937,766**NONCURRENT
                  LIABILITIES:**Accumulated
                  deferred income taxes
              
              
              2,411,166
              
              
              2,324,097Asset
                  retirement obligations
              
              
              1,112,940
              
              
              1,077,557Power
                  purchase
                  contract loss liability
              
              
              1,856,482
              
              
              2,001,006Retirement
                  benefits
              
              
              1,287,345
              
              
              1,238,973Lease
                  market
                  valuation liability
              
              
              893,800
              
              
              936,200Other
              
              
              1,472,469
              
              
              1,243,9109,034,202
              
              
              8,821,743**COMMITMENTS,
                GUARANTEES AND CONTINGENCIES (Note 13)**$
              31,211,243
              
              $
              31,067,944The
                  preceding
                  Notes to Consolidated Financial Statements as they relate to FirstEnergy
                  Corp. are an integral part of thesebalance
                  sheets.










26




**FIRSTENERGY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  thousands)*****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income
              
              $
              177,992
              
              $
              204,045
              
              $
              337,718
              
              $
              378,044Adjustments
                  to reconcile net income to net cash fromoperating
                  activities -Provision
                  for
                  depreciation
              
              
              149,025
              
              
              146,155
              
              
              291,657
              
              
              291,965Amortization
                  of regulatory assets
              
              
              306,572
              
              
              270,986
              
              
              617,413
              
              
              581,188Deferral
                  of
                  new regulatory assets
              
              
              (120,162
              )
              
              (68,315
              )
              
              (179,669
              )
              
              (112,720
              )Nuclear
                  fuel
                  and lease amortization
              
              
              18,930
              
              
              23,132
              
              
              37,578
              
              
              45,006Amortization
                  of electric service obligation
              
              
              (10,054
              )
              
              (4,818
              )
              
              (15,505
              )
              
              (9,541
              )Deferred
                  purchased power and other costs
              
              
              (82,990
              )
              
              (60,974
              )
              
              (192,223
              )
              
              (144,881
              )Deferred
                  income taxes and investment tax credits, net
              
              
              76,041
              
              
              (100,056
              )
              
              61,885
              
              
              (94,133
              )Deferred
                  rents and lease market valuation liability
              
              
              (65,446
              )
              
              (64,287
              )
              
              (101,109
              )
              
              (80,584
              )Accrued
                  retirement benefit obligations
              
              
              32,269
              
              
              39,864
              
              
              48,372
              
              
              64,500Accrued
                  compensation, net
              
              
              4,447
              
              
              17,935
              
              
              (37,275
              )
              
              22,322Commodity
                  derivative transactions, net
              
              
              13,921
              
              
              (23,992
              )
              
              14,108
              
              
              (54,779
              )Loss
                  (income)
                  from discontinued operations (Note 6)
              
              
              773
              
              
              (2,185
              )
              
              (17,923
              )
              
              (3,835
              )Decrease
                  (increase) in operating assets -Receivables
              
              
              (225,972
              )
              
              (101,304
              )
              
              (135,309
              )
              
              171,442Materials
                  and
                  supplies
              
              
              (59,309
              )
              
              (20,617
              )
              
              (51,852
              )
              
              963Prepayments
                  and other current assets
              
              
              (53,095
              )
              
              (42,563
              )
              
              (159,217
              )
              
              (89,594
              )Increase
                  (decrease) in operating liabilities -Accounts
                  payable
              
              
              42,612
              
              
              68,376
              
              
              104,031
              
              
              (108,642
              )Accrued
                  taxes
              
              
              (1,557
              )
              
              113,874
              
              
              39,155
              
              
              144,659Accrued
                  interest
              
              
              (112,388
              )
              
              (93,341
              )
              
              (3,787
              )
              
              (7,063
              )Prepayment
                  for electric service - education programs
              
              
              241,685
              
              
              -
              
              
              241,685
              
              
              -Other
              
              
              29,032
              
              
              29,645
              
              
              31,383
              
              
              (14,906
              )Net
                  cash
                  provided from operating activities
              
              
              362,326
              
              
              331,560
              
              
              931,116
              
              
              979,411**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**New
                  Financing
                  -Long-term
                  debt
              
              
              245,350
              
              
              303,162
              
              
              245,350
              
              
              884,720Short-term
                  borrowings, net
              
              
              245,803
              
              
              -
              
              
              385,614
              
              
              -Redemptions
                  and Repayments -Preferred
                  stock
              
              
              (41,750
              )
              
              -
              
              
              (139,650
              )
              
              -Long-term
                  debt
              
              
              (452,860
              )
              
              (721,023
              )
              
              (688,748
              )
              
              (989,943
              )Short-term
                  borrowings, net
              
              
              -
              
              
              (59,563
              )
              
              -
              
              
              (447,104
              )Net
                  controlled disbursement activity
              
              
              29,461
              
              
              25,385
              
              
              (476
              )
              
              (17,271
              )Common
                  stock
                  dividend payments
              
              
              (135,178
              )
              
              (121,321
              )
              
              (270,484
              )
              
              (243,786
              )Net
                  cash used
                  for financing activities
              
              
              (109,174
              )
              
              (573,360
              )
              
              (468,394
              )
              
              (813,384
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Property
                  additions
              
              
              (232,791
              )
              
              (196,094
              )
              
              (461,675
              )
              
              (334,500
              )Proceeds
                  from
                  asset sales
              
              
              7,483
              
              
              200,008
              
              
              61,207
              
              
              211,447Nonutility
                  generation trust contributions
              
              
              -
              
              
              -
              
              
              -
              
              
              (50,614
              )Contributions
                  to nuclear decommissioning trusts
              
              
              (25,372
              )
              
              (25,372
              )
              
              (50,742
              )
              
              (50,742
              )Cash
                  investments
              
              
              8,217
              
              
              6,738
              
              
              35,121
              
              
              26,956Other
              
              
              (42,132
              )
              
              75,789
              
              
              (49,826
              )
              
              16,989Net
                  cash
                  provided from (used for) investing activities
              
              
              (284,595
              )
              
              61,069
              
              
              (465,915
              )
              
              (180,464
              )Net
                  decrease
                  in cash and cash equivalents
              
              
              (31,443
              )
              
              (180,731
              )
              
              (3,193
              )
              
              (14,437
              )Cash
                  and cash
                  equivalents at beginning of period
              
              
              81,191
              
              
              280,269
              
              
              52,941
              
              
              113,975Cash
                  and cash
                  equivalents at end of period
              
              $
              49,748
              
              $
              99,538
              
              $
              49,748
              
              $
              99,538The
                  preceding
                  Notes to Consolidated Financial Statements as they relate to FirstEnergy
                  Corp. are an integral part of thesestatements.






27








***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of
      FirstEnergy Corp.:





We
      have reviewed
      the accompanying consolidated balance sheet of FirstEnergy Corp. and its
      subsidiaries as of June 30, 2005, and the related consolidated statements
      of income, comprehensive income and cash flows for each of the three-month
      and
      six-month periods ended June 30, 2005 and 2004. These interim financial
      statements are the responsibility of the Company’s management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholders’ equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(K)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 7 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005











28





**FIRSTENERGY
      CORP.**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








**EXECUTIVE
      SUMMARY**





Net
      income in the
      second quarter of 2005 was $178 million, or basic and diluted earnings of $0.54
      per share of common stock compared to net income of $204 million, or basic
      and
      diluted earnings of $0.62 per share of common stock for the second quarter
      of
      2004. Net income in the first six months of 2005 was $338 million, or basic
      earnings of $1.03 per share of common stock ($1.02 diluted) compared to $378
      million in the first six months of 2004, or basic earnings of $1.16 per share
      of
      common stock ($1.15 diluted).





During
      the second
      quarter of 2005, JCP&L settled two rate cases, resulting in a one-time net
      gain of $0.05 per share of common stock for the quarter. Also, due to a tax
      law
      change in the State of Ohio, FirstEnergy wrote-off $72 million of net deferred
      tax benefits that are not expected to be realized during a five-year phase-out
      period for Ohio income taxes. This write-off reduced second-quarter earnings
      per
      share by $0.22.





During
      the second
      quarter of 2005, both the Beaver Valley Unit 2 and Perry stations conducted
      nuclear refueling outages. Perry’s outage (including an unplanned extension)
      began on February 22, 2005 and continued into the second quarter, ending
      on
      May 6, 2005. The Beaver Valley outage began on April 4, 2005
      and ended
      on April 28, 2005.





On
      April 21,
      2005, FENOC announced that it received a notice of violation by the NRC and
      a
      proposed $5.45 million fine related to the reactor head degradation at the
      Davis-Besse Nuclear Power Station. The corrosion on the plant’s reactor head was
      discovered during a comprehensive inspection and was reported to the NRC in
      March 2002. Subsequently, FENOC investigated the causes of the problem, replaced
      the reactor head, and made numerous staff changes, as well as enhancements
      to
      plant programs and equipment. Davis-Besse has operated safely and reliably
      after
      successfully restarting in March 2004. The NRC said in a letter to FENOC that
      this action does not reflect the current performance of Davis-Besse and no
      further civil enforcement action is expected, absent any new information from
      the Department of Justice. On May 20, 2005, FENOC announced that it
      had
      been notified by the NRC that the Davis-Besse Nuclear Power Station would return
      to the standard NRC reactor oversight process, effective July 1, 2005.
      The
      NRC’s inspections of Davis-Besse are augmented to reflect commitments in a
      confirmatory order associated with the startup of the facility, and a previous
      NRC White Finding related to the performance of the emergency sirens.





FirstEnergy
      announced on May 18, 2005 that it had received approval from the PUCO
      to
      defer for future recovery charges from MISO incurred by FirstEnergy’s Ohio
      Companies. The deferred charges for 2005 are related to MISO’s administrative
      operation of FirstEnergy’s transmission systems and the daily and hourly spot
      energy market. A request filed with the PUCO to recover these charges over
      a
      five-year period, beginning in 2006, is pending.





FirstEnergy’s
      JCP&L subsidiary announced on May 25, 2005, that the NJBPU approved a
      stipulated agreement with the NJPBU staff and the Division of Ratepayer Advocate
      resolving JCP&L’s Phase II rate case filing which resulted in the one-time
      gain discussed above, and a second stipulated settlement agreement with the
      NJBPU staff resolving the motion for reconsideration of the 2003 decision in
      its
      Phase I rate proceeding.





Together,
      the two
      stipulated settlements resulted in a net average increase, effective
      June 1, 2005, of approximately $1.14 per month in the delivery portion
      of
      the bill for residential customers using 500 KWH of electricity. The increase,
      averaging 2.4% per customer, is JCP&L’s first since 1993, and follows an 11%
      decrease implemented between 1999 and 2003 under New Jersey’s Electric Discount
      and Energy Competition Act. The stipulated settlements, which are expected
      to
      increase JCP&L’s annual revenues by approximately $51 million, include a
      commitment by JCP&L to maintain a target level of customer service
      reliability.





On
      May 27,
      2005, FirstEnergy’s Ohio Companies filed with the PUCO a request to establish a
      generation charge adjustment factor, as permitted under the Ohio Companies’
      previously approved Rate Stabilization Plan. If approved, the rider would
      average $0.002554 per KWH, effective January 1, 2006, for all classes
      of
      customers. The filing reflects projected increases in fuel and related costs
      in
      2006 compared with 2002 costs.





**FIRSTENERGY’S
      BUSINESS**





FirstEnergy
      is a
      registered public utility holding company headquartered in Akron, Ohio that
      operates primarily through two core business segments.








29





·
            **Regulated
                Services**transmits,
                distributes and sells electric power through eight electric utility
                operating companies that collectively comprise the nation’s fifth largest
                investor-owned electric system, serving 4.4 million customers within
                36,100 square miles of Ohio, Pennsylvania and New Jersey. This business
                segment primarily derives its revenue from the delivery of electricity,
                including transition cost recovery.





·
            **Power
                Supply Management****Services**supplies the
                power needs of end-use customers (principally in Ohio, Pennsylvania
                and
                New Jersey) through retail and wholesale arrangements, including
                sales to
                meet the PLR requirements of FirstEnergy’s Ohio Companies and Penn. This
                business segment operates the generating facilities of the Ohio Companies
                and Penn and purchases from the wholesale market to meet its sales
                obligations. It leases fossil facilities from the EUOC and purchases
                the
                entire output of the EUOC nuclear plants. This business segment
                principally derives its revenues from electric generation
                sales.





Other
      operating
      segments provide a wide range of services, including heating, ventilation,
      air-conditioning, refrigeration, electrical and facility control systems,
      high-efficiency electrotechnologies and telecommunication services. FirstEnergy
      continues to divest these non-core businesses. See Note 6 to the consolidated
      financial statements. The assets and revenues for the other business operations
      are below the quantifiable threshold for operating segments for separate
      disclosure as "reportable segments".





**FIRSTENERGY
      INTRA-SYSTEM GENERATION ASSET TRANSFERS**




On
      May 13,
      2005, Penn, and on May 18, 2005, OE, CEI and TE, entered into certain
      agreements described below (Agreements) implementing a series of intra-system
      generation asset transfers. When concluded, the asset transfers will result
      in
      the respective undivided ownership interests of the Ohio Companies and Penn
      in
      FirstEnergy’s nuclear, fossil and hydroelectric plants being owned by NGC, and
      FGCO, respectively. The generating plant interests that are being transferred
      do
      not include leasehold interests of CEI, TE and OE in plants that are currently
      subject to sale and leaseback arrangements with non-affiliates.





These
      transactions
      are being undertaken in connection with the Ohio Companies’ and Penn’s
      restructuring plans that were approved by the PUCO and the PPUC, respectively,
      under applicable Ohio and Pennsylvania electric utility restructuring
      legislation. Consistent with the restructuring plans, generation assets that
      had
      been owned by the Ohio Companies and Penn were required to be separated from
      the
      regulated delivery business of those companies through transfer to a separate
      corporate entity. FENOC, a subsidiary of FirstEnergy, currently operates and
      maintains the nuclear generation assets to be transferred. FGCO, as lessee
      under
      a master facility lease, leases the non-nuclear generation assets to be
      transferred and operates and maintains those assets. The transactions will
      essentially complete the divestitures contemplated by the restructuring plans
      by
      transferring the ownership interests to NGC and FGCO, respectively, without
      impacting the operation of the plants.





As
      contemplated by
      the Agreements, the Ohio Companies and Penn intend to transfer their respective
      interests in the nuclear generation assets to NGC through, in the case of OE
      and
      Penn, a spin-off by way of a dividend and, in the case of CEI and TE, a sale
      at
      net book value. FGCO intends to exercise a purchase option under the Master
      Lease to acquire the non-nuclear generation assets to be transferred by the
      Ohio
      Companies at the values approved in the Ohio transition case.





Consummation
      of the
      transactions contemplated by each of the Agreements is subject to receipt of
      all
      necessary regulatory authorizations and other consents and approvals.
      FirstEnergy currently expects to complete the various asset transfers in the
      second half of 2005.





**RESULTS
      OF
      OPERATIONS**





The
      financial
      results discussed below include revenues and expenses from transactions among
      our business segments. A reconciliation of segment financial results is provided
      in Note 16 to the consolidated financial statements. The FSG business segment
      is
      included in "Other and Reconciling Adjustments" in this discussion due to its
      immaterial impact on current period financial results, but is presented
      separately in segment information provided in Note 16 to the consolidated
      financial statements. Net income (loss) by major business segment was as
      follows:








30




**Three
                      Months Ended**
                  
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **Increase**
                  
                  **June
                      30,**
                  
                  **Increase****2005**
                  
                  **2004**
                  
                  **(Decrease)**
                  
                  **2005**
                  
                  **2004**
                  
                  **(Decrease)*****(In
                      millions, except per share amounts)*****Net
                      Income (Loss)****By
                      Business Segment:**Regulated
                      Services
                  
                  
                  
                  
                  $
                  267
                  
                  $
                  234
                  
                  $
                  33
                  
                  $
                  490
                  
                  $
                  446
                  
                  $
                  44Power
                      supply
                      management services
                  
                  
                  
                  
                  
                  11
                  
                  
                  37
                  
                  
                  (26
                  )
                  
                  (25
                  )
                  
                  36
                  
                  
                  (61
                  )Other
                      and
                      reconciling adjustments*
                  
                  
                  
                  
                  
                  (100
                  )
                  
                  (67
                  )
                  
                  (33
                  )
                  
                  (127
                  )
                  
                  (104
                  )
                  
                  (23
                  )Total
                  
                  
                  
                  
                  $
                  178
                  
                  $
                  204
                  
                  $
                  (26
                  )
                  $
                  338
                  
                  $
                  378
                  
                  $
                  (40
                  )**Basic
                      Earnings Per Share:**Income
                      before
                      discontinued operations
                  
                  
                  
                  
                  
                  $0.54
                  
                  
                  $0.61
                  
                  
                  $
                      (0.07
                  )
                  
                  $0.98
                  
                  
                  $1.15
                  
                  
                  $
                      (0.17
                  )Discontinued
                      operations
                  
                  
                  
                  
                  
                  -
                  
                  
                  0.01
                  
                  
                  (0.01
                  )
                  
                  0.05
                  
                  
                  0.01
                  
                  
                  0.04Net
                      earnings
                      per basic share
                  
                  
                  
                  
                  
                  $0.54
                  
                  
                  $0.62
                  
                  
                  $
                      (0.08
                  )
                  
                  $1.03
                  
                  
                  $1.16
                  
                  
                  $
                      (0.13
                  )**Diluted
                      Earnings Per Share:**Income
                      before
                      discontinued operations
                  
                  
                  
                  
                  
                  $0.54
                  
                  
                  $0.61
                  
                  
                  $
                      (0.07
                  )
                  
                  $0.97
                  
                  
                  $1.14
                  
                  
                  $
                      (0.17
                  )Discontinued
                      operations
                  
                  
                  
                  
                  
                  -
                  
                  
                  0.01
                  
                  
                  (0.01
                  )
                  
                  0.05
                  
                  
                  0.01
                  
                  
                  0.04Net
                      earnings
                      per diluted share
                  
                  
                  
                  
                  
                  $0.54
                  
                  
                  $0.62
                  
                  
                  $
                      (0.08
                  )
                  
                  $1.02
                  
                  
                  $1.15
                  
                  
                  $
                      (0.13
                  )*
                      Represents
                      other operating segments and reconciling items including interest
                      expense
                      on holding company debt and corporate
                    support
                      services revenues and expenses.










Earnings
      in the
      second quarter of 2005 included a net gain resulting from the JCP&L rate
      settlement of $16 million (or $0.05 per share) and additional income tax expense
      of $72 million (or $0.22 per share) from the enactment of new Ohio tax
      legislation. This compares to the second quarter of 2004 which included a loss
      from the sale of GLEP of approximately $7 million ($0.02 per share) and a
      litigation settlement loss of $11 million ($0.03 per share). In addition to
      the
      second quarter items, net income in the first six months of 2005 included $22
      million ($0.07 per share) of gains from the disposition of non-core assets,
      an
      EPA settlement loss of $14 million ($0.04 per share) and an NRC fine of $3
      million ($0.01 per share).





A
      decrease in
      wholesale electric revenues and purchased power costs in the second quarter
      and
      first six months of 2005 from the corresponding periods last year primarily
      resulted from FES recording PJM sales and purchased power transactions on an
      hourly net position basis beginning in the first quarter of 2005 compared with
      recording each discrete transaction (on a gross basis) in the same period of
      2004. This change had no impact on earnings and resulted from the dedication
      of
      FirstEnergy’s Beaver Valley Power Station to PJM in January 2005. FirstEnergy
      believes that a net-hourly-position measure of revenues and purchased power
      transactions is required as these generation assets are now dedicated in PJM
      where FirstEnergy has third-party customers. Wholesale electric revenues and
      purchased power costs in the second quarter of 2004 each included $283 million
      from these transactions recorded on a gross basis — the first six months of 2004
      included $564 million from these transactions.





Excluding
      the
      effect of recording the wholesale electric revenue transactions in PJM on a
      gross basis in 2004, operating revenues in the second quarter and first six
      months of 2005 increased, reflecting in large part warmer than normal
      temperatures in the second quarter of 2005. Net income in the regulated services
      segment increased due to the additional demand. However, net income for the
      power supply management services segment was lower in both the second quarter
      and first six months of 2005 as a result of higher costs for fossil fuel,
      purchased power and nuclear refueling costs which, in aggregate, more than
      offset the revenue from increased electric generation sales. The impact of
      the
      new Ohio tax legislation is included with FirstEnergy’s other operating segments
      and reconciling adjustments.








31





***Summary
      of Results of Operations - Second Quarter of 2005 Compared with the Second
      Quarter of 2004***





Financial
      results
      for FirstEnergy and its major business segments in the second quarter of 2005
      and 2004 were as follows:





**Power****Supply**
              
              **Other
                  and****2nd
                  Quarter 2005**
              
              **Regulated**
              
              **Management**
              
              **Reconciling**
              
              **FirstEnergy****Quarterly
                  Financial Results**
              
              **Services**
              
              **Services**
              
              **Adjustments**
              
              **Consolidated*****(In
                  millions)***Revenue:ExternalElectric
              
              $
              1,165
              
              $
              1,314
              
              $
              -
              
              $
              2,479Other
              
              
              186
              
              
              65
              
              
              199
              
              
              450Internal
              
              
              80
              
              
              -
              
              
              (80
              )
              
              -Total
                  Revenues
              
              
              1,431
              
              
              1,379
              
              
              119
              
              
              2,929Expenses:Fuel
                  and
                  purchased power
              
              
              -
              
              
              933
              
              
              -
              
              
              933Other
                  operating
              
              
              408
              
              
              399
              
              
              106
              
              
              913Provision
                  for
                  depreciation
              
              
              135
              
              
              7
              
              
              6
              
              
              148Amortization
                  of regulatory assets
              
              
              307
              
              
              -
              
              
              -
              
              
              307Deferral
                  of
                  new regulatory assets
              
              
              (120
              )
              
              -
              
              
              -
              
              
              (120
              )General
                  taxes
              
              
              149
              
              
              14
              
              
              4
              
              
              167Total
                  Expenses
              
              
              879
              
              
              1,353
              
              
              116
              
              
              2,348Net
                  interest
                  charges
              
              
              99
              
              
              8
              
              
              54
              
              
              161Income
                  taxes
              
              
              186
              
              
              7
              
              
              48
              
              
              241Income
                  before
                  discontinued operations
              
              
              267
              
              
              11
              
              
              (99
              )
              
              179Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              (1
              )
              
              (1
              )Net
                  Income
                  (Loss)
              
              $
              267
              
              $
              11
              
              $
              (100
              )
              $
              178





**Power****Supply**
            
            **Other
                and****2nd
                Quarter 2004**
            
            
            
            **Regulated**
            
            **Management**
            
            **Reconciling**
            
            **FirstEnergy****Quarterly
                Financial Results**
            
            
            
            **Services**
            
            **Services**
            
            **Adjustments**
            
            **Consolidated*****(In
                millions)***Revenue:ExternalElectric
            
            
            
            
            $
            1,125
            
            $
            1,520
            
            $
            -
            
            $
            2,645Other
            
            
            
            
            
            153
            
            
            30
            
            
            164
            
            
            347Internal
            
            
            
            
            
            80
            
            
            -
            
            
            (80
            )
            
            -Total
                Revenues
            
            
            
            
            
            1,358
            
            
            1,550
            
            
            84
            
            
            2,992Expenses:Fuel
                and
                purchased power
            
            
            
            
            
            -
            
            
            1,095
            
            
            -
            
            
            1,095Other
                operating
            
            
            
            
            
            375
            
            
            355
            
            
            101
            
            
            831Provision
                for
                depreciation
            
            
            
            
            
            127
            
            
            9
            
            
            10
            
            
            146Amortization
                of regulatory assets
            
            
            
            
            
            271
            
            
            -
            
            
            -
            
            
            271Deferral
                of
                new regulatory assets
            
            
            
            
            
            (68
            )
            
            -
            
            
            -
            
            
            (68
            )General
                taxes
            
            
            
            
            
            135
            
            
            18
            
            
            5
            
            
            158Total
                Expenses
            
            
            
            
            
            840
            
            
            1,477
            
            
            116
            
            
            2,433Net
                interest
                charges
            
            
            
            
            
            113
            
            
            10
            
            
            57
            
            
            180Income
                taxes
            
            
            
            
            
            171
            
            
            26
            
            
            (20
            )
            
            177Income
                before
                discontinued operations
            
            
            
            
            
            234
            
            
            37
            
            
            (69
            )
            
            202Discontinued
                operations
            
            
            
            
            
            -
            
            
            -
            
            
            2
            
            
            2Net
                Income
                (Loss)
            
            
            
            
            $
            234
            
            $
            37
            
            $
            (67
            )
            $
            204








32





**Change
                Between**
            
            
            
            
            
            **Power****2nd
                Quarter 2005 and 2004**
            
            
            
            
            
            **Supply**
            
            **Other
                and****Quarterly
                Financial Results**
            
            
            
            **Regulated**
            
            **Management**
            
            **Reconciling**
            
            **FirstEnergy****Increase
                (Decrease)**
            
            
            
            **Services**
            
            **Services**
            
            **Adjustments**
            
            **Consolidated*****(In
                millions)***Revenue:ExternalElectric
            
            
            
            
            $
            40
            
            $
            (206
            )
            $
            -
            
            $
            (166
            )Other
            
            
            
            
            
            33
            
            
            35
            
            
            35
            
            
            103Internal
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Revenues
            
            
            
            
            
            73
            
            
            (171
            )
            
            35
            
            
            (63
            )Expenses:Fuel
                and
                purchased power
            
            
            
            
            
            -
            
            
            (162
            )
            
            -
            
            
            (162
            )Other
                operating
            
            
            
            
            
            33
            
            
            44
            
            
            5
            
            
            82Provision
                for
                depreciation
            
            
            
            
            
            8
            
            
            (2
            )
            
            (4
            )
            
            2Amortization
                of regulatory assets
            
            
            
            
            
            36
            
            
            -
            
            
            -
            
            
            36Deferral
                of
                new regulatory assets
            
            
            
            
            
            (52
            )
            
            -
            
            
            -
            
            
            (52
            )General
                taxes
            
            
            
            
            
            14
            
            
            (4
            )
            
            (1
            )
            
            9Total
                Expenses
            
            
            
            
            
            39
            
            
            (124
            )
            
            -
            
            
            (85
            )Net
                interest
                charges
            
            
            
            
            
            (14
            )
            
            (2
            )
            
            (3
            )
            
            (19
            )Income
                taxes
            
            
            
            
            
            15
            
            
            (19
            )
            
            68
            
            
            64Income
                before
                discontinued operations
            
            
            
            
            
            33
            
            
            (26
            )
            
            (30
            )
            
            (23
            )Discontinued
                operations
            
            
            
            
            
            -
            
            
            -
            
            
            (3
            )
            
            (3
            )Net
                Income
                (Loss)
            
            
            
            
            $
            33
            
            $
            (26
            )
            $
            (33
            )
            $
            (26
            )





***Regulated
      Services - Second Quarter 2005 Compared with Second Quarter
      2004***




Net
      income
      increased to $267 million from $234 million (or 14%) in the second quarter
      of
      2005 with increased operating revenues partially offset by higher operating
      expenses and taxes.





*Revenues
      -*





The
      increase in
      total revenues resulted from the following sources:





**Three
                Months Ended****June
                30,**
            
            **Increase****Revenues
                by Type of Service**
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Distribution
                services
            
            $
            1,165
            
            $
            1,125
            
            $
            40Transmission
                services
            
            
            105
            
            
            65
            
            
            40Lease
                revenue
                from affiliates
            
            
            80
            
            
            80
            
            
            -Other
            
            
            81
            
            
            88
            
            
            (7
            )Total
                Revenues
            
            $
            1,431
            
            $
            1,358
            
            $
            73





Changes
      in
      distribution deliveries by customer class in the second quarter of 2005 are
      summarized in the following table:





**Increase****Electric
                Distribution Deliveries**
            
            
            
            **(Decrease)**Residential
            
            
            
            
            
            9.5
            %Commercial
            
            
            
            
            
            2.9
            %Industrial
            
            
            
            
            
            (3.8
            )%Total
                Distribution Deliveries
            
            
            
            
            
            2.4
            %





Increased
      consumption offset in part by lower prices resulted in higher distribution
      delivery revenue. The following table summarizes major factors contributing
      to
      the $40 million increase in distribution services revenue in the second quarter
      of 2005:








33





**Increase****Sources
                of Change in Distribution Revenues**
            
            **(Decrease)*****(In
                millions)***Changes
                in
                customer usage
            
            $
            52Changes
                in
                prices:Rate
                changes
                --Ohio
                shopping
                incentive
            
            
            (11
            )Other
            
            
            (1
            )Net
                Increase
                in Distribution Revenues
            
            $
            40




Distribution
      revenues benefited from warmer than normal temperatures in the second quarter
      of
      2005 that increased the air-conditioning load of residential and commercial
      customers. Reduced industrial demand as a result of a softening in the
      automotive and steel-related sectors offset part of the weather-induced increase
      in load. A reduction in prices primarily resulted from additional credits
      provided to customers under the Ohio transition plan - those changes do not
      affect current period earnings due to deferral of the incentives for future
      recovery from customers.





Transmission
      revenues increased $40 million in the second quarter of 2005 from the same
      period last year due in part to an amended power supply agreement with FES
      in
      June 2004. Other
      revenues
      decreased $7 million due in part to a reduction in JCP&L transition bond
      revenues.





*Expenses-*





The
      higher revenues
      discussed above were partially offset by the following increases in
      expenses:





·  Higher
      transmission
      expenses of $42 million due in part to an amended power supply agreement with
      FES, which also increased revenue;





·  Increased
      provision
      for depreciation of $8 million due to property additions;





·  Additional
      amortization of regulatory assets of $36 million, principally due to increased
      amortization of Ohio transition costs;





·
            Increased
                general taxes of $14 million due to additional Pennsylvania gross
                receipts
                tax and the absence in 2005 of Pennsylvania property tax refunds
                recognized in the second quarter of 2004;
                and





·  Higher
      income taxes
      of $15 million due to increased taxable income.





Partially
      offsetting these higher costs were two factors:





·  Additional
      deferral
      of regulatory assets of $52 million, primarily the PUCO-approved MISO
      administrative costs, JCP&L reliability improvements and related interest
      (see Note 14 - Regulatory Matters - Transmission; New Jersey); and





·  Lower
      interest
      charges of $14 million resulting from debt and preferred stock redemptions
      and
      refinancings.





***Power
      Supply Management Services - Second Quarter 2005 Compared with Second Quarter
      2004***




Net
      income for this
      segment decreased to $11 million in the second quarter of 2005 from $37 million
      in the same period last year. A decrease in the gross generation margin and
      higher non-fuel nuclear costs resulted in lower net income.








34




*Generation
      Margin -*





The
      gross
      generation margin in the second quarter of 2005 decreased by $44 million
      compared to the same period of 2004, as shown in the table below.





**Three
                Months Ended****June
                30,****Gross
                Generation Margin**
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Electric
                generation revenue
            
            $
            1,314
            
            $
            1,520
            
            $
            (206
            )Fuel
                and
                purchased power costs
            
            
            933
            
            
            1,095
            
            
            (162
            )Gross
                generation margin
            
            $
            381
            
            $
            425
            
            $
            (44
            )





Excluding
      the
      effect of recording PJM sales and purchases of $283 million on a gross basis
      in
      2004, electric generation revenues increased $77 million while fuel and
      purchased power costs increased $121 million in the second quarter of 2005.
      The
      higher fuel and purchased power costs primarily resulted from higher prices
      which more than offset the benefit of increased sales to the retail and
      wholesale markets.





*Revenues
      -*





Excluding
      the
      effect of the change in recording PJM wholesale transactions, electric
      generation revenues increased $77 million in the second quarter of 2005 compared
      to the same period of 2004 primarily as a result of a 1.5% increase in KWH
      sales
      and higher unit prices. The additional retail sales reduced energy available
      for
      sale to the wholesale market resulting in a 0.9% reduction in those sales
      (before the PJM adjustment). Overall, revenues to the wholesale market increased
      due to a 7% rise in prices.





The
      change in
      reported segment revenues resulted from the following sources:




**Three
                  Months Ended****June
                  30,**
              
              **Increase****Revenues
                  by Type of Service**
              
              **2005**
              
              **2004**
              
              **(Decrease)*****(In
                  millions)***Electric
                  generation sales:Retail
              
              $
              989
              
              $
              930
              
              $
              59Wholesale
              
              
              325
              
              
              307
              
              
              18Total
                  electric generation sales
              
              
              1,314
              
              
              1,237
              
              
              77Transmission
              
              
              15
              
              
              23
              
              
              (8
              )Other
              
              
              50
              
              
              7
              
              
              43Total
              
              
              1,379
              
              
              1,267
              
              
              112PJM
                  gross
                  transactions
              
              
              -
              
              
              283
              
              
              (283
              )Total
                  Revenues
              
              $
              1,379
              
              $
              1,550
              
              $
              (171
              )




Changes
        in KWH
        sales are summarized in the following table:





**Electric
                Generation**
            
            **Increase****(Decrease)**Retail
            
            
            2.3
            %Wholesale
            
            
            (0.9
            )%Total
                Electric Generation
            
            
            1.5
            %**
                Decrease of
                15.6% including the effect of the PJM revision.





The
      other revenues
      increase in the second quarter of 2005 includes $40 million related to gas
      commodity operations. These transactions resulted from procuring fuel for
      gas-fired peaking capacity that was ultimately not required for generation
      and
      subsequently sold into the wholesale market. Related gas procurement costs
      of
      $38 million are reflected in the other operating costs in the second quarter
      of
      2005.





*Expenses
      -*




Excluding
      the
      effect of the $283 million of PJM purchased power costs recorded on a gross
      basis in 2004, total operating expenses, net interest charges and income taxes
      increased in aggregate by $138 million in the second quarter of 2005 compared
      to
      the same period of 2004. Higher fuel and purchased power costs contributed
      $121
      million ($162 million, net of $283 million PJM effect) of the increase,
      resulting from higher fuel costs of $89 million and increased purchased power
      costs of $32 million. Factors contributing to the higher costs are summarized
      in
      the following table:






35





**Increase****Source
                of Change in Fuel and Purchased Power**
            
            **(Decrease)*****(In
                millions)***Fuel:Change
                due to
                price
            
            $
            65Change
                due to
                volume
            
            
            2489Purchased
                Power:Change
                due to
                price
            
            
            64Change
                due to
                volume
            
            
            (9
            )Deferred
                costs
            
            
            (23
            )32Net
                Increase
                in Fuel and Purchased Power Costs
            
            $
            121






FirstEnergy’s
      fleet
      of generating plants established a new output record of 19.1 billion KWH.
      Increased coal and emission allowance costs combined to increase fossil fuel
      expense. Higher coal costs resulted from increased purchases, market adjustment
      provisions in coal contracts reflecting higher market prices and increased
      transportation costs. Emission allowance costs increased primarily from higher
      prices. To a lesser extent, fuel expense increased due to the increased mix
      of
      fossil versus nuclear generation resulting in large part from the nuclear
      refueling outages in the second quarter of 2005 following a year with no
      scheduled nuclear outages. Fossil generation increased 12% in the second quarter
      of 2005 while nuclear generation decreased by 16%.





Non-fuel
      nuclear
      costs increased $33 million primarily due to costs from the Beaver Valley Unit
      2
      refueling outage (started April 4, 2005) and to a lesser extent from the Perry
      Unit 1 outage initiated in the first quarter of 2005 and completed May 6,
      2005. There were no nuclear refueling outages in the second quarter of
      2004.





Partially
      offsetting these higher costs were the following factors:





·  Reduced
      non-fuel
      fossil generation expense of $7 million due to different maintenance outage
      schedules;





·  Lower
      transmission
      costs of $10 million due in part to the amended power supply agreement that
      resulted in the regulated services segment assuming certain transmission
      obligations previously borne by the power supply management services segment;
      and





·  Lower
      income taxes
      of $19 million due to lower taxable income.





***Other
      -
      Second Quarter 2005 Compared with Second Quarter 2004***





FirstEnergy’s
      financial results from other operating segments and reconciling adjustments,
      including interest expense on holding company debt and corporate support
      services revenues and expenses, resulted in a net decrease in FirstEnergy’s net
      income in the second quarter of 2005 compared to the same quarter of 2004.
      The
      decrease was primarily due to the effect of the new Ohio tax legislation,
      partially offset by the absence in the second quarter of 2005 of a litigation
      settlement loss of $11 million and the after-tax loss on the sale of GLEP of
      $7
      million recorded in the second quarter of 2004.





On
      June 30,
      2005, the State of Ohio enacted new tax legislation that creates a new
      Commercial Activity Tax (CAT), which is based on qualifying "taxable gross
      receipts" and will not consider any expenses or costs incurred to generate
      such
      receipts, except for items such as cash discounts, returns and allowances,
      and
      bad debts. The CAT tax is effective July 1, 2005, and replaces the Ohio
      income-based franchise tax and the Ohio personal property tax. The CAT tax
      is
      phased-in while the current income-based franchise tax is phased-out over a
      five-year period at a rate of 20% annually, beginning with the year ended 2005,
      and the personal property tax is phased-out over a four-year period at a rate
      of
      approximately 25% annually, beginning with the year ended 2005. For example,
      during the phase-out period the Ohio income-based franchise tax will be computed
      consistently with the prior tax law, except that the tax liability as computed
      will be multiplied by 4/5 in 2005; 3/5 in 2006; 2/5 in 2007 and 1/5 in 2008,
      therefore eliminating the current income-based franchise tax over a five-year
      period. As a result of the new tax structure, all net deferred tax benefits
      that
      are not expected to reverse during the five-year phase-in period were
      written-off as of June 30, 2005. The
      impact on
      income taxes associated with the required adjustment to net deferred taxes
      for
      the second quarter of 2005 was additional tax expense of approximately $72
      million, which was partially offset by the initial phase-out of the Ohio
      income-based franchise tax, which reduced income taxes by approximately $8
      million in the second quarter of 2005. See Note 12 to the consolidated financial
      statements.





36


***Summary
      of Results of Operations - First Six Months of 2005 Compared with the First
      Six
      Months of 2004***





Financial
      results
      for FirstEnergy and its major business segments for the first six months of
      2005
      and 2004 were as follows:





**Power****Supply**
            
            **Other
                and****First
                Six Months of 2005**
            
            
            
            **Regulated**
            
            **Management**
            
            **Reconciling**
            
            **FirstEnergy****Financial
                Results**
            
            
            
            **Services**
            
            **Services**
            
            **Adjustments**
            
            **Consolidated*****(In
                millions)***Revenue:ExternalElectric
            
            
            
            
            $
            2,327
            
            $
            2,589
            
            $
            -
            
            $
            4,916Other
            
            
            
            
            
            363
            
            
            84
            
            
            367
            
            
            814Internal
            
            
            
            
            
            158
            
            
            -
            
            
            (158
            )
            
            -Total
                Revenues
            
            
            
            
            
            2,848
            
            
            2,673
            
            
            209
            
            
            5,730Expenses:Fuel
                and
                purchased power
            
            
            
            
            
            -
            
            
            1,828
            
            
            -
            
            
            1,828Other
                operating
            
            
            
            
            
            826
            
            
            807
            
            
            172
            
            
            1,805Provision
                for
                depreciation
            
            
            
            
            
            261
            
            
            17
            
            
            14
            
            
            292Amortization
                of regulatory assets
            
            
            
            
            
            617
            
            
            -
            
            
            -
            
            
            617Deferral
                of
                new regulatory assets
            
            
            
            
            
            (180
            )
            
            -
            
            
            -
            
            
            (180
            )General
                taxes
            
            
            
            
            
            296
            
            
            45
            
            
            12
            
            
            353Total
                Expenses
            
            
            
            
            
            1,820
            
            
            2,697
            
            
            198
            
            
            4,715Net
                interest
                charges
            
            
            
            
            
            197
            
            
            18
            
            
            117
            
            
            332Income
                taxes
            
            
            
            
            
            341
            
            
            (17
            )
            
            39
            
            
            363Income
                before
                discontinued operations
            
            
            
            
            
            490
            
            
            (25
            )
            
            (145
            )
            
            320Discontinued
                operations
            
            
            
            
            
            -
            
            
            -
            
            
            18
            
            
            18Net
                Income
                (Loss)
            
            
            
            
            $
            490
            
            $
            (25
            )
            $
            (127
            )
            $
            338








**Power****Supply**
            
            **Other
                and****First
                Six Months of 2004**
            
            
            
            **Regulated**
            
            **Management**
            
            **Reconciling**
            
            **FirstEnergy****Financial
                Results**
            
            
            
            **Services**
            
            **Services**
            
            **Adjustments**
            
            **Consolidated*****(In
                millions)***Revenue:ExternalElectric
            
            
            
            
            $
            2,279
            
            $
            3,022
            
            $
            -
            
            $
            5,301Other
            
            
            
            
            
            289
            
            
            50
            
            
            335
            
            
            674Internal
            
            
            
            
            
            159
            
            
            -
            
            
            (159
            )
            
            -Total
                Revenues
            
            
            
            
            
            2,727
            
            
            3,072
            
            
            176
            
            
            5,975Expenses:Fuel
                and
                purchased power
            
            
            
            
            
            -
            
            
            2,229
            
            
            -
            
            
            2,229Other
                operating
            
            
            
            
            
            741
            
            
            702
            
            
            189
            
            
            1,632Provision
                for
                depreciation
            
            
            
            
            
            254
            
            
            17
            
            
            21
            
            
            292Amortization
                of regulatory assets
            
            
            
            
            
            581
            
            
            -
            
            
            -
            
            
            581Deferral
                of
                new regulatory assets
            
            
            
            
            
            (113
            )
            
            -
            
            
            -
            
            
            (113
            )General
                taxes
            
            
            
            
            
            283
            
            
            42
            
            
            12
            
            
            337Total
                Expenses
            
            
            
            
            
            1,746
            
            
            2,990
            
            
            222
            
            
            4,958Net
                interest
                charges
            
            
            
            
            
            219
            
            
            21
            
            
            111
            
            
            351Income
                taxes
            
            
            
            
            
            316
            
            
            25
            
            
            (49
            )
            
            292Income
                before
                discontinued operations
            
            
            
            
            
            446
            
            
            36
            
            
            (108
            )
            
            374Discontinued
                operations
            
            
            
            
            
            -
            
            
            -
            
            
            4
            
            
            4Net
                Income
                (Loss)
            
            
            
            
            $
            446
            
            $
            36
            
            $
            (104
            )
            $
            378














37





**Power****Change
                Between**
            
            
            
            
            
            **Supply**
            
            **Other
                and****First
                Six Months 2005 vs. 2004**
            
            
            
            **Regulated**
            
            **Management**
            
            **Reconciling**
            
            **FirstEnergy****Financial
                Results**
            
            
            
            **Services**
            
            **Services**
            
            **Adjustments**
            
            **Consolidated****Increase
                (Decrease)**
            
            
            
            ***(In
                millions)***Revenue:ExternalElectric
            
            
            
            
            $
            48
            
            $
            (433
            )
            $
            -
            
            $
            (385
            )Other
            
            
            
            
            
            74
            
            
            34
            
            
            32
            
            
            140Internal
            
            
            
            
            
            (1
            )
            
            -
            
            
            1
            
            
            -Total
                Revenues
            
            
            
            
            
            121
            
            
            (399
            )
            
            33
            
            
            (245
            )Expenses:Fuel
                and
                purchased power
            
            
            
            
            
            -
            
            
            (401
            )
            
            -
            
            
            (401
            )Other
                operating
            
            
            
            
            
            85
            
            
            105
            
            
            (17
            )
            
            173Provision
                for
                depreciation
            
            
            
            
            
            7
            
            
            -
            
            
            (7
            )
            
            -Amortization
                of regulatory assets
            
            
            
            
            
            36
            
            
            -
            
            
            -
            
            
            36Deferral
                of
                new regulatory assets
            
            
            
            
            
            (67
            )
            
            -
            
            
            -
            
            
            (67
            )General
                taxes
            
            
            
            
            
            13
            
            
            3
            
            
            -
            
            
            16Total
                Expenses
            
            
            
            
            
            74
            
            
            (293
            )
            
            (24
            )
            
            (243
            )Net
                interest
                charges
            
            
            
            
            
            (22
            )
            
            (3
            )
            
            6
            
            
            (19
            )Income
                taxes
            
            
            
            
            
            25
            
            
            (42
            )
            
            88
            
            
            71Income
                before
                discontinued operations
            
            
            
            
            
            44
            
            
            (61
            )
            
            (37
            )
            
            (54
            )Discontinued
                operations
            
            
            
            
            
            -
            
            
            -
            
            
            14
            
            
            14Net
                Income
                (Loss)
            
            
            
            
            $
            44
            
            $
            (61
            )
            $
            (23
            )
            $
            (40
            )





***Regulated
      Services - First Six Months of 2005 Compared with First Six Months of
      2004***





Net
      income
      increased to $490 million in the first six months of 2005 from $446 million
      in
      the same period of 2004 due to increased operating revenues partially offset
      by
      higher operating expenses and taxes.





*Revenues
      -*





The
      increase in
      total revenues resulted from the following sources:





**Six
                Months Ended****June
                30,**
            
            **Increase****Revenues
                by Type of Service**
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Distribution
                services
            
            $
            2,327
            
            $
            2,279
            
            $
            48Transmission
                services
            
            
            197
            
            
            130
            
            
            67Lease
                revenue
                from affiliates
            
            
            158
            
            
            159
            
            
            (1
            )Other
            
            
            166
            
            
            159
            
            
            7Total
                Revenues
            
            $
            2,848
            
            $
            2,727
            
            $
            121





Changes
      in
      distribution deliveries by customer class are summarized in the following
      table:





**Electric
                Distribution Deliveries**
            
            **Increase**Residential
            
            
            3.8
            %Commercial
            
            
            3.8
            %Industrial
            
            
            0.1
            %Total
                Distribution Deliveries
            
            
            2.5
            %








38




Increased
      consumption offset in part by lower prices resulted in higher distribution
      delivery revenue. The following table summarizes major factors contributing
      to
      the $48 million increase in distribution services revenue in the first half
      of
      2005:





**Increase****Sources
                of Change in Distribution Revenues**
            
            **(Decrease)*****(In
                millions)***Changes
                in
                customer usage
            
            $
            75Changes
                in
                prices:Rate
                changes
                -Ohio
                shopping incentive
            
            
            (22
            )Other
            
            
            8Rate
                mix and
                other
            
            
            (13
            )Net
                Increase
                in Distribution Revenues
            
            $
            48




Distribution
      revenues benefited from warmer than normal temperatures in the second quarter
      of
      2005 that increased the air-conditioning load of residential and commercial
      customers. Sales to industrial customers were flat due in part to a softening
      in
      automotive and steel-related markets. A reduction in prices primarily resulted
      from additional shopping credits under the Ohio transition plan.




Transmission
      revenues increased $67 million in the first six months of 2005 from the same
      period last year due in part to the amended power supply agreement with FES
      in
      June 2004. Other
      revenues
      increased $7 million primarily due to a payment received under a contract
      provision associated with the prior sale of TMI, which was offset in part by
      reduced JCP&L transition bond revenue.





*Expenses-*





The
      higher revenues
      discussed above were partially offset by the following increases in
      expenses:





· Higher
        transmission expenses of $85 million due in part to the amended power supply
        agreement with FES, which also increased revenue;
 
 ·  Increased
        provision
        for depreciation of $7 million reflecting the effect of property additions
        and
        additional costs for decommissioning the Saxton nuclear unit;
 
 · Additional
        amortization of regulatory assets of $36 million, principally due to
        amortization of Ohio transition costs;
 ·
                Increased
                    general taxes of $13 million related to additional Pennsylvania
                    gross
                    receipts tax and the absence in 2005 of Pennsylvania property
                    tax refunds
                    recognized in the second quarter of 2004;
                    and
 
 · Higher
        income taxes
        of $25 million due to increased taxable income.




Partially
      offsetting these higher costs were two factors:





·  Additional
      deferral
      of regulatory assets of $67 million, primarily the PUCO-approved MISO
      administrative costs, JCP&L reliability improvements, shopping incentive
      credits and related interest on those deferrals (see Note 14 - Regulatory
      Matters - Transmission, New Jersey); and





·  Lower
      interest
      charges of $22 million resulting from debt and preferred stock
      redemptions.





***Power
      Supply Management Services - First Six Months of 2005 Compared with the First
      Six Months of 2004***





The
      net loss for
      this segment was $25 million in the first six months of 2005 compared to net
      income of $36 million in the same period last year. A reduction in the gross
      generation margin, higher nuclear operating costs and amounts recognized for
      fines, penalties and obligations associated with proceedings involving the
      Sammis Plant and the Davis-Besse Nuclear Power Station produced the net loss.








39




*Generation
      Margin -*





The
      gross
      generation margin in the first six months of 2005 decreased by $32 million
      compared to the same period of 2004, as shown in the table below.





**Six
                Months Ended****June
                30,****Gross
                Generation Margin**
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Electric
                generation revenue
            
            $
            2,589
            
            $
            3,022
            
            $
            (433
            )Fuel
                and
                purchased power costs
            
            
            1,828
            
            
            2,229
            
            
            (401
            )Gross
                Generation Margin
            
            $
            761
            
            $
            793
            
            $
            (32
            )





Excluding
      the
      effect of PJM sales and purchases of $564 million recorded on a gross basis
      in
      2004, electric generation revenues increased $131 million while fuel and
      purchased power costs increased $163 million. The higher fuel and purchased
      power costs primarily resulted from higher prices which more than offset the
      benefit of increased sales to retail and wholesale markets.





*Revenues
      -*





Excluding
      the
      effect of the change in recording PJM wholesale transactions, electric
      generation revenues increased $131 million in the first six months of 2005
      compared to the same period of 2004 as a result of a 0.9% increase in KWH sales
      and higher unit prices. Additional retail sales reduced energy available for
      sale to the wholesale market.





The
      change in
      reported segment revenues resulted from the following sources:





**Six
                Months Ended****June
                30,**
            
            **Increase****Revenues
                by Type of Service**
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Electric
                generation sales:Retail
            
            $
            1,969
            
            $
            1,864
            
            $
            105Wholesale
            
            
            620
            
            
            594
            
            
            26Total
                Electric Generation Sales
            
            
            2,589
            
            
            2,458
            
            
            131Transmission
            
            
            25
            
            
            37
            
            
            (12
            )Other
            
            
            59
            
            
            13
            
            
            46Total
            
            
            2,673
            
            
            2,508
            
            
            165PJM
                gross
                transactions
            
            
            -
            
            
            564
            
            
            (564
            )Total
                Revenues
            
            $
            2,673
            
            $
            3,072
            
            $
            (399
            )





Changes
      in KWH
      sales are summarized in the following table:





**Increase****Electric
                Generation**
            
            **(Decrease)**Retail
            
            
            1.7
            %Wholesale
            
            
            (1.8
            )%Total
                Electric Generation
            
            
            0.9
            %**
                Decrease of
                15.8% including the effect of the PJM revision.





The
      other revenues
      increase in the first six months of 2005 primarily resulted from the $40 million
      of revenues from the gas commodity operations previously discussed in the second
      quarter 2005 results analysis.








40





*Expenses
      -*





Excluding
      the
      effect of the $564 million of PJM purchased power costs recorded on a gross
      basis in 2004, total operating expenses, net interest charges and income taxes
      increased in aggregate by $226 million. Higher
      fuel and
      purchased power costs contributed $163 million of the increase, resulting from
      higher fuel costs of $123 million and increased purchased power costs of $40
      million. Factors contributing to the higher costs are summarized in the
      following table:





**Increase****Source
                of Change in Fuel and Purchased Power**
            
            **(Decrease)*****(In
                millions)***Fuel:Change
                due to
                price
            
            $
            88Change
                due to
                volume
            
            
            35123Purchased
                Power:Change
                due to
                price
            
            
            124Change
                due to
                volume
            
            
            (36
            )Deferred
                costs
            
            
            (48
            )40Net
                Increase
                in Fuel and Purchased Power Costs
            
            $
            163




FirstEnergy’s
      fleet
      of generating plants established a new output record of 37.9 billion KWH.
      Increased coal and emission allowance costs combined to increase fossil fuel
      expense. Higher coal costs resulted from increased purchases, market adjustment
      provisions in coal contracts reflecting higher market prices and increased
      transportation costs. Emission allowance costs increased primarily from higher
      prices. To a lesser extent, fuel expense increased due to the increased mix
      of
      fossil versus nuclear generation resulting in large part from the nuclear
      refueling outages in first six months of 2005 following a year with no scheduled
      nuclear outages. Fossil generation increased 10% in the first six months of
      2005
      while nuclear generation decreased by 14%.





Non-fuel
      nuclear
      costs increased $100 million due primarily to refueling outages at Perry Unit
      1
      (including an unplanned extension) and Beaver Valley Unit 2 and a scheduled
      23-day mid-cycle inspection outage at the Davis-Besse nuclear plant. There
      were
      no scheduled nuclear outages in the first six months of 2004.





Partially
      offsetting these higher costs were the following factors:





·  Reduced
      non-fuel
      fossil generation expense of $17 million due to different maintenance outage
      schedules;





·  Lower
      transmission
      costs of $37 million due in part to the amended power supply agreement that
      resulted in the regulated services segment assuming certain transmission
      obligations previously borne by the power supply management services segment;
      and





·  Lower
      income taxes
      of $42 million due to lower taxable income.








41




***Other
      -
      First Six Months of 2005 Compared with the First Six Months of
      2004.***





FirstEnergy’s
      financial results from other operating segments and reconciling adjustments,
      including interest expense on holding company debt and corporate support
      services revenues and expenses, resulted in a net decrease in FirstEnergy’s net
      income in the first six months of 2005 compared to the same period of 2004.
      The
      decrease primarily reflected the effect of the new Ohio tax legislation
      (discussed in the Other - Second Quarter 2005 results analysis section),
      partially offset by the effect of discontinued operations, which included an
      after-tax net gain of $17 million (see Note 6). The following table summarizes
      the sources of income from discontinued operations:





**Six
                Months Ended****June
                30,**
            
            **Increase****2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***Discontinued
                operations (net of tax)Gain
                on
                sale:Natural
                gas
                business
            
            $
            5
            
            $
            -
            
            $
            5FSG
                and MYR
                Subsidiaries
            
            
            12
            
            
            -
            
            
            12Reclassification
                of operating income
            
            
            1
            
            
            4
            
            
            (3
            )Total
            
            $
            18
            
            $
            4
            
            $
            14





***Postretirement
      Plans***





Pension
      costs were
      lower in 2005 due to last year’s $500 million voluntary contribution and an
      increase in the market value of pension plan assets during 2004. Combined with
      amendments to FirstEnergy’s health care plan in the first quarter of 2005,
      postretirement benefits expense decreased by $17 million in the second quarter
      of 2005 and $37 million in the first six months of 2005 compared to the
      corresponding periods of 2004. The following table summarizes the net pension
      and OPEB expense (excluding amounts capitalized) for the second quarter and
      first six months ended June 30, 2005 and 2004.





**Three
                  Months Ended**
              
              
              
              **Six
                  Months Ended****Postretirement**
              
              **June
                  30,**
              
              
              **June
                  30,****Benefits
                  Expense ***
              
              **2005**
              
              **2004**
              
              **(Decrease)**
              
              **2005**
              
              **2004**
              
              **(Decrease)*****(In
                  millions)***Pension
              
              $
              8
              
              $
              22
              
              $
              (14
              )
              $
              16
              
              $
              42
              
              $
              (26
              )OPEB
              
              
              18
              
              
              21
              
              
              (3
              )
              
              36
              
              
              47
              
              
              (11
              )Total
              
              $
              26
              
              $
              43
              
              $
              (17
              )
              $
              52
              
              $
              89
              
              $
              (37
              )*
                  Excludes
                  the capitalized portion of postretirement benefits costs (see Note
                  10 for
                  total costs).







The
      decrease in pension and OPEB
      expenses are included in various cost categories and have contributed to other
      cost reductions discussed above.





**CAPITAL
      RESOURCES AND LIQUIDITY**





FirstEnergy’s
      cash
      requirements in 2005 for operating expenses, construction expenditures,
      scheduled debt maturities and preferred stock redemptions are expected to be
      met
      without increasing FirstEnergy’s net debt and preferred stock outstanding.
      Available borrowing capacity under credit facilities will be used to manage
      working capital requirements. Thereafter, FirstEnergy expects to use a
      combination of cash from operations and funds from the capital
      markets.





***Changes
      in Cash Position***





The
      primary source
      of ongoing cash for FirstEnergy, as a holding company, is cash dividends from
      its subsidiaries. The holding company also has access to $2.0 billion of
      short-term financing under a revolving credit facility, subject to short-term
      debt limitations under current regulatory approvals of $1.5 billion and to
      outstanding borrowings by subsidiaries of FirstEnergy who are also parties
      to
      such facility. In the second quarter of 2005, FirstEnergy received $279 million
      of cash dividends from its subsidiaries and paid $135 million in cash dividends
      to its common shareholders - in the first six months of 2005, it received and
      paid $416 million and $270 million, respectively. There are no material
      restrictions on the payment of cash dividends by FirstEnergy’s
      subsidiaries.





As
      of June 30,
      2005, FirstEnergy had $50 million of cash and cash equivalents ($3 million
      restricted as an indemnity reserve) compared with $53 million ($3 million
      restricted as an indemnity reserve) as of December 31, 2004. The major
      sources for changes in these balances are summarized below.








42




***Cash
      Flows From Operating Activities***




FirstEnergy's
      consolidated net cash from operating activities is provided primarily by its
      regulated and power supply businesses (see "RESULTS OF OPERATIONS" above).
      Net
      cash provided by operating activities was $362 million and $332 million in
      the
      second quarters of 2005 and 2004, respectively, and $931 million and $979
      million in the first six months of 2005 and 2004, respectively, summarized
      as
      follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings
                *
            
            $
            501
            
            $
            377
            
            $
            865
            
            $
            882Working
                capital and other
            
            
            (139
            )
            
            (45
            )
            
            66
            
            
            97Total
                cash
                flows from operating activities
            
            $
            362
            
            $
            332
            
            $
            931
            
            $
            979*
                Cash
                earnings are a non-GAAP measure (see reconciliation
                below).




Cash
      earnings, as
      disclosed in the table above, are not a measure of performance calculated in
      accordance with GAAP. FirstEnergy believes that cash earnings is a useful
      financial measure because it provides investors and management with an
      additional means of evaluating its cash-based operating performance. The
      following table reconciles cash earnings with net income.





**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****Reconciliation
                  of Cash Earnings**
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  millions)***Net
                  income
                  (GAAP)
              
              $
              178
              
              $
              204
              
              $
              338
              
              $
              378Non-cash
                  charges (credits):Provision
                  for
                  depreciation
              
              
              149
              
              
              146
              
              
              292
              
              
              292Amortization
                  of regulatory assets
              
              
              307
              
              
              271
              
              
              617
              
              
              581Deferral
                  of
                  new regulatory assets
              
              
              (120
              )
              
              (68
              )
              
              (180
              )
              
              (113
              )Nuclear
                  fuel
                  and lease amortization
              
              
              19
              
              
              23
              
              
              38
              
              
              45Deferred
                  purchased power and other costs
              
              
              (83
              )
              
              (61
              )
              
              (192
              )
              
              (145
              )Deferred
                  income taxes and investment tax credits
              
              
              76
              
              
              (100
              )
              
              62
              
              
              (94
              )Deferred
                  rents and lease market valuation liability
              
              
              (65
              )
              
              (64
              )
              
              (101
              )
              
              (81
              )Income
                  (loss)
                  from discontinued operations
              
              
              1
              
              
              (2
              )
              
              (18
              )
              
              (4
              )Other
                  non-cash expenses
              
              
              39
              
              
              28
              
              
              9
              
              
              23Cash
                  earnings
                  (non-GAAP)
              
              $
              501
              
              $
              377
              
              $
              865
              
              $
              882


In
      the second
      quarter of 2005, cash earnings increased $124 million from the same period
      last
      year as described under "RESULTS OF OPERATIONS." Cash earnings during the first
      six months of 2005 decreased by $17 million from the same period of 2004. In
      the
      second quarter of 2005, compared with the second quarter 2004, the use of cash
      for working capital increased by $94 million, principally from changes in
      receivables, accrued taxes, prepayments and materials and supplies, offset
      in
      part by accounts payable and funds received for prepaid electric service under
      the Ohio Schools Council’s Energy for Education Program. The use of cash for
      receivables resulted principally from the conversion of the CFC receivable
      sale
      to an on-balance sheet transaction, which added $155 million of receivables
      to
      the balance sheet as of June 30, 2005. The first six months of 2005
      compared to the first six months of 2004, working capital changes provided
      $31
      million less cash, compared to the same period of 2005, due in part to changes
      in receivables, accrued taxes and prepayments, offset by accounts payable and
      the funds received under the Energy for Education Program.





**Cash
      Flows
      From Financing Activities**





In
      the second
      quarter and first six months of 2005, cash used for financing activities was
      $109 million and $468 million, respectively, compared to $573 million and $813
      million in the second quarter and first six months of 2004 respectively. The
      following table summarizes security issuances and redemptions.








43




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****Securities
                  Issued or Redeemed**
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  millions)****New
                  issues*Pollution
                  control notes
              
              $
              245
              
              $
              -
              
              $
              245
              
              $
              185Secured
                  notes
              
              
              -
              
              
              300
              
              
              -
              
              
              550Unsecured
                  notes
              
              
              -
              
              
              3
              
              
              -
              
              
              150$
              245
              
              $
              303
              
              $
              245
              
              $
              885*Redemptions*First
                  mortgage bonds
              
              $
              177
              
              $
              290
              
              $
              178
              
              $
              382Pollution
                  control notes
              
              
              247
              
              
              -
              
              
              247
              
              
              -Secured
                  notes
              
              
              29
              
              
              31
              
              
              48
              
              
              73Long-term
                  revolving credit
              
              
              -
              
              
              175
              
              
              215
              
              
              310Unsecured
                  notes
              
              
              -
              
              
              225
              
              
              -
              
              
              225Preferred
                  stock
              
              
              42
              
              
              -
              
              
              140
              
              
              -$
              495
              
              $
              721
              
              $
              828
              
              $
              990Short-term
                  borrowings, net increase (decrease)
              
              $
              246
              
              $
              (60
              )
              $
              386
              
              $
              (447
              )










FirstEnergy
      had
      approximately $555 million of short-term indebtedness as of June 30,
      2005
      compared to approximately $170 million as of December 31, 2004. Available
      bank borrowings as of June 30, 2005 included the following:





**Borrowing
                Capability**
            
            **FirstEnergy**
            
            **OE***
            
            **Penelec**
            
            **Total*****(In
                millions)***Short-term
                revolving credit**
            
            $
            2,000
            
            $
            -
            
            $
            -
            
            $
            2,000Utilized
            
            
            (41
            )
            
            -
            
            
            -
            
            
            (41
            )Letters
                of
                credit
            
            
            (140
            )
            
            -
            
            
            -
            
            
            (140
            )Net
            
            
            1,819
            
            
            -
            
            
            -
            
            
            1,819Short-term
                bank facilities
            
            
            -
            
            
            14
            
            
            75
            
            
            89Utilized
            
            
            -
            
            
            -
            
            
            (75
            )
            
            (75
            )Net
            
            
            -
            
            
            14
            
            
            -
            
            
            14Total
                unused
                borrowing capability
            
            $
            1,819
            
            $
            14
            
            $
            -
            
            $
            1,833*
                Short-term
                revolving credit agreement matured on July 1, 2005 and was not
                renewed.**Credit
                facility is also available to OE, Penelec and certain other FirstEnergy
                subsidiaries, as discussed below.





As
      of June 30,
      2005, the Ohio Companies and Penn had the aggregate capability to issue
      approximately $4.1 billion of additional FMB on the basis of property additions
      and retired bonds under the terms of their respective mortgage indentures.
      The
      issuance of FMB by OE and CEI are also subject to provisions of their senior
      note indentures generally limiting the incurrence of additional secured debt,
      subject to certain exceptions that would permit, among other things, the
      issuance of secured debt (including FMB) (i) supporting pollution control notes
      or similar obligations, or (ii) as an extension, renewal or replacement of
      previously outstanding secured debt. In addition, these provisions would permit
      OE and CEI to incur additional secured debt not otherwise permitted by a
      specified exception of up to $668 million and $570 million, respectively, as
      of
      June 30, 2005. Under the provisions of its senior note indenture, JCP&L
      may issue additional FMB only as collateral for senior notes. As of
      June 30, 2005, JCP&L had the capability to issue $597 million of
      additional senior notes upon the basis of FMB collateral. Based upon applicable
      earnings coverage tests in their respective charters, OE, Penn, TE and JCP&L
      could issue a total of $4.3 billion of preferred stock (assuming no additional
      debt was issued) as of June 30, 2005. CEI, Met-Ed and Penelec have no
      restrictions on the issuance of preferred stock.





As
      of June 30,
      2005, approximately $1 billion remained unused under an existing shelf
      registration statement, filed by FirstEnergy with the SEC in 2003, to support
      future securities issues. The shelf registration provides the flexibility to
      issue and sell various types of securities, including common stock, debt
      securities, and share purchase contracts and related share purchase
      units.





FirstEnergy’s
      working capital and short-term borrowing needs are met principally with a $2
      billion five-year revolving credit facility that was entered into on
      June 14, 2005 by FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed,
      Penelec, FES and ATSI, as borrowers, with a syndicate of banks. The facility
      replaced FirstEnergy’s $375 million and $1 billion three-year credit agreements,
      OE’s $125 million three-year credit agreement and OE’s recently-expired $250
      million two-year credit agreement. Borrowings under the facility are available
      to each borrower separately and will mature on the earlier of 364 days from
      the
      date of borrowing and the commitment termination date.






44




The
      following table
      summarizes the borrowing sub-limits for each borrower under the facility, as
      well as the limitations on short-term indebtedness applicable to each borrower
      under current regulatory approvals and applicable statutory and/or charter
      limitations.





**Revolving**
            **Regulatory
                and****Credit
                Facility**
            **Other
                Short-Term****Borrower**
            **Sub-Limit**
            **Debt
                Limitations****1*****(In
                millions)*****FirstEnergy**
            $2,000
            $1,500**OE**
            500
            500**Penn**
            50
            49**CEI**
            250
            500**TE**
            250
            500**JCP&L**
            425
            414**Met-Ed**
            250
            2502**Penelec**
            250
            2502**FES**
            -3
            n/a**ATSI**
            -3
            26







(1) As of June 30, 2005.




(2) Excluding amounts which may be borrowed under the Utility Money
      Pool.




(3)
            Borrowing
                sublimits for FES and ATSI may be increased to up to $250 million
                and $100
                million, respectively, by delivering notice to the administrative
                agent
                that either (i) such borrower has senior unsecured debt ratings of
                at
                least BBB- by S&P and Baa3 by Moody’s or (ii) FirstEnergy has
                guaranteed the obligations of such borrower under the
                facility.







The
      revolving
      credit facility, combined with an aggregate $550 million of accounts receivable
      financing facilities for OE, CEI, TE, Met-Ed, Penelec and Penn, are intended
      to
      provide liquidity to meet short-term working capital requirements for
      FirstEnergy and its subsidiaries.





Under
      the revolving
      credit facility, borrowers may request the issuance of letters of credit
      expiring up to one year from the date of issuance. The stated amount of
      outstanding letters of credit will count against total commitments available
      under the facility and against the applicable borrower’s borrowing sub-limit.
      Total unused borrowing capability under existing credit facilities and accounts
      receivable financing facilities totaled $1.96 billion as of June 30,
      2005.





The
      revolving
      credit facility contains financial covenants, such that each borrower shall
      maintain a consolidated debt to total capitalization ratio of no more than
      0.65
      to 1.00. In addition, unless and until FirstEnergy obtains senior unsecured
      debt
      ratings of BBB- by S&P or Baa2 by Moody’s, FirstEnergy will maintain a fixed
      charge ratio of at least 2.00 to 1.00.





As
      of June 30,
      2005, FirstEnergy and it’s subsidiaries’ fixed charge coverage ratios, as
      defined under the credit agreements, were as follows:





**Debt****To
                Total**
            **Fixed
                Charge****Borrower**
            **Capitalization**
            **Ratio****FirstEnergy**
            0.55
                to
                1.00
            4.55**OE**
            0.39
                to
                1.00
            6.66**Penn**
            0.35
                to
                1.00
            16.97**CEI**
            0.58
                to
                1.00
            3.82**TE**
            0.43
                to
                1.00
            3.48**JCP&L**
            0.31
                to
                1.00
            4.94**Met-Ed**
            0.38
                to
                1.00
            7.01**Penelec**
            0.35
                to
                1.00
            5.63





The
      facility does
      not contain any provisions that either restrict the ability to borrow or
      accelerate repayment of outstanding advances as a result of any change in the
      credit ratings. Pricing is defined in "pricing grids", whereby the cost of
      funds
      borrowed under the facility is related to the credit ratings of the company
      borrowing the funds.






45





FirstEnergy’s
      regulated companies also have the ability to borrow from each other and the
      holding company to meet their short-term working capital requirements. A similar
      but separate arrangement exists among FirstEnergy’s unregulated companies. FESC
      administers these two money pools and tracks surplus funds of FirstEnergy and
      the respective regulated and unregulated subsidiaries, as well as proceeds
      available from bank borrowings. Companies receiving a loan under the money
      pool
      agreements must repay the principal amount of the loan, together with accrued
      interest, within 364 days of borrowing the funds. The rate of interest is the
      same for each company receiving a loan from their respective pool and is based
      on the average cost of funds available through the pool. The average interest
      rate for borrowings in the second quarter of 2005 was 2.93% for the regulated
      companies’ money pool and 2.86% for the unregulated companies' money
      pool.





On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy and
      its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and its nuclear operations further stabilize.





On
      July 18,
      2005, Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s outlook
      resulted from steady financial improvement and steps taken by management to
      improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in their outlook recognized
      management’s regional strategy of focusing on its core utility businesses and
      the improvement in FirstEnergy’s credit profile stemming from the application of
      free cash flow toward debt reduction. Moody’s noted that a ratings upgrade could
      be considered if FirstEnergy continues to achieve planned improvements in its
      operations and balance sheet.





The
      total principal
      or par value of optional redemptions during the second quarter of 2005 totaled
      $110 million with one optional redemption completed following the end of the
      second quarter as shown in the table below.





**Optional
                Debt and Preferred Stock****Redemptions
                by Company**
            
            **Date
                of****Redemption**
            
            **Principal/Par**
            
            **Annual
                Cost*****(In
                millions)***CEI
            
            
            May
                1,
                2005
            
            $
            2
            
            
            7.000
            %June
                1,
                2005
            
            
            4
            
            
            7.350
            %JCP&L
            
            
            May
                1,
                2005
            
            
            6
            
            
            7.125
            %June
                30,
                2005
            
            
            50
            
            
            8.450
            %Met-Ed
            
            
            May
                1,
                2005
            
            
            7
            
            
            6.000
            %Penelec
            
            
            May
                1,
                2005
            
            
            3
            
            
            6.125
            %Penn
            
            
            May
                16,
                2005
            
            
            13
            
            
            7.625
            %May
                16,
                2005
            
            
            25
            
            
            7.750
            %$
            110TE
            
            
            July
                1,
                2005
            
            $
            30
            
            
            7.000
            %





***Cash
      Flows From Investing Activities***





Net
      cash flows used
      in investing activities resulted principally from property additions. Regulated
      services expenditures for property additions primarily include expenditures
      supporting the distribution of electricity. Capital expenditures by the power
      supply management services segment are principally generation-related. The
      following table summarizes the investment activities for the three months and
      six months ended June 30, 2005 and 2004 by FirstEnergy’s regulated
      services, power supply management services and other segments:











46





**Summary
                of Cash Flows**
            
            **Property****Used
                for Investing Activities**
            
            **Additions**
            
            **Investments**
            
            **Other**
            
            **Total****Sources
                (Uses)**
            
            ***(In
                millions)*****Three
                Months Ended June 30, 2005**Regulated
                services
            
            $
            (158
            )
            $
            (19
            )
            $
            (10
            )
            $
            (187
            )Power
                supply
                management services
            
            
            (66
            )
            
            -
            
            
            -
            
            
            (66
            )Other
            
            
            (2
            )
            
            3
            
            
            (6
            )
            
            (5
            )Reconciling
                items
            
            
            (7
            )
            
            (20
            )
            
            -
            
            
            (27
            )Total
            
            $
            (233
            )
            $
            (36
            )
            $
            (16
            )
            $
            (285
            )**Three
                Months Ended June 30, 2004**Regulated
                services
            
            $
            (129
            )
            $
            3
            
            $
            (5
            )
            $
            (131
            )Power
                supply
                management services
            
            
            (59
            )
            
            (2
            )
            
            -
            
            
            (61
            )Other
            
            
            (1
            )
            
            180
            
            
            2
            
            
            181Reconciling
                items
            
            
            (8
            )
            
            80
            
            
            -
            
            
            72Total
            
            $
            (197
            )
            $
            261
            
            $
            (3
            )
            $
            61








**Six
                Months Ended June 30, 2005**Regulated
                services
            
            $
            (299
            )
            $
            4
            
            $
            (7
            )
            $
            (302
            )Power
                supply
                management services
            
            
            (147
            )
            
            (1
            )
            
            -
            
            
            (148
            )Other
            
            
            (5
            )
            
            19
            
            
            (19
            )
            
            (5
            )Reconciling
                items
            
            
            (11
            )
            
            -
            
            
            -
            
            
            (11
            )Total
            
            $
            (462
            )
            $
            22
            
            $
            (26
            )
            $
            (466
            )**Six
                Months Ended June 30, 2004**Regulated
                services
            
            $
            (220
            )
            $
            (46
            )
            $
            (7
            )
            $
            (273
            )Power
                supply
                management services
            
            
            (103
            )
            
            (3
            )
            
            -
            
            
            (106
            )Other
            
            
            (2
            )
            
            173
            
            
            4
            
            
            175Reconciling
                items
            
            
            (10
            )
            
            53
            
            
            (19
            )
            
            24Total
            
            $
            (335
            )
            $
            177
            
            $
            (22
            )
            $
            (180
            )





Net
      cash used for
      investing activities was $285 million in the second quarter of 2005 compared
      to
      $61 million of cash provided from investing activities in the same period of
      2004. The change was primarily due to $193 million of lower proceeds from assets
      sales, a $36 million increase in property additions and an $83 million change
      in
      interest rate swap activity. Net cash used for investing activities increased
      by
      $286 million in the first six months of 2005 compared to the same period of
      2004. The increase principally resulted from lower proceeds from the sale of
      assets of $150 million, increased property additions of $127 million and a
      $47
      million change in interest rate swap activity, partially offset by the absence
      of a $51 million NUG trust refund in 2004.





During
      the second
      half of 2005, capital requirements for property additions and capital leases
      are
      expected to be approximately $622 million, including $24 million for nuclear
      fuel. FirstEnergy has additional requirements of approximately $41 million
      for
      maturing long-term debt during the remainder of 2005. These cash requirements
      are expected to be satisfied from internal cash and short-term credit
      arrangements.





FirstEnergy’s
      capital spending for the period 2005-2007 is expected to be about $3.3 billion
      (excluding nuclear fuel), of which $1.0 billion applies to 2005. Investments
      for
      additional nuclear fuel during the 2005-2007 period are estimated to be
      approximately $282 million, of which approximately $58 million applies to 2005.
      During the same period, FirstEnergy’s nuclear fuel investments are expected to
      be reduced by approximately $284 million and $86 million respectively, as the
      nuclear fuel is consumed.





**GUARANTEES
      AND OTHER ASSURANCES**





As
      part of normal
      business activities, FirstEnergy enters into various agreements on behalf of
      its
      subsidiaries to provide financial or performance assurances to third parties.
      Such agreements include contract guarantees, surety bonds, and LOCs. Some of
      the
      guaranteed contracts contain ratings contingent collateralization
      provisions.








47




As
      of June 30,
      2005, the maximum potential future payments under outstanding guarantees and
      other assurances totaled $2.4 billion as summarized below:





**Maximum****Guarantees
                and Other Assurances**
            
            **Exposure*****(In
                millions)***FirstEnergy
                guarantees of subsidiaries:Energy
                and
                energy-related contracts (1)
            
            $
            897Other
                (2)
            
            
            1721,069Surety
                bonds
            
            
            296Letters
                of
                credit (3)(4)
            
            
            1,058Total
                Guarantees and Other Assurances
            
            $
            2,423(1)Issued
                for a
                one-year term, with a 10-day termination right by
                FirstEnergy.(2)Issued
                for
                various terms.(3)Includes
                $140
                million issued for various terms under LOC capacity
                availableunder
                FirstEnergy's revolving credit agreement and $299 million outstanding
                insupport of pollution control revenue bonds issued with various
                maturities.(4)Includes
                approximately $194 million pledged in connection with the sale
                andleaseback of Beaver Valley Unit 2 by CEI and TE, $291 million pledged
                in
                connectionwith
                the sale and leaseback of Beaver Valley Unit 2 by OE and $134 million
                pledgedin
                connection with the sale and leaseback of Perry Unit 1 by
                OE.





FirstEnergy
      guarantees energy and energy-related payments of its subsidiaries involved
      in
      energy marketing activities - principally to facilitate normal
      physical transactions involving electricity, gas, emission allowances and coal.
      FirstEnergy also provides guarantees to various providers of subsidiary
      financing principally for the acquisition of property, plant and equipment.
      These agreements legally obligate FirstEnergy and its subsidiaries to fulfill
      the obligations of those subsidiaries directly involved in energy and
      energy-related transactions or financings where the law might  otherwise
      limit the
      counterparties’ claims. If demands of a counterparty were to exceed the ability
      of a subsidiary to satisfy existing obligations, FirstEnergy’s guarantee enables
      the counterparty’s legal claim to be satisfied by FirstEnergy’s other assets.
      The likelihood that such parental guarantees will increase amounts otherwise
      paid by FirstEnergy to meet its obligations incurred in connection with ongoing
      energy-related contracts is remote.





While
      these types
      of guarantees are normally parental commitments for the future payment of
      subsidiary obligations, subsequent to the occurrence of a credit rating
      downgrade or "material adverse event" the immediate posting of cash collateral
      or provision of an LOC may be required of the subsidiary. The following table
      summarizes collateral provisions in effect as of June 30,
      2005:





**Total**
            
            **Collateral
                Paid**
            
            **Remaining****Collateral
                Provisions**
            
            
            
            **Exposure**
            
            **Cash**
            
            **LOC**
            
            **Exposure*****(In
                millions)***Credit
                rating
                downgrade
            
            
            
            
            $
            367
            
            $
            141
            
            $
            18
            
            $
            208Adverse
                event
            
            
            
            
            
            50
            
            
            -
            
            
            7
            
            
            43Total
            
            
            
            
            $
            417
            
            $
            141
            
            $
            25
            
            $
            251





Most
      of
      FirstEnergy’s surety bonds are backed by various indemnities common within the
      insurance industry. Surety bonds and related guarantees provide additional
      assurance to outside parties that contractual and statutory obligations will
      be
      met in a number of areas including construction contracts, environmental
      commitments and various retail transactions.





FirstEnergy
      has
      guaranteed the obligations of the operators of the TEBSA project up to a maximum
      of $6 million (subject to escalation) under the project's operations and
      maintenance agreement. In connection with the sale of TEBSA in January 2004,
      the
      purchaser indemnified FirstEnergy against any loss under this guarantee.
      FirstEnergy has provided an LOC ($47 million as of June 30, 2005, which
      is
      included in the caption "Other" in the above table of Guarantees and Other
      Assurances), which is renewable and declines yearly based upon the senior
      outstanding debt of TEBSA.








48




**OFF-BALANCE
      SHEET ARRANGEMENTS**





FirstEnergy
      has
      obligations that are not included on its Consolidated Balance Sheet related
      to
      the sale and leaseback arrangements involving Perry Unit 1, Beaver Valley Unit
      2
      and the Bruce Mansfield Plant, which are satisfied through the operating lease
      payments. The present value of these sale and leaseback operating lease
      commitments, net of trust investments, total $1.3 billion as of June 30,
      2005.





FirstEnergy
      has
      equity ownership interests in certain various businesses that are accounted
      for
      using the equity method. There are no undisclosed material contingencies related
      to these investments. Certain guarantees that FirstEnergy does not expect to
      have a material current or future effect on its financial condition, liquidity
      or results of operations are disclosed under contractual obligations
      above.




On
      June 16,
      2005, the CFC receivables financing structure was renewed and restructured
      from
      an off-balance sheet transaction to an on-balance sheet transaction. Under
      the
      new structure, any borrowings under the facility appear on the balance sheet
      as
      short-term debt.





**MARKET
      RISK
      INFORMATION**





FirstEnergy
      uses
      various market risk sensitive instruments, including derivative contracts,
      primarily to manage the risk of price and interest rate fluctuations.
      FirstEnergy’s Risk Policy Committee, comprised of members of senior management,
      provides general management oversight to risk management activities throughout
      the Company.





***Commodity
      Price Risk***





FirstEnergy
      is
      exposed to market risk primarily due to fluctuating electricity, natural gas,
      coal, nuclear fuel, emission allowance prices and energy transmission. To manage
      the volatility relating to these exposures, it uses a variety of non-derivative
      and derivative instruments, including forward contracts, options, futures
      contracts and swaps. The derivatives are used principally for hedging purposes
      and, to a much lesser extent, for trading purposes. All derivatives that fall
      within the scope of SFAS 133 must be recorded at their fair market value and
      be
      marked to market. The majority of FirstEnergy’s derivative hedging contracts
      qualify for the normal purchases and normal sales under the SFAS 133 exemption
      and are therefore excluded from the table below. Of those contracts not exempt
      from such treatment, most are non-trading contracts that do not qualify for
      hedge accounting treatment. The change in the fair value of commodity derivative
      contracts related to energy production during the second quarter and first
      six
      months of 2005 is summarized in the following table:





**Three
                Months Ended**
            
            **Six
                Months Ended****Increase
                (Decrease) in the Fair Value**
            
            
            
            **June
                30, 2005**
            
            **June
                30, 2005****of
                Commodity Derivative Contracts**
            
            
            
            **Non-Hedge**
            
            **Hedge**
            
            **Total**
            
            **Non-Hedge**
            
            **Hedge**
            
            **Total*****(In
                millions)*****Change
                in the Fair Value of****Commodity
                Derivative Contracts:**Outstanding
                net asset at beginning of period
            
            
            
            
            $
            55
            
            $
            3
            
            $
            58
            
            $
            62
            
            $
            2
            
            $
            64New
                contract when entered
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Additions/change
                in value of existing contracts
            
            
            
            
            
            -
            
            
            (4
            )
            
            (4
            )
            
            (1
            )
            
            2
            
            
            1Change
                in techniques/assumptions
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Settled
                contracts
            
            
            
            
            
            -
            
            
            (1
            )
            
            (1
            )
            
            (7
            )
            
            -
            
            
            (7
            )Sale
                of retail natural gas contracts
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            (6
            )
            
            (5
            )Outstanding
                net asset at end of period(1)
            
            
            
            
            $
            55
            
            $
            (2
            )
            $
            53
            
            $
            55
            
            $
            (2
            )
            $
            53**Non-commodity
                Net Assets at End of Period:**Interest
                rate swaps(2)
            
            
            
            
            
            -
            
            
            12
            
            
            12
            
            
            -
            
            
            12
            
            
            12**Net
                Assets - Derivative Contracts at End of Period**
            
            
            
            
            $
            55
            
            $
            10
            
            $
            65
            
            $
            55
            
            $
            10
            
            $
            65**Impact
                of Changes in Commodity Derivative Contracts****(3)**Income
                Statement effects (pre-tax)
            
            
            
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Balance
                Sheet effects:Other
                comprehensive income (pre-tax)
            
            
            
            
            $
            -
            
            $
            (5
            )
            $
            (5
            )
            $
            -
            
            $
            (4
            )
            $
            (4
            )Regulatory
                liability
            
            
            
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (7
            )
            $
            -
            
            $
            (7
            )(1)Includes
                $54 million in non-hedge commodity derivative contracts which are
                offset
                by a regulatory liability.(2)Interest
                rate swaps are treated as cash flow or fair value hedges. (See Interest
                Rate Swap Agreements - Fair Value Hedges and ForwardStarting Swap Agreements - Cash Flow Hedges)(3)Represents
                the change in value of existing contracts, settled contracts and
                changes
                in techniques/assumptions.








49




Derivatives
      are
      included on the Consolidated Balance Sheet as of June 30, 2005 as
      follows:





**Balance
                Sheet Classification**
            
            **Non-Hedge**
            
            **Hedge**
            
            **Total*****(In
                millions)*****Current**-Other
                assets
            
            $
            1
            
            $
            2
            
            $
            3Other
                liabilities
            
            
            (1
            )
            
            (4
            )
            
            (5
            )**Non-Current**-Other
                deferred charges
            
            
            55
            
            
            24
            
            
            79Other
                non-current liabilities
            
            
            -
            
            
            (12
            )
            
            (12
            )Net
                assets
            
            $
            55
            
            $
            10
            
            $
            65





The
      valuation of
      derivative contracts is based on observable market information to the extent
      that such information is available. In cases where such information is not
      available, FirstEnergy relies on model-based information. The model provides
      estimates of future regional prices for electricity and an estimate of related
      price volatility. FirstEnergy uses these results to develop estimates of fair
      value for financial reporting purposes and for internal management decision
      making. Sources of information for the valuation of derivative contracts by
      year
      are summarized in the following table:




**Sources
                  of Information -****Fair
                  Value by Contract Year**
              
              **2005**(1)
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **Thereafter**
              
              **Total*****(In
                  millions)***Prices
                  actively quoted(2)
              
              $
              1
              
              $
              1
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              2Other
                  external sources(3)
              
              
              9
              
              
              8
              
              
              10
              
              
              -
              
              
              -
              
              
              -
              
              
              27Prices
                  based
                  on models
              
              
              -
              
              
              -
              
              
              -
              
              
              8
              
              
              8
              
              
              8
              
              
              24Total(4)
              
              $
              10
              
              $
              9
              
              $
              10
              
              $
              8
              
              $
              8
              
              $
              8
              
              $
              53(1)For
                  the
                  last two quarters of 2005.(2)Exchange
                  traded.(3)Broker
                  quote sheets.(4)Includes
                  $54 million in non-hedge commodity derivative contracts which are
                  offset
                  by a regulatory liability.






FirstEnergy
      performs sensitivity analyses to estimate its exposure to the market risk of
      its
      commodity positions. A hypothetical 10% adverse shift (an increase or decrease
      depending on the derivative position) in quoted market prices in the near term
      on both FirstEnergy's trading and nontrading derivative instruments would not
      have had a material effect on its consolidated financial position (assets,
      liabilities and equity) or cash flows as of June 30, 2005. Based on
      derivative contracts held as of June 30, 2005, an adverse 10% change
      in
      commodity prices would decrease net income by approximately $2 million for
      the
      next twelve months.





***Interest
      Rate Swap Agreements - Fair Value Hedges***





FirstEnergy
      utilizes fixed-to-floating interest rate swap agreements, as part of its ongoing
      effort to manage the interest rate risk of its debt portfolio. These derivatives
      are treated as fair value hedges of fixed-rate, long-term debt issues - protecting against
      the risk of changes in the fair value of fixed-rate debt instruments due to
      lower interest rates. Swap maturities, call options, fixed interest rates and
      interest payment dates match those of the underlying obligations. During the
      second quarter of 2005, FirstEnergy executed no new fixed-for-floating interest
      rate swaps and unwound swaps with a total notional amount of $350 million (see
      Note 7). As of June 30, 2005, the debt underlying the $1.4 billion
      outstanding notional amount of interest rate swaps had a weighted average fixed
      interest rate of 5.54%, which the swaps have effectively converted to a current
      weighted average variable interest rate of 4.43%.








50




**June
                  30, 2005**
              
              **December
                  31, 2004****Notional**
              
              **Maturity**
              
              **Fair**
              
              **Notional**
              
              **Maturity**
              
              **Fair****Interest
                  Rate Swaps**
              
              **Amount**
              
              **Date**
              
              **Value**
              
              **Amount**
              
              **Date**
              
              **Value*****(Dollars
                  in millions)***Fixed
                  to
                  Floating Rate
              
              $
              200
              
              
              2006
              
              $
              (2
              )
              $
              200
              
              
              2006
              
              $
              (1
              )(Fair
                  value
                  hedges)
              
              
              100
              
              
              2008
              
              
              (1
              )
              
              100
              
              
              2008
              
              
              (1
              )50
              
              
              2010
              
              
              1
              
              
              100
              
              
              2010
              
              
              150
              
              
              2011
              
              
              2
              
              
              100
              
              
              2011
              
              
              2450
              
              
              2013
              
              
              13
              
              
              400
              
              
              2013
              
              
              4100
              
              
              2014
              
              
              4
              
              
              100
              
              
              2014
              
              
              2150
              
              
              2015
              
              
              (2
              )
              
              150
              
              
              2015
              
              
              (7
              )200
              
              
              2016
              
              
              6
              
              
              200
              
              
              2016
              
              
              1-
              
              
              2018
              
              
              -
              
              
              150
              
              
              2018
              
              
              5-
              
              
              2019
              
              
              -
              
              
              50
              
              
              2019
              
              
              2100
              
              
              2031
              
              
              (2
              )
              
              100
              
              
              2031
              
              
              (4
              )$
              1,400
              
              
              
              
              $
              19
              
              $
              1,650
              
              
              
              
              $
              4





***Forward
      Starting Swap Agreements - Cash Flow Hedges***





During
      the quarter,
      FirstEnergy entered into several forward starting swap agreements in order
      to
      hedge a portion of the consolidated interest rate risk associated with the
      planned issuance of fixed-rate, long-term debt securities for one or more of
      its
      consolidated entities in the fourth quarter of 2006. These derivatives are
      treated as cash flow hedges, protecting against the risk of changes in the
      future interest payments resulting from changes in benchmark U.S. Treasury
      rates
      between the date of hedge inception and the date of the debt issuance. As of
      June 30, 2005, FirstEnergy had entered into forward starting swaps with
      an
      aggregate notional amount of $375 million.





***Equity
      Price Risk***





Included
      in nuclear
      decommissioning trusts are marketable equity securities carried at their market
      value of approximately $976 million and $951 million as of June 30,
      2005
      and December 31, 2004, respectively. A hypothetical 10% decrease in
      prices
      quoted by stock exchanges would result in a $98 million reduction in fair value
      as of June 30, 2005.





**CREDIT
      RISK**




Credit
      risk is the
      risk of an obligor’s failure to meet the terms of any investment contract, loan
      agreement or otherwise perform as agreed. Credit risk arises from all activities
      in which success depends on issuer, borrower or counterparty performance,
      whether reflected on or off the balance sheet. FirstEnergy engages in
      transactions for the purchase and sale of commodities including gas,
      electricity, coal and emission allowances. These transactions are often with
      major energy companies within the industry.





FirstEnergy
      maintains credit policies with respect to its counterparties to manage overall
      credit risk. This includes performing independent risk evaluations, actively
      monitoring portfolio trends and using collateral and contract provisions to
      mitigate exposure. As part of its credit program, FirstEnergy aggressively
      manages the quality of its portfolio of energy contracts evidenced by a current
      weighted average risk rating for energy contract counterparties of BBB
      (S&P). As of June 30, 2005, the largest credit concentration was with
      one party, currently rated investment grade, that represented 8% of
      FirstEnergy’s total credit risk. Within its unregulated energy subsidiaries, 99%
      of credit exposures, net of collateral and reserve, were with investment-grade
      counterparties as of June 30, 2005.





**Outlook**





***State
      Regulatory Matters***





In
      Ohio, New Jersey
      and Pennsylvania, laws applicable to electric industry restructuring contain
      similar provisions that are reflected in the Companies' respective state
      regulatory plans. These provisions include:





·
            restructuring
                the electric generation business and allowing the Companies' customers
                to
                select a competitive electric generation supplier other than the
                Companies;





·
            establishing
                or defining the PLR obligations to customers in the Companies' service
                areas;






51





·
            providing
                the
                Companies with the opportunity to recover potentially stranded investment
                (or transition costs) not otherwise recoverable in a competitive
                generation market;





·
            itemizing
                (unbundling) the price of electricity into its component elements
                -
                including generation, transmission, distribution and stranded costs
                recovery charges;





·
            continuing
                regulation of the Companies' transmission and distribution systems;
                and





·
            requiring
                corporate separation of regulated and unregulated business
                activities.




The
        EUOCs
        recognize, as regulatory assets, costs which the FERC, PUCO, PPUC and NJBPU
        have
        authorized for recovery from customers in future periods or for which
        authorization is probable. Without the probability of such authorization,
        costs
        currently recorded as regulatory assets would have been charged to income
        as
        incurred. All regulatory assets are expected to be recovered from customers
        under the Companies' respective transition and regulatory plans. Based on
        those
        plans, the Companies continue to bill and collect cost-based rates for their
        transmission and distribution services, which remain regulated; accordingly,
        it
        is appropriate that the Companies continue the application of SFAS 71 to
        those
        operations.


**June
                30,**
            
            **December
                31,**
            
            **Increase****Regulatory
                Assets***
            
            
            
            **2005**
            
            **2004**
            
            **(Decrease)*****(In
                millions)***OE
            
            
            
            
            $
            935
            
            $
            1,116
            
            $
            (181
            )CEI
            
            
            
            
            
            902
            
            
            959
            
            
            (57
            )TE
            
            
            
            
            
            330
            
            
            375
            
            
            (45
            )JCP&L
            
            
            
            
            
            2,138
            
            
            2,176
            
            
            (38
            )Met-Ed
            
            
            
            
            
            673
            
            
            693
            
            
            (20
            )Penelec
            
            
            
            
            
            183
            
            
            200
            
            
            (17
            )ATSI
            
            
            
            
            
            17
            
            
            13
            
            
            4Total
            
            
            
            
            $
            5,178
            
            $
            5,532
            
            $
            (354
            )*
                Penn had
                net regulatory liabilities of approximately $37 million and $18
                million included in NoncurrentLiabilities
                on the Consolidated Balance Sheet as of June 30, 2005 and December
                31,
                2004, respectively.





Regulatory
      assets
      by source are as follows:





**June
                  30,**
              
              **December
                  31,**
              
              **Increase****Regulatory
                  Assets by Source**
              
              **2005**
              
              **2004**
              
              **(Decrease)*****(In
                  millions)***Regulatory
                  transition costs
              
              
              $
              4,380
              
              $
              4,889
              
              $
              (509
              )Customer
                  shopping incentives *
              
              
              
              736
              
              
              612
              
              
              124Customer
                  receivables for future income taxes
              
              
              
              296
              
              
              246
              
              
              50Societal
                  benefits charge
              
              
              
              30
              
              
              51
              
              
              (21
              )Loss
                  on
                  reacquired debt
              
              
              
              85
              
              
              89
              
              
              (4
              )Employee
                  postretirement benefit costs
              
              
              
              60
              
              
              65
              
              
              (5
              )Nuclear
                  decommissioning, decontaminationand
                  spent
                  fuel disposal costs
              
              
              
              (166
              )
              
              (169
              )
              
              3Asset
                  removal
                  costs
              
              
              
              (361
              )
              
              (340
              )
              
              (21
              )Property
                  losses and unrecovered plant costs
              
              
              
              40
              
              
              50
              
              
              (10
              )MISO
                  transmission costs
              
              
              
              20
              
              
              -
              
              
              20JCP&L
                  reliability costs
              
              
              
              27
              
              
              -
              
              
              27Other
              
              
              
              31
              
              
              39
              
              
              (8
              )Total
              
              
              $
              5,178
              
              $
              5,532
              
              $
              (354
              )*
                The Ohio
                Companies are deferring customer shopping incentives and interest
                costs as
                new regulatory assets inaccordance
                with the transition and rate stabilization plans. These regulatory
                assets,
                totaling $736 million as ofJune
                30, 2005
                (OE - $274 million, CEI - $354 million, TE - $108 million) will be
                recovered through a surchargeequal
                to the
                RTC rate in effect when the transition costs have been fully recovered.
                Recovery of the newregulatory
                assets will begin at that time and amortization of the regulatory
                assets
                for each accounting periodwill
                be equal
                to the surcharge revenue recognized during that period.


***Reliability
      Initiatives***




FirstEnergy
      is
      proceeding with the implementation of the recommendations regarding enhancements
      to regional reliability that were to be completed subsequent to 2004 and will
      continue to periodically assess the FERC-ordered Reliability Study
      recommendations for forecasted 2009 system conditions, recognizing revised
      load
      forecasts and other changing system conditions which may impact the
      recommendations. Thus far, implementation of the recommendations has not
      required, nor is expected to require, substantial investment in new, or material
      upgrades, to existing equipment. The FERC or other applicable government
      agencies and reliability coordinators, however, may take a different view as
      to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy's filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the proceeding.









52


As
      a result of
      outages experienced in JCP&L's service area in 2002 and 2003, the NJBPU had
      implemented reviews into JCP&L's service reliability. On March 29,
      2004, the NJBPU adopted a Memorandum of Understanding (MOU) that set out
      specific tasks related to service reliability to be performed by JCP&L and a
      timetable for completion and endorsed JCP&L's ongoing actions to implement
      the MOU. On June 9, 2004, the NJBPU approved a Stipulation that
      incorporates the final report of a Special Reliability Master who made
      recommendations on appropriate courses of action necessary to ensure system-wide
      reliability. The Stipulation also incorporates the Executive Summary and
      Recommendation portions of the final report of a focused audit of JCP&L's
      Planning and Operations and Maintenance programs and practices (Focused Audit).
      A Final Order in the Focused Audit docket was issued by the NJBPU on
      July 23, 2004. On February 11, 2005, JCP&L met with the Ratepayer
      Advocate to discuss reliability improvements. JCP&L continues to file
      compliance reports reflecting activities associated with the MOU and
      Stipulation.





See
      Note 14 to the
      consolidated financial statements for a more detailed discussion of reliability
      initiatives, including actions by the PPUC, that impact Met-Ed, Penelec and
      Penn.





***Ohio***





The
      Ohio Companies'
      Rate Stabilization Plan extends current generation prices through 2008, ensuring
      adequate generation supply at stabilized prices, and continues the Ohio
      Companies' support of energy efficiency and economic development efforts. On
      October 1 and October 4, 2004, the OCC and NOAC, respectively,
      filed
      appeals with the Supreme Court of Ohio to overturn the June 9, 2004
      PUCO
      order and associated entries on rehearing. Other key components of the Rate
      Stabilization Plan include the following:





·
            Amortization
                period for transition costs being recovered through the RTC extends
                for OE
                to as late as 2007; CEI to as late as mid-2009 and TE to as late
                as
                mid-2008;





·
            Deferral
                of
                interest costs on the accumulated customer shopping incentives as
                new
                regulatory assets; and





·
            Ability
                to
                request increases in generation charges during 2006 through 2008,
                under
                certain limited conditions, for increases in fuel costs and
                taxes.





On
      May 27,
      2005, the Ohio Companies filed an application with the PUCO to establish a
      generation rate adjustment rider under the Rate Stabilization Plan. The
      application seeks to implement recovery of increased fuel costs from 2006
      through 2008 applicable to the Ohio Companies' retail customers through a tariff
      rider to be implemented January 1, 2006. The application reflects projected
      increases in fuel costs in 2006 compared to 2002 baseline costs. The new rider
      is seeking to recover all costs above the baseline (approximately $93 million
      in
      2006). Various parties including the OCC have intervened in this case. The
      Ohio
      Companies have received discovery requests from the OCC and the PUCO staff.
      A
      procedural schedule has been established by the PUCO, with a hearing scheduled
      for October 4, 2005.





On
      December 9,
      2004, the PUCO rejected the auction price results from a required competitive
      bid process and issued an entry stating that the pricing under the approved
      Rate
      Stabilization Plan will take effect on January 1, 2006. The PUCO may
      require the Ohio Companies to undertake, no more often than annually, a similar
      competitive bid process to secure generation for the years 2007 and 2008. On
      July 22, 2005, FirstEnergy filed a competitive bid process for the period
      beginning in 2007 that is similar to the competitive bid process approved by
      the
      PUCO for the Ohio Companies in 2004. Any acceptance of future competitive bid
      results would terminate the Rate Stabilization Plan pricing, but not the related
      approved accounting, and not until twelve months after the PUCO authorizes
      such
      termination.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Ohio.





***New
      Jersey***





The
      2003 NJBPU
      decision on JCP&L's base electric rate proceeding ordered a Phase II
      proceeding in which the NJBPU would review whether JCP&L is in compliance
      with current service reliability and quality standards and determine whether
      the
      expenditures and projects undertaken by JCP&L to increase its system's
      reliability are prudent and reasonable for rate recovery. Depending on its
      assessment of JCP&L's service reliability, the NJBPU could have increased
      JCP&L’s return on equity to 9.75% or decreased it to 9.25%. On
      August 15, 2003 and June 1, 2004, JCP&L filed with the NJBPU an
      interim motion and a supplemental and amended motion for rehearing and
      reconsideration of the 2003 NJBPU decision, respectively. On July 16,
      2004,
      JCP&L filed the Phase II petition and testimony with the NJBPU, requesting
      an increase in base rates of $36 million for the recovery of system reliability
      costs and a 9.75% return on equity. The filing also requested an increase to
      the
      MTC deferred balance recovery of approximately $20 million annually.







53


On
      May 25,
      2005, the NJBPU approved two stipulated settlement agreements. The first
      stipulation between JCP&L and the NJBPU staff resolves all of the issues
      associated with JCP&L's motion for reconsideration of the 2003 NJBPU order
      (Phase I Order). The second stipulation between JCP&L, the NJBPU staff and
      the Ratepayer Advocate resolves all of the issues associated with JCP&L's
      Phase II proceeding. The stipulated settlements provide for, among other things,
      the following:





·  An
      annual increase
      in distribution revenues of $23 million effective June 1, 2005, associated
      with the Phase I Order reconsideration;





·  An
      annual increase
      in distribution revenues of $36 million effective June 1, 2005, related
      to
      JCP&L's Phase II Petition;





·  An
      annual reduction
      in both rates and amortization expense of $8 million, effective June 1,
      2005, in anticipation of an NJBPU order regarding JCP&L's request to
      securitize up to $277 million of its deferred cost balance;





·  An
      increase in
      JCP&L's authorized return on common equity from 9.5% to 9.75%;
      and





·  A
      commitment by
      JCP&L to maintain a target level of customer service reliability with a
      reduction in JCP&L's authorized return on common equity to its previous
      level of 9.5% after the target is not met for two consecutive quarters. The
      authorized return on common equity would then be restored to 9.75% when the
      target is met for two consecutive quarters.





The
      Phase II
      stipulation included an agreement that the distribution revenues increase
      reflects a three-year amortization of JCP&L's service reliability
      improvement costs incurred in 2003-2005. This resulted in the creation of a
      regulatory asset associated with the accelerated tree trimming costs which
      were
      expensed in 2003 and 2004. The establishment of the new regulatory asset of
      approximately $28 million resulted in an increase to net income of approximately
      $16 million ($0.05 per share of FirstEnergy common stock) in the second quarter
      of 2005.





JCP&L
      sells all
      self-supplied energy (NUGs and owned generation) to the wholesale market with
      offsetting credits to its deferred energy balance with the exception of 300
      MW
      from JCP&L's NUG committed supply currently being used to serve BGS
      customers pursuant to NJBPU order. New BGS tariffs reflecting the results of
      a
      February 2005 auction for the BGS supply became effective June 1, 2005.
      On
      May 5, 2005, the NJBPU issued an order that BGS procurement proposals
      for
      post transition year four be filed by July 1, 2005. The NJBPU requested
      that the filings address transmission rate issues and rate design alternatives.
      JCP&L filed its proposal on July 1, 2005. The auction is scheduled to
      take place in February 2006 for the supply period beginning June 1,
      2006.





In
      accordance with
      an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
      2004 supporting a continuation of the current level and duration of the funding
      of TMI-2 decommissioning costs by New Jersey customers without a reduction,
      termination or capping of the funding. On September 30, 2004, JCP&L
      filed an updated TMI-2 decommissioning study. This study resulted in an updated
      total decommissioning cost estimate of $729 million (in 2003 dollars) compared
      to the estimated $528 million (in 2003 dollars) from the prior 1995
      decommissioning study. The Ratepayer Advocate filed comments on
      February 28, 2005. On March 18, 2005, JCP&L filed a response to
      those comments. A schedule for further proceedings has not yet been
      set.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in New Jersey.





***Pennsylvania***





In
      accordance with
      PPUC directives, Met-Ed and Penelec have been negotiating with interested
      parties in an attempt to resolve the merger savings issues that are the subject
      of remand from the Commonwealth Court. Met-Ed’s and Penelec’s combined portion
      of total merger savings is estimated to be approximately $31.5 million. On
      April 13, 2005, the Commonwealth Court issued an interim order in the
      remand proceeding that the parties should report the status of the negotiations
      to the PPUC with a copy to the ALJ. The parties exchanged settlement proposals
      in May and June 2005 and continue to have settlement discussions.







54


Met-Ed
      and Penelec
      purchase a portion of their PLR requirements from FES through a wholesale power
      sales agreement. The PLR sale is automatically extended for each successive
      calendar year unless any party elects to cancel the agreement by November 1
      of the preceding year. Under the terms of the wholesale agreement, FES retains
      the supply obligation and the supply profit and loss risk, for the portion
      of
      power supply requirements not self-supplied by Met-Ed and Penelec under their
      NUG contracts and other power contracts with nonaffiliated third party
      suppliers. This arrangement reduces Met-Ed's and Penelec's exposure to high
      wholesale power prices by providing power at a fixed price for their uncommitted
      PLR energy costs during the term of the agreement with FES. Met-Ed and Penelec
      are authorized to defer differences between NUG contract costs and current
      market prices.





On
      January 12,
      2005, Met-Ed and Penelec filed, before the PPUC, a request for deferral of
      transmission-related costs beginning January 1, 2005, estimated to be
      approximately $8 million per month.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Pennsylvania.





***Transmission***





On
      September 16, 2004, the FERC issued an order that imposed additional
      obligations on CEI under certain pre-Open Access transmission contracts among
      CEI and the cities of Cleveland and Painesville, Ohio. Under the FERC's original
      decision, CEI would have been responsible for a portion of new energy market
      charges imposed by MISO when its energy markets began in the spring of 2005.
      CEI
      filed for rehearing of the order from the FERC on October 18, 2004.
      On
      April 15, 2005, the FERC issued an order on rehearing that "carves out"
      these contracts from the MISO Day 2 market, which became effective April 1,
      2005. While the order on rehearing is favorable to CEI, the impact of the FERC
      decision on CEI is dependent upon many factors, including the arrangements
      made
      by the cities for transmission service and MISO's ability to administer the
      contracts. Accordingly, the impact of this decision cannot be determined at
      this
      time.





On
      December 30, 2004, the Ohio Companies filed with the PUCO two applications
      related to the recovery of transmission and ancillary service related costs.
      The
      first application seeks recovery of these costs beginning January 1,
      2006.
      At the time of filing the application, these costs were estimated to be
      approximately $30 million per year; however, the Ohio Companies anticipate
      that
      this amount will increase. The Ohio Companies requested that these costs be
      recovered through a rider that would be effective on January 1, 2006 and
      adjusted thereafter each July 1. The Ohio Companies reached a settlement with
      OCC, PUCO staff, Industrial Energy Users - Ohio and OPAE. The only other party
      in this proceeding, Dominion Retail, Inc., agreed not to oppose the settlement.
      This settlement, which was filed with the PUCO on July 22, 2005, provides for
      the rider recovery requested by the Ohio Companies, with carrying charges
      applied in the subsequent year’s rider for any over or under collection while
      the then-current rider is in effect. If the settlement stipulation is approved
      by the PUCO, the actual amounts to be recovered through the January 1, 2006
      rider will be submitted to the PUCO on or before November 1, 2005.





The
      second
      application seeks authority to defer costs associated with transmission and
      ancillary service related costs incurred during the period from October 1,
      2003 through December 31, 2005. On May 18, 2005, the PUCO granted
      the
      accounting authority for the Ohio Companies to defer incremental transmission
      and ancillary service-related charges incurred as a participant in the MISO,
      but
      only for those costs incurred during the period December 30, 2004, through
      December 31, 2005. Deferral of all costs incurred prior to December
      31,
      2004 was denied. The PUCO also authorized the Ohio Companies to accrue carrying
      charges on the deferred balances. An application filed with the PUCO to recover
      these deferred charges over a five-year period through the rider, beginning
      in
      2006, is pending. The OCC, OPAE and the Ohio Companies each filed applications
      for rehearing. The Ohio Companies sought authority to defer the transmission
      and
      ancillary service related costs incurred during the period October 1, 2003
      through December 29, 2004, while both OCC and OPAE sought to have the PUCO
      deny
      deferral of all costs. On
      July 6,
      2005, the PUCO denied the Ohio Companies and OCC’s applications and, at the
      request of the Ohio Companies, struck as untimely OPAE’s application. The Ohio
      Companies and the OCC have sixty days from that date to file a notice of appeal
      with the Ohio Supreme Court.





On
      January 31,
      2005, certain PJM transmission owners made three filings pursuant to a
      settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
      Penelec were parties to that proceeding and joined in two of the filings. In
      the
      first filing, the settling transmission owners submitted a filing justifying
      continuation of their existing rate design within the PJM RTO. In the second
      filing, the settling transmission owners proposed a revised Schedule 12 to
      the
      PJM tariff designed to harmonize the rate treatment of new and existing
      transmission facilities. Interventions and protests were filed on
      February 22, 2005. In the third filing, Baltimore Gas and Electric Company
      and Pepco Holdings, Inc. requested a formula rate for transmission service
      provided within their respective zones. On May 31, 2005, the FERC issued
      an
      order on these cases. First, it set for hearing the existing rate design and
      indicated that it will issue a final order within six months. Second, the FERC
      approved the proposed Schedule 12 rate harmonization. Third, the FERC accepted
      the proposed formula rate, subject to referral and hearing procedures. On
      June 30, 2005, the PJM transmission owners filed a request for rehearing
      of
      the May 31, 2005 order.







55


***Environmental
      Matters***




The
      Companies
      accrue environmental liabilities only when they conclude that it is probable
      that they have an obligation for such costs and can reasonably determine the
      amount of such costs. Unasserted claims are reflected in the Companies’
      determination of environmental liabilities and are accrued in the period that
      they are both probable and reasonably estimable.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





*National
      Ambient Air Quality Standards*




In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Michigan, New Jersey,
      Ohio and Pennsylvania) and the District of Columbia based on proposed findings
      that air emissions from 28 eastern states and the District of Columbia
      significantly contribute to nonattainment of the NAAQS for fine particles and/or
      the "8-hour" ozone NAAQS in other states. CAIR will require additional
      reductions of NO x and SO 2 emissions in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      The Companies’
      Michigan, Ohio and Pennsylvania fossil-fired generation facilities will be
      subject to the caps on SO 2 and NO x emissions, whereas
      our New Jersey fossil-fired generation facilities will be subject to a cap
      on
      NO x emissions only.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these regulations may be
      substantial and will depend on how they are ultimately implemented by the states
      in which the Companies operate affected facilities.





*Mercury
      Emissions*





In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission caps
      under the EPA's CAIR program. Phase II of the mercury cap-and-trade program
      will
      cap nationwide mercury emissions from coal-fired power plants at 15 tons per
      year by 2018. The future cost of compliance with these regulations may be
      substantial.





*W.
      H. Sammis
      Plant*





In
      1999 and 2000,
      the EPA issued NOV or Compliance Orders to nine utilities covering 44 power
      plants, including the W. H. Sammis Plant, which is owned by OE and Penn. In
      addition, the U.S. Department of Justice (DOJ) filed eight civil complaints
      against various investor-owned utilities, including a complaint against OE
      and
      Penn in the U.S. District Court for the Southern District of Ohio. These cases
      are referred to as New Source Review cases. The NOV and complaint allege
      violations of the Clean Air Act based on operation and maintenance of the W.
      H.
      Sammis Plant dating back to 1984. The complaint requests permanent injunctive
      relief to require the installation of "best available control technology" and
      civil penalties of up to $27,500 per day of violation. On August 7,
      2003,
      the United States District Court for the Southern District of Ohio ruled that
      11
      projects undertaken at the W. H. Sammis Plant between 1984 and 1998 required
      pre-construction permits under the Clean Air Act. On March 18, 2005,
      OE and
      Penn announced that they had reached a settlement with the EPA, the DOJ and
      three states (Connecticut, New Jersey, and New York) that resolved all issues
      related to the W. H. Sammis Plant New Source Review litigation. This settlement
      agreement, which is in the form of a Consent Decree that was approved by the
      Court on July 11, 2005, requires OE and Penn to reduce emissions from the W.
      H.
      Sammis Plant and other plants through the installation of pollution control
      devices requiring capital expenditures currently estimated to be $1.1 billion
      (primarily in the 2008 to 2011 time period). The settlement agreement also
      requires OE and Penn to spend up to $25 million toward environmentally
      beneficial projects, which include wind energy purchase power agreements over
      a
      20-year term. OE and Penn agreed to pay a civil penalty of $8.5 million. Results
      for the first quarter of 2005 included the penalties payable by OE and Penn
      of
      $7.8 million and $0.7 million, respectively. OE and Penn also recognized
      liabilities of $9.2 million and $0.8 million, respectively, for probable future
      cash contributions toward environmentally beneficial projects during the first
      quarter of 2005.








56




*Climate
      Change*





In
      December 1997,
      delegates to the United Nations' climate summit in Japan adopted an agreement,
      the Kyoto Protocol (Protocol), to address global warming by reducing the amount
      of man-made greenhouse gases emitted by developed countries by 5.2% from 1990
      levels between 2008 and 2012. The United States signed the Protocol in 1998
      but
      it failed to receive the two-thirds vote of the United States Senate required
      for ratification. However, the Bush administration has committed the United
      States to a voluntary climate change strategy to reduce domestic greenhouse
      gas
      intensity - the ratio of emissions to economic output - by 18 percent through
      2012.





The
      Companies
      cannot currently estimate the financial impact of climate change policies,
      although the potential restrictions on CO 2 emissions could
      require significant capital and other expenditures. However, the CO 2 emissions per
      kilowatt-hour of electricity generated by the Companies is lower than many
      regional competitors due to the Companies' diversified generation sources which
      include low or non-CO 2 emitting gas-fired
      and nuclear generators.





*Regulation
      of
      Hazardous Waste*




The
      Companies have
      been named as PRPs at waste disposal sites, which may require cleanup under
      the
      Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
      Allegations of disposal of hazardous substances at historical sites and the
      liability involved are often unsubstantiated and subject to dispute; however,
      federal law provides that all PRPs for a particular site are liable on a joint
      and several basis. Therefore, environmental liabilities that are considered
      probable have been recognized on the Consolidated Balance Sheet as of
      June 30, 2005, based on estimates of the total costs of cleanup, the
      Companies' proportionate responsibility for such costs and the financial ability
      of other nonaffiliated entities to pay. In addition, JCP&L has accrued
      liabilities for environmental remediation of former manufactured gas plants
      in
      New Jersey; those costs are being recovered by JCP&L through a
      non-bypassable SBC. Included in Current Liabilities and Other Noncurrent
      Liabilities are accrued liabilities aggregating approximately $64 million as
      of
      June 30, 2005.





See
      Note 13(B) to
      the consolidated financial statements for further details and a complete
      discussion of environmental matters.





***Other
      Legal Proceedings***





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to FirstEnergy's normal business operations pending against FirstEnergy
      and its subsidiaries. The most significant not otherwise discussed above are
      described below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that the FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.







57


Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.





One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





FENOC
      received a
      subpoena in late 2003 from a grand jury sitting in the United States District
      Court for the Northern District of Ohio, Eastern Division requesting the
      production of certain documents and records relating to the inspection and
      maintenance of the reactor vessel head at the Davis-Besse Nuclear Power Station.
      On December 10, 2004, FirstEnergy received a letter from the United
      States
      Attorney's Office stating that FENOC is a target of the federal grand jury
      investigation into alleged false statements made to the NRC in the Fall of
      2001
      in response to NRC Bulletin 2001-01. The letter also said that the designation
      of FENOC as a target indicates that, in the view of the prosecutors assigned
      to
      the matter, it is likely that federal charges will be returned against FENOC
      by
      the grand jury. On February 10, 2005, FENOC received an additional subpoena
      for documents related to root cause reports regarding reactor head degradation
      and the assessment of reactor head management issues at Davis-Besse. On May 11,
      2005, FENOC received a subpoena for documents related to outside meetings
      attended by Davis-Besse personnel on corrosion and cracking of control rod
      drive
      mechanisms and additional root cause evaluations.





On
      April 21,
      2005, the NRC issued a NOV and proposed a $5.45 million civil penalty related
      to
      the degradation of the Davis-Besse reactor vessel head described above. On
      July
      8, 2005, FENOC requested an additional 120 days to respond to the NOV.
      FirstEnergy accrued $2.0 million for the proposed fine in 2004 and accrued
      the
      remaining liability for the proposed fine during the first quarter of
      2005.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      based on the events surrounding Davis-Besse, it could have a material adverse
      effect on FirstEnergy's or its subsidiaries' financial condition and results
      of
      operations.





Effective
      July 1, 2005 the NRC oversight panel for Davis-Besse was terminated
      and
      Davis-Besse returned to the standard NRC reactor oversight process. At that
      time, NRC inspections were augmented to include inspections to support the
      NRC's
      Confirmatory Order dated March 8, 2004 that was issued at the time of
      startup and to address an NRC White Finding related to the performance of the
      emergency sirens.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, which currently is owned and/or leased by OE, CEI, TE and Penn (however,
      see Note 17 regarding FirstEnergy’s pending intra-system generation asset
      transfers, which include owned portions of the plant). On
      April 4,
      2005, the NRC held a public forum to discuss FENOC’s performance at the Perry
      Nuclear Power Plant as identified in the NRC's annual assessment letter to
      FENOC. Similar public meetings are held with all nuclear power plant licensees
      following issuance by the NRC of their annual assessments. According to the
      NRC,
      overall the Perry Plant operated "in a manner that preserved public health
      and
      safety" and met all cornerstone objectives although it remained under the
      heightened NRC oversight since August 2004. During the public forum and in
      the
      annual assessment, the NRC indicated that additional inspections will continue
      and that the plant must improve performance to be removed from the
      Multiple/Repetitive Degraded Cornerstone Column of the Action Matrix. On
      May 26, 2005, the NRC held a public meeting to discuss its oversight
      of the
      Perry Plant. While the NRC stated that the plant continued to operate safely,
      the NRC also stated that the overall performance had not substantially improved
      since the heightened inspection was initiated. If performance does not improve,
      the NRC has a range of options under the Reactor Oversight Process, from
      increased oversight to possible impact to the plant’s operating authority. As a
      result, these matters could have a material adverse effect on FirstEnergy's
      or
      its subsidiaries' financial condition.







58


On
      October 20,
      2004, FirstEnergy was notified by the SEC that the previously disclosed informal
      inquiry initiated by the SEC's Division of Enforcement in September 2003
      relating to the restatements in August 2003 of previously reported results
      by
      FirstEnergy and the Ohio Companies, and the Davis-Besse extended outage, have
      become the subject of a formal order of investigation. The SEC's formal order
      of
      investigation also encompasses issues raised during the SEC's examination of
      FirstEnergy and the Companies under the PUHCA. Concurrent with this
      notification, FirstEnergy received a subpoena asking for background documents
      and documents related to the restatements and Davis-Besse issues. On
      December 30, 2004, FirstEnergy received a subpoena asking for documents
      relating to issues raised during the SEC's PUHCA examination. FirstEnergy has
      cooperated fully with the informal inquiry and will continue to do so with
      the
      formal investigation.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      or are otherwise made subject to liability based on the above matters, it could
      have a material adverse effect on FirstEnergy's or its subsidiaries' financial
      condition and results of operations.





See
      Note 13(C) to
      the consolidated financial statements for further details and a complete
      discussion of other legal proceedings.





**NEW
      ACCOUNTING STANDARDS AND INTERPRETATIONS**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. FirstEnergy will adopt this Statement effective
      January 1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the second period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, FirstEnergy will adopt this
      Interpretation in the fourth quarter of 2005. FirstEnergy is currently
      evaluating the effect this Interpretation will have on its financial
      statements.





*SFAS
      123(R),
      "Share-Based Payment"*





In
      December 2004,
      the FASB issued SFAS 123(R), a revision to SFAS 123, which requires expensing
      stock options in the financial statements. Important to applying the new
      standard is understanding how to (1) measure the fair value of stock-based
      compensation awards and (2) recognize the related compensation cost for those
      awards. For an award to qualify for equity classification, it must meet certain
      criteria in SFAS 123(R). An award that does not meet those criteria will be
      classified as a liability and remeasured each period. SFAS 123(R) retains SFAS
      123's requirements on accounting for income tax effects of stock-based
      compensation. In April 2005, the SEC delayed the effective date of SFAS 123(R)
      to annual, rather than interim, periods that begin after June 15, 2005.
      The
      SEC’s new rule results in a six-month deferral for FirstEnergy and other
      companies with a fiscal year beginning January 1. Therefore, FirstEnergy
      will adopt this Statement effective January 1, 2006. The Company will be
      applying modified prospective application, without restatement of prior interim
      periods. Any potential cumulative adjustments have not been determined.
      FirstEnergy uses the Black-Scholes option-pricing model to value options and
      will continue to do so upon adoption of SFAS 123(R).







59


*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, FirstEnergy
      continues to evaluate its investments as required by existing authoritative
      guidance.





*FSP
                109-1, "Application of FASB Statement No. 109, Accounting for Income
                Taxes, to the Tax Deduction and Qualified Production Activities Provided
                by the American Jobs Creation Act of
                2004"*




Issued
      in December
      2004, FSP 109-1 provides guidance related to the provision within the American
      Jobs Creation Act of 2004 (Act) that provides a tax deduction on qualified
      production activities. The Act includes a tax deduction of up to nine percent
      (when fully phased-in) of the lesser of (a) "qualified production activities
      income," as defined in the Act, or (b) taxable income (after the deduction
      for
      the utilization of any net operating loss carryforwards). This tax deduction
      is
      limited to 50 percent of W-2 wages paid by the taxpayer. The FASB believes
      that
      the deduction should be accounted for as a special deduction in accordance
      with
      SFAS 109, "Accounting for Income Taxes." FirstEnergy is currently evaluating
      this FSP and does not expect it to have a material impact on the Company's
      financial statements.














60


**OHIO
                    EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****STATEMENTS
                    OF INCOME****OPERATING
                    REVENUES**
                
                $
                716,612
                
                $
                718,347
                
                $
                1,442,970
                
                $
                1,461,642**OPERATING
                    EXPENSES AND TAXES:**Fuel
                
                
                12,006
                
                
                13,844
                
                
                23,922
                
                
                28,914Purchased
                    power
                
                
                227,507
                
                
                237,826
                
                
                474,097
                
                
                487,707Nuclear
                    operating costs
                
                
                92,607
                
                
                74,392
                
                
                188,260
                
                
                154,033Other
                    operating costs
                
                
                95,589
                
                
                91,797
                
                
                178,768
                
                
                177,157Provision
                    for
                    depreciation
                
                
                31,654
                
                
                30,215
                
                
                57,706
                
                
                60,144Amortization
                    of regulatory assets
                
                
                109,670
                
                
                100,124
                
                
                221,441
                
                
                213,819Deferral
                    of
                    new regulatory assets
                
                
                (39,026
                )
                
                (25,167
                )
                
                (63,821
                )
                
                (44,062
                )General
                    taxes
                
                
                46,043
                
                
                39,488
                
                
                94,121
                
                
                88,054Income
                    taxes
                
                
                91,192
                
                
                65,787
                
                
                146,164
                
                
                127,361Total
                    operating expenses and taxes
                
                
                667,242
                
                
                628,306
                
                
                1,320,658
                
                
                1,293,127**OPERATING
                    INCOME**
                
                
                49,370
                
                
                90,041
                
                
                122,312
                
                
                168,515**OTHER
                    INCOME (net of income taxes)**
                
                
                16,860
                
                
                16,787
                
                
                17,283
                
                
                33,144**NET
                    INTEREST CHARGES:**Interest
                    on
                    long-term debt
                
                
                15,732
                
                
                16,395
                
                
                31,341
                
                
                32,984Allowance
                    for
                    borrowed funds used during constructionand
                    capitalized interest
                
                
                (3,006
                )
                
                (1,593
                )
                
                (5,241
                )
                
                (2,974
                )Other
                    interest expense
                
                
                5,670
                
                
                4,046
                
                
                8,264
                
                
                6,936Subsidiary's
                    preferred stock dividend requirements
                
                
                738
                
                
                640
                
                
                1,378
                
                
                1,280Net
                    interest
                    charges
                
                
                19,134
                
                
                19,488
                
                
                35,742
                
                
                38,226**NET
                    INCOME**
                
                
                47,096
                
                
                87,340
                
                
                103,853
                
                
                163,433**PREFERRED
                    STOCK DIVIDEND REQUIREMENTS**
                
                
                658
                
                
                659
                
                
                1,317
                
                
                1,220**EARNINGS
                    ON COMMON STOCK**
                
                $
                46,438
                
                $
                86,681
                
                $
                102,536
                
                $
                162,213**STATEMENTS
                    OF COMPREHENSIVE INCOME****NET
                    INCOME**
                
                $
                47,096
                
                $
                87,340
                
                $
                103,853
                
                $
                163,433**OTHER
                    COMPREHENSIVE INCOME (LOSS):**Unrealized
                    gain (loss) on available for sale securities
                
                
                (12,960
                )
                
                (1,021
                )
                
                (15,677
                )
                
                4,146Income
                    tax
                    (benefit) related to other comprehensive income
                
                
                (4,546
                )
                
                (421
                )
                
                (5,670
                )
                
                1,709Other
                    comprehensive income (loss), net of tax
                
                
                (8,414
                )
                
                (600
                )
                
                (10,007
                )
                
                2,437**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                38,682
                
                $
                86,740
                
                $
                93,846
                
                $
                165,870The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Ohio Edison
                    Company are an integral part of thesestatements.
    61
   **OHIO
                    EDISON COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                5,553,362
                
                $
                5,440,374Less
                    -
                    Accumulated provision for depreciation
                
                
                2,770,924
                
                
                2,716,8512,782,438
                
                
                2,723,523Construction
                    work in progress -Electric
                    plant
                
                
                226,124
                
                
                203,167Nuclear
                    fuel
                
                
                -
                
                
                21,694226,124
                
                
                224,8613,008,562
                
                
                2,948,384**OTHER
                    PROPERTY AND INVESTMENTS:**Investment
                    in
                    lease obligation bonds
                
                
                341,582
                
                
                354,707Nuclear
                    plant
                    decommissioning trusts
                
                
                447,649
                
                
                436,134Long-term
                    notes receivable from associated companies
                
                
                207,430
                
                
                208,170Other
                
                
                45,394
                
                
                48,5791,042,055
                
                
                1,047,590**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                1,283
                
                
                1,230Receivables
                    -Customers
                    (less accumulated provisions of $6,282,000 and $6,302,000,
                    respectively,for
                    uncollectible accounts)
                
                
                282,283
                
                
                274,304Associated
                    companies
                
                
                167,260
                
                
                245,148Other
                    (less
                    accumulated provisions of $52,000 and $64,000,
                    respectively,for
                    uncollectible accounts)
                
                
                10,549
                
                
                18,385Notes
                    receivable from associated companies
                
                
                598,151
                
                
                538,871Materials
                    and
                    supplies, at average cost
                
                
                108,221
                
                
                90,072Prepayments
                    and other
                
                
                20,324
                
                
                13,1041,188,071
                
                
                1,181,114**DEFERRED
                    CHARGES:**Regulatory
                    assets
                
                
                935,223
                
                
                1,115,627Property
                    taxes
                
                
                61,419
                
                
                61,419Unamortized
                    sale and leaseback costs
                
                
                57,670
                
                
                60,242Other
                
                
                67,867
                
                
                68,2751,122,179
                
                
                1,305,563$
                6,360,867
                
                $
                6,482,651**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity -Common
                    stock,
                    without par value, authorized 175,000,000 shares - 100 shares
                    outstanding
                
                $
                2,099,089
                
                $
                2,098,729Accumulated
                    other comprehensive loss
                
                
                (57,125
                )
                
                (47,118
                )Retained
                    earnings
                
                
                367,734
                
                
                442,198Total
                    common
                    stockholder's equity
                
                
                2,409,698
                
                
                2,493,809Preferred
                    stock
                
                
                60,965
                
                
                60,965Preferred
                    stock of consolidated subsidiary
                
                
                14,105
                
                
                39,105Long-term
                    debt
                    and other long-term obligations
                
                
                1,104,584
                
                
                1,114,9143,589,352
                
                
                3,708,793**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                289,215
                
                
                398,263Short-term
                    borrowings -Associated
                    companies
                
                
                82,389
                
                
                11,852Other
                
                
                143,912
                
                
                167,007Accounts
                    payable -Associated
                    companies
                
                
                100,452
                
                
                187,921Other
                
                
                12,824
                
                
                10,582Accrued
                    taxes
                
                
                172,478
                
                
                153,400Other
                
                
                84,545
                
                
                74,663885,815
                
                
                1,003,688**NONCURRENT
                    LIABILITIES:**Accumulated
                    deferred income taxes
                
                
                724,040
                
                
                766,276Accumulated
                    deferred investment tax credits
                
                
                55,800
                
                
                62,471Asset
                    retirement obligation
                
                
                350,387
                
                
                339,134Retirement
                    benefits
                
                
                314,543
                
                
                307,880Other
                
                
                440,930
                
                
                294,4091,885,700
                
                
                1,770,170**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                6,360,867
                
                $
                6,482,651The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Ohio Edison
                    Company are an integral part of these balance sheets.
    62
   **OHIO
                    EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                47,096
                
                $
                87,340
                
                $
                103,853
                
                $
                163,433Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                31,654
                
                
                30,215
                
                
                57,706
                
                
                60,144Amortization
                    of regulatory assets
                
                
                109,670
                
                
                100,124
                
                
                221,441
                
                
                213,819Deferral
                    of
                    new regulatory assets
                
                
                (39,026
                )
                
                (25,167
                )
                
                (63,821
                )
                
                (44,062
                )Nuclear
                    fuel
                    and lease amortization
                
                
                9,493
                
                
                10,591
                
                
                18,663
                
                
                21,852Amortization
                    of lease costs
                
                
                (35,982
                )
                
                (35,482
                )
                
                (2,952
                )
                
                (2,452
                )Amortization
                    of electric service obligation
                
                
                (3,991
                )
                
                -
                
                
                (3,991
                )
                
                -Deferred
                    income taxes and investment tax credits, net
                
                
                19,485
                
                
                (20,542
                )
                
                (5,142
                )
                
                (50,587
                )Accrued
                    retirement benefit obligations
                
                
                4,627
                
                
                6,106
                
                
                6,661
                
                
                17,229Accrued
                    compensation, net
                
                
                850
                
                
                (372
                )
                
                (3,157
                )
                
                4,032Decrease
                    (increase) in operating assets -Receivables
                
                
                (8,378
                )
                
                127,707
                
                
                77,745
                
                
                75,772Materials
                    and
                    supplies
                
                
                (2,315
                )
                
                (3,104
                )
                
                (18,149
                )
                
                (5,866
                )Prepayments
                    and other current assets
                
                
                5,657
                
                
                5,315
                
                
                (7,220
                )
                
                (6,514
                )Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                (45,373
                )
                
                (334,764
                )
                
                (85,227
                )
                
                (93,785
                )Accrued
                    taxes
                
                
                (25,370
                )
                
                (30,877
                )
                
                19,078
                
                
                (342,454
                )Accrued
                    interest
                
                
                (7,784
                )
                
                (5,553
                )
                
                (791
                )
                
                (110
                )Prepayment
                    for electric service - education programs
                
                
                136,142
                
                
                -
                
                
                136,142
                
                
                -Other
                
                
                6,357
                
                
                (11,403
                )
                
                18,071
                
                
                (5,294
                )Net
                    cash
                    provided from (used for) operating activities
                
                
                202,812
                
                
                (99,866
                )
                
                468,910
                
                
                5,157**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing
                    -Long-term
                    debt
                
                
                146,450
                
                
                -
                
                
                146,450
                
                
                30,000Short-term
                    borrowings, net
                
                
                16,260
                
                
                -
                
                
                47,442
                
                
                -Redemptions
                    and Repayments -Preferred
                    stock
                
                
                (37,750
                )
                
                -
                
                
                (37,750
                )
                
                -Long-term
                    debt
                
                
                (244,721
                )
                
                (19,809
                )
                
                (260,508
                )
                
                (116,810
                )Short-term
                    borrowings, net
                
                
                -
                
                
                (94,155
                )
                
                -
                
                
                (77,814
                )Dividend
                    Payments -Common
                    stock
                
                
                (130,000
                )
                
                (117,000
                )
                
                (177,000
                )
                
                (171,000
                )Preferred
                    stock
                
                
                (658
                )
                
                (659
                )
                
                (1,317
                )
                
                (1,220
                )Net
                    cash used
                    for financing activities
                
                
                (250,419
                )
                
                (231,623
                )
                
                (282,683
                )
                
                (336,844
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (41,675
                )
                
                (47,302
                )
                
                (121,458
                )
                
                (84,963
                )Contributions
                    to nuclear decommissioning trusts
                
                
                (7,885
                )
                
                (7,885
                )
                
                (15,770
                )
                
                (15,770
                )Loan
                    repayments from (loans to) associated companies, net
                
                
                95,498
                
                
                359,878
                
                
                (58,540
                )
                
                408,790Other
                
                
                1,748
                
                
                27,139
                
                
                9,594
                
                
                23,411Net
                    cash
                    provided from (used for) investing activities
                
                
                47,686
                
                
                331,830
                
                
                (186,174
                )
                
                331,468Net
                    increase
                    (decrease) in cash and cash equivalents
                
                
                79
                
                
                341
                
                
                53
                
                
                (219
                )Cash
                    and cash
                    equivalents at beginning of period
                
                
                1,204
                
                
                1,323
                
                
                1,230
                
                
                1,883Cash
                    and cash
                    equivalents at end of period
                
                $
                1,283
                
                $
                1,664
                
                $
                1,283
                
                $
                1,664The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Ohio Edison
                    Company are an integral part of thesestatements.
   63







***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of Ohio
      Edison Company:





We
      have reviewed
      the accompanying consolidated balance sheet of Ohio Edison Company and its
      subsidiaries as of June 30, 2005, and the related consolidated statements
      of income and comprehensive income and cash flows for each of the three-month
      and six-month periods ended June 30, 2005 and 2004. These interim financial
      statements are the responsibility of the Company’s management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 7 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005





64





**OHIO
      EDISON
      COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








OE
      is a wholly
      owned electric utility subsidiary of FirstEnergy. OE and its wholly owned
      subsidiary, Penn, conduct business in portions of Ohio and Pennsylvania,
      providing regulated electric distribution services. The OE Companies also
      provide generation services to those customers electing to retain the OE
      Companies as their power supplier. The OE Companies provide power directly
      to
      wholesale customers under previously negotiated contracts, as well as to some
      alternative energy suppliers under OE’s transition plan. The OE Companies have
      unbundled the price of electricity into its component elements - including
      generation, transmission, distribution and transition charges. Power supply
      requirements of the OE Companies are provided by FES -- an affiliated
      company.





**Results
      of Operations**




Earnings
      on common
      stock in the second quarter of 2005 decreased to $46 million from $87 million
      in
      the second quarter of 2004. The decrease in earnings primarily resulted from
      increases in nuclear operating costs, regulatory asset amortization, general
      taxes and a one-time income tax charge, which were partially offset by lower
      purchased power costs and higher regulatory asset deferrals. During the first
      six months of 2005, earnings on common stock decreased to $103 million from
      $162
      million in the same period of 2004. The decrease in earnings for the first
      half
      of 2005 primarily resulted from reduced operating revenues and other income,
      and
      increased nuclear operating costs, regulatory asset amortization and the
      one-time income tax charge. These reductions to earnings were partially offset
      by decreased fuel and purchased power costs, as well as, increased regulatory
      asset deferrals.





Operating
      revenues
      decreased by $2 million or 0.2% in the second quarter of 2005 compared with
      the
      same period in 2004. Lower revenues for the quarter primarily resulted from
      a
      $12 million decrease in wholesale sales, partially offset by increases in retail
      generation and distribution revenues of $6 million and $5 million, respectively.
      During the first six months of 2005 compared to the same period in 2004,
      operating revenues decreased by $19 million or 1.3%. Lower revenues for the
      first half of 2005 were due to a $36 million decrease in wholesale sales,
      partially offset by increases in retail generation and distribution revenues
      of
      $12 million and $7 million, respectively.





Lower
      wholesale
      revenues for the second quarter and the first six months of 2005 reflected
      decreased sales to FES of $22 million (15.7% KWH sales decrease) and $50 million
      (18.1% KWH sales decrease), respectively, due to reduced nuclear generation
      available for sale. The decreases in sales to FES were partially offset by
      increased sales of $10 million and $14 million, respectively, to non-affiliated
      customers (including MSG sales). Under its Ohio transition plan, OE is required
      to provide MSG to non-affiliated alternative suppliers (see Outlook - Regulatory
      Matters).





Increased
      retail
      generation revenues for the second quarter of 2005 resulted from increased
      sales
      to residential and commercial customers of $7 million and $1 million,
      respectively, partially offset by a $2 million decrease in sales to industrial
      customers. The increased generation KWH sales to residential (12.2%) and
      commercial (2.4%) customers were due to warmer than normal temperatures in
      the
      second quarter of 2005 which increased air-conditioning loads. Lower industrial
      revenues reflected a 6.7% decrease in generation KWH sales, partially offset
      by
      higher composite unit prices. The industrial KWH sales decrease resulted from
      increased customer shopping. Generation services provided to industrial
      customers by alternative suppliers as a percent of total industrial sales
      delivered in OE’s service area increased by 2.6 percentage points compared with
      the second quarter of 2004. Residential and commercial customer shopping
      remained relatively unchanged.





Retail
      generation
      revenues increased for the first six months of 2005 compared to the same period
      of 2004 in all customer sectors (residential - $5 million, commercial - $4
      million and industrial - $3 million). The higher residential and commercial
      revenues were due to increased generation KWH sales (residential - 3.3% and
      commercial - 3.2%). The increase in industrial revenues reflected higher
      composite unit prices ($5 million), partially offset by a 1.6% decrease in
      generation KWH sales. Similar to the second quarter of 2005, industrial KWH
      sales decreased principally due to increased customer shopping (2.4 percentage
      points increase compared with the 2004 period), while residential and commercial
      customer shopping remained relatively unchanged.





Revenues
      from
      distribution throughput increased $5 million in the second quarter of 2005
      compared with the same period in 2004. Distribution deliveries to residential
      customers increased $14 million due to an 11.4% increase in KWH deliveries,
      partially offset by lower composite unit prices. Distribution revenues from
      commercial and industrial customers decreased by $3 million and $7 million,
      respectively, primarily due to lower composite unit prices. Lower unit prices
      in
      the commercial sector that reduced revenues by $5 million were partially offset
      by a 2.4% increase in KWH deliveries; industrial revenues decreased due to
      lower
      units prices ($4 million) and a 3.4% decrease in KWH deliveries. Residential
      and
      commercial KWH deliveries reflected warmer than normal temperatures in the
      second quarter of 2005.






65




Revenues
      from
      distribution throughput increased $7 million in the first six months of 2005
      compared with the same period in 2004 due to higher revenues from residential
      customers partially offset by lower commercial and industrial sector revenues.
      Residential revenues increased $13 million, reflecting a 4.4% increase in KWH
      deliveries. Commercial distribution revenues declined slightly with lower
      composite unit prices partially offset by a 3.0% increase in KWH deliveries.
      Industrial distribution revenues decreased by $6 million reflecting lower
      composite unit prices, partially offset by a 1.6% increase in KWH distribution
      deliveries.





Under
      the Ohio
      transition plan, OE provides incentives to customers to encourage switching
      to
      alternative energy providers. OE’s revenues were reduced by $1 million from
      additional credits in the second quarter and $4 million in the first six months
      of 2005 compared to the same periods in 2004. These revenue reductions are
      deferred for future recovery from customers under OE’s transition plan and do
      not affect current period earnings (See Regulatory Matters below).





Changes
      in electric
      generation sales and distribution deliveries in the second quarter and first
      six
      months of 2005 from the corresponding periods of 2004 are summarized in the
      following table:





**Changes
                in KWH Sales**
            
            **Three
                Months**
            
            **Six
                Months****Increase
                (Decrease)**Electric
                Generation:Retail
            
            
            1.6
            %
            
            1.4
            %Wholesale
            
            
            (9.8
            )%
            
            (13.6
            )%**Total
                Electric Generation Sales**
            
            
            **(4.0**
            **)%**
            
            **(5.8**
            **)%**Distribution
                Deliveries:Residential
            
            
            11.4
            %
            
            4.4
            %Commercial
            
            
            2.4
            %
            
            3.0
            %Industrial
            
            
            (3.4
            )%
            
            1.6
            %**Total
                Distribution Deliveries**
            
            
            **2.8**
            **%**
            
            **3.0**
            **%**





*Operating
      Expenses and Taxes*





Total
      operating
      expenses and taxes increased by $39 million in the second quarter and $28
      million in the first six months of 2005 from the same periods of 2004. The
      following table presents changes from the prior year by expense
      category.





**Operating
                  Expenses and Taxes - Changes**
              
              **Three
                  Months**
              
              **Six
                  Months****Increase
                  (Decrease)**
              
              ***(In
                  millions)***Fuel
                  costs
              
              $
              (2
              )
              $
              (5
              )Purchased
                  power costs
              
              
              (10
              )
              
              (14
              )Nuclear
                  operating costs
              
              
              18
              
              
              34Other
                  operating costs
              
              
              4
              
              
              2Provision
                  for
                  depreciation
              
              
              1
              
              
              (2
              )Amortization
                  of regulatory assets
              
              
              10
              
              
              8Deferral
                  of
                  new regulatory assets
              
              
              (14
              )
              
              (20
              )General
                  taxes
              
              
              7
              
              
              6Income
                  taxes
              
              
              25
              
              
              19**Net
                  increase in operating expenses and taxes**
              
              $
              39
              
              $
              28





Lower
      fuel costs in
      the second quarter and first six months of 2005, compared with the same periods
      of 2004, resulted from decreased nuclear generation - down 15.7% and 18.1%,
      respectively. Purchased power costs were lower in both periods of 2005,
      reflecting lower unit costs and a reduction in KWH purchased in the first half
      of 2005. KWH purchases were relatively unchanged in the second quarter. Nuclear
      operating costs increased primarily due to the costs from the Beaver Valley
      Unit
      2 refueling outage (started April 4, 2005) and to a lesser extent from the
      Perry
      Unit 1 outage initiated in the first quarter of 2005 that was completed on
      May
      6, 2005. There were no nuclear refueling outages in the same periods last year.
      The increase in other operating costs in the second quarter and first six months
      of 2005, compared to the same periods of 2004, resulted primarily from higher
      vegetation management costs and increased MISO transmission expenses, partially
      offset by lower employee benefits expenses.





Depreciation
      in the
      second quarter of 2005 was relatively unchanged compared to the second quarter
      of 2004. The decrease in the first six months of 2005 compared with the same
      period of 2004 was attributable to revised estimated service life assumptions
      for fossil generating plants. Higher regulatory asset amortization in both
      periods was primarily due to increased amortization of transition costs being
      recovered under the Rate Stabilization Plan. Deferral of new regulatory assets
      decreased expenses by $13 million in both the second quarter and the first
      six
      months of 2005 primarily from the PUCO-approved MISO deferrals and related
      interest beginning in the second quarter of 2005 (see Outlook - Regulatory
      Matters).






66




General
      taxes
      increased in the second quarter and first six months of 2005 compared to the
      same periods of 2004, primarily due to the absence of a $6 million Pennsylvania
      property tax refund recorded in the second quarter of 2004.





Income
      taxes
      increased in the second quarter and first six months of 2005 compared to the
      same periods of 2004, primarily due to the effects of new tax legislation in
      Ohio (see Note 12 to consolidated financial statements). On June 30, 2005,
      the
      State of Ohio enacted new tax legislation that creates a new Commercial Activity
      Tax (CAT), which is based on qualifying "taxable gross receipts" and will not
      consider any expenses or costs incurred to generate such receipts, except for
      items such as cash discounts, returns and allowances, and bad debts. The CAT
      tax
      is effective July 1, 2005, and replaces the Ohio income-based franchise
      tax
      and the Ohio personal property tax. The CAT tax is phased-in while the current
      income-based franchise tax is phased-out over a five-year period at a rate
      of
      20% annually, beginning with the year ended 2005, and personal property tax
      is
      phased-out over a four-year period at a rate of approximately 25%, annually
      beginning with the year ended 2005. During the phase-out period the Ohio income
      tax will be computed consistently with the prior tax law, except that the tax
      liability as computed will be multiplied by 4/5 in 2005; 3/5 in 2006; 2/5 in
      2007 and 1/5 in 2008, therefore eliminating the current income-based franchise
      tax over a five-year period.





As
      a result of the
      new tax structure, all net deferred tax benefits that are not expected to
      reverse during the five-year phase-in period were written-off as of
      June 30, 2005. Accordingly, OE’s income tax expense increased by $36
      million for the three and six-month periods ended June 30, 2005. Income
      tax
      expense was reduced during the three and six-month periods ended June 30,
      2005 by approximately $5 million by the initial phase-out of the Ohio income
      tax.





*Other
      Income*





Other
      income
      decreased $16 million in the first six months of 2005 compared with the same
      period of 2004, primarily due to an $8.5 million civil penalty payable to the
      Department of Justice and a $10 million liability for environmental projects
      recognized in connection with the Sammis Plant settlement (see Outlook -
      Environmental Matters).





*Net
      Interest
      Charges*





Net
      interest
      charges continued to trend lower, decreasing by $0.4 million in the second
      quarter and $2 million in the first six months of 2005 compared with the same
      periods of 2004, reflecting $200 million of debt redemptions since July 1,
      2004.





**Capital
      Resources and Liquidity**





OE’s
      cash
      requirements in 2005 for operating expenses, construction expenditures,
      scheduled debt maturities and preferred stock redemptions are expected to be
      met
      without increasing OE’s net debt and preferred stock outstanding. Available
      borrowing capacity under credit facilities will be used to manage working
      capital requirements. Thereafter, OE expects to use a combination of cash from
      operations and funds from the capital markets.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005, OE's cash and cash equivalents of approximately $1 million remained
      unchanged from its December 31, 2004 balance.








67




*Cash
      Flows From
      Operating Activities*





Cash
      provided from
      operating activities during the second quarter and first six months of 2005,
      compared with the corresponding periods in 2004 were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings(*)
            
            $
            144
            
            $
            153
            
            $
            329
            
            $
            383Working
                capital and other
            
            
            59
            
            
            (253
            )
            
            140
            
            
            (378
            )Total
                cash
                flows form operating activities
            
            $
            203
            
            $
            (100
            )
            $
            469
            
            $
            5(*)Cash
                earnings is a non-GAAP measure (see reconciliation
                below).





Cash
      earnings, as
      disclosed in the table above, are not a measure of performance calculated in
      accordance with GAAP. OE believes that cash earnings is a useful financial
      measure because it provides investors and management with an additional means
      of
      evaluating its cash-based operating performance. The following table reconciles
      cash earnings with net income.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings******
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            47
            
            $
            87
            
            $
            104
            
            $
            163Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            32
            
            
            30
            
            
            58
            
            
            60Amortization
                of regulatory assets
            
            
            110
            
            
            100
            
            
            221
            
            
            214Amortization
                of lease costs
            
            
            (36)
            
            
            (35)
            
            
            (3)
            
            
            (2)Nuclear
                fuel
                and capital lease amortization
            
            
            9
            
            
            11
            
            
            19
            
            
            22Deferral
                of
                new regulatory assets
            
            
            (39)
            
            
            (25)
            
            
            (64)
            
            
            (44)Deferred
                income taxes and investment tax credits, net
            
            
            19
            
            
            (21)
            
            
            (5)
            
            
            (51)Other
                non-cash items
            
            
            2
            
            
            6
            
            
            (1)
            
            
            21Cash
                earnings
                (Non-GAAP)
            
            $
            144
            
            $
            153
            
            $
            329
            
            $
            383




Net
      cash from
      operating activities increased $303 million in the second quarter of 2005,
      compared with the second quarter of 2004, due to a $312 million increase from
      changes in working capital, partially offset by a $9 million decrease in cash
      earnings as described above and under "Results from Operations". The increase
      in
      working capital primarily reflects net changes in accounts payable and accounts
      receivable to associated companies of $152 million and $136 million of funds
      received for prepaid electric service under the Energy for Education program.





Net
      cash from
      operating activities increased $464 million in the first six months of 2005,
      compared with the same period in 2004, due to a $518 million increase from
      changes in working capital, partially offset by a $54 million decrease in cash
      earnings as described above and under "Results from Operations". The increase
      in
      working capital primarily reflects changes in accrued taxes of $362 million
      and
      $136 million of funds received for the Energy for Education program. The accrued
      taxes change includes a $249 million reallocation of tax liabilities among
      the
      FirstEnergy subsidiaries pursuant to the tax sharing agreement in the first
      quarter of 2004.





*Cash
      Flows From
      Financing Activities*




Net
      cash used for
      financing activities increased to $250 million in the second quarter of 2005
      from $232 million in the second quarter of 2004. The increase primarily resulted
      from a $13 million increase in common stock dividends to FirstEnergy and a
      $6
      million increase in net debt and preferred stock redemptions. Net cash used
      for
      financing activities decreased to $283 million in the first six months of 2005
      from $337 million in the same period of 2004. The decrease was due to a $60
      million decrease in net debt and preferred stock redemptions, partially offset
      by a $6 million increase in common stock dividends to FirstEnergy.




On
      May 16,
      2005, Penn redeemed all 127,500 outstanding shares of 7.625% preferred stock
      at
      $102.29 per share and all 250,000 outstanding shares of 7.75% preferred stock
      at
      $100 per share, including accrued dividends to the date of redemption.






68




OE
      had
      approximately $599 million of cash and temporary cash investments (which include
      short-term notes receivable from associated companies) and $226 million of
      short-term indebtedness as of June 30, 2005. OE has authorization from
      the
      PUCO to incur short-term debt of up to $500 million (including bank facilities
      and the utility money pool described below). Penn has authorization from the
      SEC
      to incur short-term debt up to its charter limit of $49 million (including
      the
      utility money pool). In addition, Penn
      Power Funding
      LLC (Penn Funding), a wholly owned subsidiary of Penn, is a limited liability
      company whose borrowings are secured by customer accounts receivable purchased
      from Penn. Penn Funding can borrow up to $25 million under a receivables
      financing arrangement. As a separate legal entity with separate creditors,
      Penn
      Funding would have to satisfy its obligations to creditors before any of its
      remaining assets could be made available to Penn. As of
      June 30, 2005, the facility was drawn for $20 million. On July 15,
      2005, the facility was renewed until June 29, 2006. The annual facility
      fee
      is 0.25% on the entire finance limit.





On
      April 6, 2004,
      Ohio Air Quality Development Authority and Ohio Water Development Authority
      pollution control bonds aggregating $100 million and $6.45 million,
      respectively, were refunded by OE. The new bonds were issued in a Dutch Auction
      interest rate mode, insured with municipal bond insurance and secured by
      FMB.





On
      July 1, 2005,
      Ohio Water Development Authority pollution control bonds aggregating $40 million
      were refunded by OE. The new bonds were issued in a Dutch Auction interest
      rate
      mode, insured with municipal bond insurance. OE provided FMB collateral to
      the
      bond insurer.





OE
      and Penn had the
      aggregate capability to issue approximately $1.8 billion of additional FMB
      on
      the basis of property additions and retired bonds under the terms of their
      respective mortgage indentures. The issuance of FMB by OE is also subject to
      provisions of its senior note indentures generally limiting the incurrence
      of
      additional secured debt, subject to certain exceptions that would permit, among
      other things, the issuance of secured debt (including FMB) (i) supporting
      pollution control notes or similar obligations, or (ii) as an extension, renewal
      or replacement of previously outstanding secured debt. In addition, these
      provisions would permit OE to incur additional secured debt not otherwise
      permitted by a specified exception of up to $668 million as of June 30,
      2005. Based upon applicable earnings coverage tests in their respective
      charters, OE and Penn could issue a total of $2.5 billion of preferred stock
      (assuming no additional debt was issued) as of June 30, 2005.





On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. OE's and
      Penn’s borrowing limits under the facility are $550 million. The facility
      replaced FirstEnergy’s $375 million and $1 billion three-year credit agreements
      and OE’s $125 million three-year credit agreement, as well as OE’s
      recently-expired $250 million two-year credit agreement.





OE
      and Penn have
      the ability to borrow from their regulated affiliates and FirstEnergy to meet
      their short-term working capital requirements. FESC administers this money
      pool
      and tracks surplus funds of FirstEnergy and its regulated subsidiaries.
      Companies receiving a loan under the money pool agreements must repay the
      principal amount, together with accrued interest, within 364 days of borrowing
      the funds. The rate of interest is the same for each company receiving a loan
      from the pool and is based on the average cost of funds available through the
      pool. The average interest rate for borrowings in the second quarter of 2005
      was
      2.93%.





OE’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and the securities of FirstEnergy. The ratings outlook from the
      rating agencies on all such securities is positive.





On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy Corp.
      and its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and as its nuclear operations further stabilize.





On
      July 18, 2005,
      Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s rating
      outlook resulted from steady financial improvement and steps taken by management
      to improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in its outlook recognized management’s
      regional strategy of focusing on its core utility businesses and the improvement
      in FirstEnergy’s credit profile stemming from the application of free cash flow.
      Moody’s noted that a ratings upgrade could be considered if FirstEnergy
      continues to achieve planned improvements in its operations and balance
      sheet.





*Cash
      Flows From
      Investing Activities*




Net
      cash provided
      from investing activities totaled $48 million in the second quarter of 2005
      compared with $332 million for the same period in 2004. The $284 million change
      for the second quarter resulted primarily from a $264 million decrease in loan
      repayments from associated companies and a decrease in property additions.
      During the first six months of 2005, net cash used for investing activities
      totaled $186 million compared to net cash provided from investing activities
      of
      $331 million in the same period of 2004. The $518 million change resulted
      primarily from a $467 million position change from receiving loan repayments
      from associated companies in 2004 to issuing loans to associated companies
      in
      2005, and a $36 million increase in property additions.






69




During
      the second
      half of 2005, capital requirements for property additions and capital leases
      are
      expected to be approximately $133 million, including $17 million for nuclear
      fuel. OE has additional requirements of approximately $24 million to meet
      sinking fund requirements for preferred stock and maturing long-term debt
      (excluding Penn’s optional redemptions disclosed above) during the remainder of
      2005. These cash requirements are expected to be satisfied from internal cash
      and short-term credit arrangements.




OE’s
      capital
      spending for the period 2005-2007 is expected to be about $667 million
      (excluding nuclear fuel), of which approximately $218 million applies to 2005.
      Investments for additional nuclear fuel during the 2005-2007 period are
      estimated to be approximately $147 million, of which about $35 million applies
      to 2005. During the same period, its nuclear fuel investments are expected
      to be
      reduced by approximately $129 million and $40 million, respectively, as the
      nuclear fuel is consumed.





**Off-Balance
      Sheet Arrangements**





Obligations
      not
      included on OE’s Consolidated Balance Sheets primarily consist of sale and
      leaseback arrangements involving Perry Unit 1 and Beaver Valley Unit 2. The
      present value of these operating lease commitments, net of trust investments,
      was $663 million as of June 30, 2005.





**Equity
      Price Risk**




Included
      in OE’s
      nuclear decommissioning trust investments are marketable equity securities
      carried at their market value of approximately $251 million and $248 million
      as
      of June 30, 2005 and December 31, 2004, respectively. A hypothetical
      10% decrease in prices quoted by stock exchanges would result in a $25 million
      reduction in fair value as of June 30, 2005. Changes in the fair value
      of
      these investments are recorded in OCI unless recognized as a result of a sale
      or
      recognized as regulatory assets or liabilities.





**Outlook**




The
      electric
      industry continues to transition to a more competitive environment and all
      of
      the OE Companies’ customers can select alternative energy suppliers. The OE
      Companies continue to deliver power to residential homes and businesses through
      their existing distribution system, which remains regulated. Customer rates
      have
      been restructured into separate components to support customer choice. In Ohio
      and Pennsylvania, the OE Companies have a continuing responsibility to provide
      power to those customers not choosing to receive power from an alternative
      energy supplier subject to certain limits. Adopting new approaches to regulation
      and experiencing new forms of competition have created new
      uncertainties.





*FirstEnergy
      Intra-System Generation Asset Transfers*





On
      May 13,
      2005, Penn, and on May 18, 2005, OE, CEI and TE, entered into certain
      agreements described below (Agreements) implementing a series of intra-system
      generation asset transfers. When concluded, the asset transfers will result
      in
      the respective undivided ownership interests of the Ohio Companies and Penn
      in
      FirstEnergy’s nuclear, fossil and hydroelectric plants being owned by NGC, and
      FGCO, respectively. The generating plant interests that are being transferred
      do
      not include leasehold interests of CEI, TE and OE in plants that are currently
      subject to sale and leaseback arrangements with non-affiliates.





These
      transactions
      are being undertaken in connection with the Ohio Companies’ and Penn’s
      restructuring plans that were approved by the PUCO and the PPUC, respectively,
      under applicable Ohio and Pennsylvania electric utility restructuring
      legislation. Consistent with the restructuring plans, generation assets that
      had
      been owned by the Ohio Companies and Penn were required to be separated from
      the
      regulated delivery business of those companies through transfer to a separate
      corporate entity. FENOC, a subsidiary of FirstEnergy, currently operates and
      maintains the nuclear generation assets to be transferred. FGCO, as lessee
      under
      a master facility lease, leases the non-nuclear generation assets to be
      transferred and operates and maintains those assets. The transactions will
      essentially complete the divestitures contemplated by the restructuring plans
      by
      transferring the ownership interests to NGC and FGCO, respectively, without
      impacting the operation of the plants.





As
      contemplated by
      the Agreements, the Ohio Companies and Penn intend to transfer their respective
      interests in the nuclear generation assets to NGC through, in the case of OE
      and
      Penn, a spin-off by way of dividend and, in the case of CEI and TE, a sale
      at
      net book value. FGCO intends to exercise a purchase option under the Master
      Lease to acquire the non-nuclear generation assets to be transferred by the
      Ohio
      Companies and Penn at the values approved in the Ohio Transition
      Case.






70




Consummation
      of the
      transactions contemplated by each of the Agreements is subject to receipt of
      all
      necessary regulatory authorizations and other consents and approvals.
      FirstEnergy currently expects to complete the various asset transfers in the
      second half of 2005.





Regulatory
      Matters





In
      2001, Ohio
      customer rates were restructured to establish separate charges for transmission,
      distribution, transition cost recovery and a generation-related component.
      When
      one of OE's customers elects to obtain power from an alternative supplier,
      OE
      reduces the customer's bill with a "generation shopping credit," based on the
      generation component (plus an incentive), and the customer receives a generation
      charge from the alternative supplier. OE has continuing PLR responsibility
      to
      its franchise customers through December 31, 2008 unless the PUCO accepts
      future competitive bid results prior to the end of that period under the revised
      Rate Stabilization Plan. As part of OE's transition plan, it is obligated to
      supply electricity to customers who do not choose an alternative supplier.
      OE is
      also required to provide 560 MW of low cost supply (MSG) to unaffiliated
      alternative suppliers who serve customers within its service area. FES acts
      as
      an alternate supplier for a portion of the load in OE's franchise area.





OE's
      Rate
      Stabilization Plan extends current generation prices through 2008, ensuring
      adequate generation supply at stabilized prices, and continues OE's support
      of
      energy efficiency and economic development efforts. On October 1 and
      October 4, 2004, the OCC and NOAC, respectively, filed appeals with
      the
      Supreme Court of Ohio to overturn the June 9, 2004 PUCO order and
      associated entries on rehearing. Other key components of the Rate Stabilization
      Plan include the following:





·
            Amortization
                period for transition costs being recovered through the RTC for OE
                extends
                to as late as 2007;





·
            Deferral
                of
                interest costs on the accumulated customer shopping incentives as
                new
                regulatory assets; and





·
            Ability
                to
                request increases in generation charges during 2006 through 2008,
                under
                certain limited conditions, for increases in fuel costs and
                taxes.





On
      May 27,
      2005, OE filed an application with the PUCO to establish a generation rate
      adjustment rider under the Rate Stabilization Plan. The application seeks to
      implement recovery of increased fuel costs from 2006 through 2008 applicable
      to
      OE’s retail customers through a tariff rider to be implemented January 1,
      2006. The application reflects projected increases in fuel costs in 2006
      compared to 2002 baseline costs. The new rider is seeking to recover all costs
      above the baseline. Various parties including the OCC have intervened in this
      case. OE has received discovery requests from the OCC and the PUCO staff. A
      procedural schedule has been established by the PUCO, with a hearing scheduled
      for October 4, 2005.





On
      December 9,
      2004, the PUCO rejected the auction price results from a required competitive
      bid process and issued an entry stating that the pricing under the approved
      Rate
      Stabilization Plan will take effect on January 1, 2006. The PUCO may
      require OE to undertake, no more often than annually, a similar competitive
      bid
      process to secure generation for the years 2007 and 2008. On July 22,
      2005,
      FirstEnergy filed a competitive bid process for the period beginning in 2007
      that is similar to the competitive bid process approved by the PUCO for OE
      in
      2004. Any acceptance of future competitive bid results would terminate the
      Rate
      Stabilization Plan pricing, but not the related approved accounting, and not
      until twelve months after the PUCO authorizes such termination.





On
      December 30, 2004, OE filed with the PUCO two applications related to
      the
      recovery of transmission and ancillary service related costs. The first
      application seeks recovery of these costs beginning January 1, 2006. At the
      time
      of filing the application, these costs were estimated to be approximately $14
      million per year; however, OE anticipates that this amount will increase. OE
      requested that these costs be recovered through a rider that would be effective
      on January 1, 2006 and adjusted thereafter each July 1. OE reached a
      settlement with OCC, PUCO staff, Industrial Energy Users - Ohio and OPAE. The
      only other party in this proceeding, Dominion Retail, Inc., agreed not to oppose
      the settlement. This settlement, which was filed with the PUCO on July 22,
      2005,
      provides for the rider recovery requested by OE, with carrying charges applied
      in the subsequent year’s rider for any over or under collection while the
      then-current rider is in effect. If the settlement stipulation is approved
      by
      the PUCO, the actual amounts to be recovered through the January 1, 2006 rider
      will be submitted to the PUCO on or before November 1, 2005.








71




The
      second
      application seeks authority to defer costs associated with transmission and
      ancillary service related costs incurred during the period from October 1,
      2003 through December 31, 2005. On
      May 18,
      2005, the PUCO granted the accounting authority for OE to defer incremental
      transmission and ancillary service-related charges incurred as a participant
      in
      the MISO, but only for those costs incurred during the period December 30,
      2004,
      through December 31, 2005. Deferral of all costs incurred prior to December
      31,
      2004 was denied. The PUCO also authorized OE to accrue carrying charges on
      the
      deferred balances. An application filed with the PUCO to recover these deferred
      charges over a five-year period through the rider, beginning in 2006, is
      pending. The OCC, OPAE and OE each filed applications for rehearing. OE sought
      authority to defer the transmission and ancillary service related costs incurred
      during the period October 1, 2003 through December 29, 2004, while both OCC
      and
      OPAE sought to have the PUCO deny deferral of all costs. On
      July 6,
      2005, the PUCO denied OE's and OCC’s applications and, at the request of OE,
      struck as untimely OPAE’s application. OE and the OCC have sixty days from that
      date to file a notice of appeal with the Ohio Supreme Court.





OE
      and Penn record
      as regulatory assets costs which have been authorized by the PUCO, the PPUC
      and
      the FERC for recovery from customers in future periods and, without such
      authorization, would have been charged to income when incurred. OE’s regulatory
      assets as of June 30, 2005 and December 31, 2004, were $0.9 billion
      and $1.1 billion, respectively. OE is deferring customer shopping incentives
      and
      interest costs as new regulatory assets in accordance with its transition and
      rate stabilization plans. These regulatory assets total $274 million as of
      June 30, 2005 and will be recovered through a surcharge rate equal to
      the
      RTC rate in effect when the transition costs have been fully recovered. Recovery
      of the new regulatory assets will begin at that time and amortization of the
      regulatory assets for each accounting period will be equal to the surcharge
      revenue recognized during that period. Penn's net regulatory asset components
      aggregate as net regulatory liabilities of approximately $37 million and $18
      million, and are included in Other Noncurrent Liabilities on the Consolidated
      Balance Sheet as of June 30, 2005 and December 31, 2004,
      respectively.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Ohio and Pennsylvania and a more detailed discussion
      of
      reliability initiatives, including actions by the PPUC, that impact
      Penn.





*Environmental
      Matters*





OE
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in OE's determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





*National
      Ambient Air Quality Standards*





In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Ohio and Pennsylvania)
      and the District of Columbia based on proposed findings that air emissions
      from
      28 eastern states and the District of Columbia significantly contribute to
      nonattainment of the NAAQS for fine particles and/or the "8-hour" ozone NAAQS
      in
      other states. CAIR will require additional reductions of NO x and SO 2 emissions in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      The OE
      Companies’ Ohio and Pennsylvania fossil-fuel generation facilities will be
      subject to the caps on SO 2 and NO x emissions.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions
      in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these
      regulations may be substantial and will depend on how they are ultimately
      implemented by the states in which the OE Companies operate affected facilities.





*Mercury
      Emissions*




In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission caps
      under the EPA's CAIR program. Phase II of the mercury cap-and-trade program
      will
      cap nationwide mercury emissions from coal-fired power plants at 15 tons per
      year by 2018. The future cost of compliance with these regulations may be
      substantial.








72




*W.
      H. Sammis
      Plant*





In
      1999 and 2000,
      the EPA issued NOV or Compliance Orders to nine utilities covering 44 power
      plants, including the W. H. Sammis Plant, which is owned by OE and Penn. In
      addition, the U.S. Department of Justice (DOJ) filed eight civil complaints
      against various investor-owned utilities, including a complaint against OE
      and
      Penn in the U.S. District Court for the Southern District of Ohio. These cases
      are referred to as New Source Review cases. The NOV and complaint allege
      violations of the Clean Air Act based on operation and maintenance of the W.
      H.
      Sammis Plant dating back to 1984. The complaint requests permanent injunctive
      relief to require the installation of "best available control technology" and
      civil penalties of up to $27,500 per day of violation. On August 7,
      2003,
      the United States District Court for the Southern District of Ohio ruled that
      11
      projects undertaken at the W. H. Sammis Plant between 1984 and 1998 required
      pre-construction permits under the Clean Air Act. On March 18, 2005,
      OE and
      Penn announced that they had reached a settlement with the EPA, the DOJ and
      three states (Connecticut, New Jersey, and New York) that resolved all issues
      related to the W. H. Sammis Plant New Source Review litigation. This settlement
      agreement, which is in the form of a Consent Decree that was approved by the
      Court on July 11, 2005, requires OE and Penn to reduce emissions from
      the
      W. H. Sammis Plant and other plants through the installation of pollution
      control devices requiring capital expenditures currently estimated to be $1.1
      billion (primarily in the 2008 to 2011 time period). The settlement agreement
      also requires OE and Penn to spend up to $25 million toward environmentally
      beneficial projects, which include wind energy purchase power agreements over
      a
      20-year term. OE and Penn agreed to pay a civil penalty of $8.5 million. Results
      for the first quarter of 2005 included the penalties payable by OE and Penn
      of
      $7.8 million and $0.7 million, respectively. OE and Penn also recognized
      liabilities of $9.2 million and $0.8 million, respectively, for probable future
      cash contributions toward environmentally beneficial projects during the first
      quarter of 2005.





*Climate
      Change*





In
      December 1997,
      delegates to the United Nations' climate summit in Japan adopted an agreement,
      the Kyoto Protocol (Protocol), to address global warming by reducing the amount
      of man-made greenhouse gases emitted by developed countries by 5.2% from 1990
      levels between 2008 and 2012. The United States signed the Protocol in 1998
      but
      it failed to receive the two-thirds vote of the United States Senate required
      for ratification. However, the Bush administration has committed the United
      States to a voluntary climate change strategy to reduce domestic greenhouse
      gas
      intensity - the ratio of emissions to economic output - by 18 percent through
      2012.





The
      OE Companies
      cannot currently estimate the financial impact of climate change policies,
      although the potential restrictions on CO 2 emissions could
      require significant capital and other expenditures. However, the CO 2 emissions per KWH
      of electricity generated by the OE Companies is lower than many regional
      competitors due to the OE Companies' diversified generation sources which
      include low or non-CO 2 emitting
      gas-fired
      and nuclear generators.





*Regulation
      of
      Hazardous Waste*





As
      a result of the
      Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
      Substances Control Act of 1976, federal and state hazardous waste regulations
      have been promulgated. Certain fossil-fuel combustion waste products, such
      as
      coal ash, were exempted from hazardous waste disposal requirements pending
      the
      EPA's evaluation of the need for future regulation. The EPA subsequently
      determined that regulation of coal ash as a hazardous waste is unnecessary.
      In
      April 2000, the EPA announced that it will develop national standards regulating
      disposal of coal ash under its authority to regulate nonhazardous
      waste.





See
      Note 13(B) to
      the consolidated financial statements for further details and a complete
      discussion of environmental matters.





*Other
      Legal
      Proceedings*





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to OE's normal business operations pending against OE and its
      subsidiaries. The most significant are described below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that the FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.






73





Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.





One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, in which the OE Companies have a 35.24% interest (however, see Note
      17
      regarding FirstEnergy’s pending intra-system generation asset transfers, which
      will include owned portions of the plant). On April 4, 2005, the NRC
      held a
      public forum to discuss FENOC’s performance at the Perry Nuclear Power Plant as
      identified in the NRC's annual assessment letter to FENOC. Similar public
      meetings are held with all nuclear power plant licensees following issuance
      by
      the NRC of their annual assessments. According to the NRC, overall the Perry
      Plant operated "in a manner that preserved public health and safety" and met
      all
      cornerstone objectives although it remained under the heightened NRC oversight
      since August 2004. During the public forum and in the annual assessment, the
      NRC
      indicated that additional inspections will continue and that the plant must
      improve performance to be removed from the Multiple/Repetitive Degraded
      Cornerstone Column of the Action Matrix. On May 26, 2005, the NRC held
      a
      public meeting to discuss its oversight of the Perry Plant. While the NRC stated
      that the plant continued to operate safely, the NRC also stated that the overall
      performance had not substantially improved since the heightened inspection
      was
      initiated. If performance does not improve, the NRC has a range of options
      under
      the Reactor Oversight Process from increased oversight to possible impact to
      the
      plant’s operating authority. As a result, these matters could have a material
      adverse effect on FirstEnergy's or its subsidiaries' financial
      condition.





On
      October 20,
      2004, FirstEnergy was notified by the SEC that the previously disclosed informal
      inquiry initiated by the SEC's Division of Enforcement in September 2003
      relating to the restatements in August 2003 of previously reported results
      by
      FirstEnergy and OE, and the Davis-Besse extended outage (OE has no interest
      in
      Davis-Besse), have become the subject of a formal order of investigation. The
      SEC's formal order of investigation also encompasses issues raised during the
      SEC's examination of FirstEnergy and the Companies under the PUHCA. Concurrent
      with this notification, FirstEnergy received a subpoena asking for background
      documents and documents related to the restatements and Davis-Besse issues.
      On
      December 30, 2004, FirstEnergy received a subpoena asking for documents
      relating to issues raised during the SEC's PUHCA examination. FirstEnergy has
      cooperated fully with the informal inquiry and will continue to do so with
      the
      formal investigation.






74




If
        it were
        ultimately determined that FirstEnergy or its subsidiaries have legal liability
        or are otherwise made subject to liability based on the above matter, it
        could
        have a material adverse effect on FirstEnergy's or its subsidiaries' financial
        condition and results of operations.


See
      Note 13(C) to
      the consolidated financial statements for further details and a complete
      discussion of other legal proceedings.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. OE will adopt this Statement effective January
      1,
      2006.





*FIN
                47,
                "Accounting for Conditional Asset Retirement Obligations - an
                interpretation of FASB Statement No.
                143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the second period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, OE will adopt this Interpretation
      in
      the fourth quarter of 2005. OE is currently evaluating the effect this standard
      will have on its financial statements.





*EITF
                Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
                its
                Application to Certain
                Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, OE continues
      to
      evaluate its investments as required by existing authoritative
      guidance.











75





**THE
                      CLEVELAND ELECTRIC ILLUMINATING COMPANY****CONSOLIDATED
                      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                      Months Ended**
                  
                  
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  
                  
                  **June
                      30,****2005**
                  
                  **2004**
                  
                  
                  
                  **2005**
                  
                  **2004*****(In
                      thousands)*****STATEMENTS
                      OF INCOME****OPERATING
                      REVENUES**
                  
                  $
                  448,747
                  
                  $
                  440,876
                  
                  
                  
                  
                  $
                  881,920
                  
                  $
                  867,411**OPERATING
                      EXPENSES AND TAXES:**Fuel
                  
                  
                  21,110
                  
                  
                  19,376
                  
                  
                  
                  
                  
                  39,437
                  
                  
                  36,572Purchased
                      power
                  
                  
                  138,842
                  
                  
                  136,505
                  
                  
                  
                  
                  
                  281,726
                  
                  
                  271,182Nuclear
                      operating costs
                  
                  
                  36,786
                  
                  
                  18,521
                  
                  
                  
                  
                  
                  95,513
                  
                  
                  51,236Other
                      operating costs
                  
                  
                  74,711
                  
                  
                  79,634
                  
                  
                  
                  
                  
                  138,284
                  
                  
                  143,661Provision
                      for
                      depreciation
                  
                  
                  33,387
                  
                  
                  32,776
                  
                  
                  
                  
                  
                  64,502
                  
                  
                  64,964Amortization
                      of regulatory assets
                  
                  
                  55,016
                  
                  
                  50,022
                  
                  
                  
                  
                  
                  109,042
                  
                  
                  98,090Deferral
                      of
                      new regulatory assets
                  
                  
                  (40,701
                  )
                  
                  (32,956
                  )
                  
                  
                  
                  
                  (65,989
                  )
                  
                  (51,436
                  )General
                      taxes
                  
                  
                  36,605
                  
                  
                  34,480
                  
                  
                  
                  
                  
                  75,492
                  
                  
                  73,298Income
                      taxes
                  
                  
                  34,734
                  
                  
                  25,161
                  
                  
                  
                  
                  
                  39,611
                  
                  
                  29,174Total
                      operating expenses and taxes
                  
                  
                  390,490
                  
                  
                  363,519
                  
                  
                  
                  
                  
                  777,618
                  
                  
                  716,741**OPERATING
                      INCOME**
                  
                  
                  58,257
                  
                  
                  77,357
                  
                  
                  
                  
                  
                  104,302
                  
                  
                  150,670**OTHER
                      INCOME (net of income taxes)**
                  
                  
                  9,270
                  
                  
                  9,494
                  
                  
                  
                  
                  
                  13,574
                  
                  
                  21,221**NET
                      INTEREST CHARGES:**Interest
                      on
                      long-term debt
                  
                  
                  28,410
                  
                  
                  36,695
                  
                  
                  
                  
                  
                  56,362
                  
                  
                  68,906Allowance
                      for
                      borrowed funds used during construction
                  
                  
                  (1,294
                  )
                  
                  (1,015
                  )
                  
                  
                  
                  
                  (883
                  )
                  
                  (2,726
                  )Other
                      interest expense
                  
                  
                  1,742
                  
                  
                  1,446
                  
                  
                  
                  
                  
                  8,256
                  
                  
                  7,511Net
                      interest
                      charges
                  
                  
                  28,858
                  
                  
                  37,126
                  
                  
                  
                  
                  
                  63,735
                  
                  
                  73,691**NET
                      INCOME**
                  
                  
                  38,669
                  
                  
                  49,725
                  
                  
                  
                  
                  
                  54,141
                  
                  
                  98,200**PREFERRED
                      STOCK DIVIDEND REQUIREMENTS**
                  
                  
                  -
                  
                  
                  1,755
                  
                  
                  
                  
                  
                  2,918
                  
                  
                  3,499**EARNINGS
                      ON COMMON STOCK**
                  
                  $
                  38,669
                  
                  $
                  47,970
                  
                  
                  
                  
                  $
                  51,223
                  
                  $
                  94,701**STATEMENTS
                      OF COMPREHENSIVE INCOME****NET
                      INCOME**
                  
                  $
                  38,669
                  
                  $
                  49,725
                  
                  
                  
                  
                  $
                  54,141
                  
                  $
                  98,200**OTHER
                      COMPREHENSIVE INCOME (LOSS):**Unrealized
                      loss on available for sale securities
                  
                  
                  (1,349
                  )
                  
                  (10,371
                  )
                  
                  
                  
                  
                  (2,570
                  )
                  
                  (2,323
                  )Income
                      tax
                      benefit related to other comprehensive income
                  
                  
                  419
                  
                  
                  4,248
                  
                  
                  
                  
                  
                  923
                  
                  
                  952Other
                      comprehensive income (loss), net of tax
                  
                  
                  (930
                  )
                  
                  (6,123
                  )
                  
                  
                  
                  
                  (1,647
                  )
                  
                  (1,371
                  )**TOTAL
                      COMPREHENSIVE INCOME**
                  
                  $
                  37,739
                  
                  $
                  43,602
                  
                  
                  
                  
                  $
                  52,494
                  
                  $
                  96,829The
                      preceding
                      Notes to Consolidated Financial Statements as they relate to
                      The Cleveland
                      Electric Illuminating Company are anintegral
                      part
                      of these statements.
    76
   **THE
                      CLEVELAND ELECTRIC ILLUMINATING COMPANY****CONSOLIDATED
                      BALANCE SHEETS****(Unaudited)****June
                      30,**
                  
                  **December
                      31,****2005**
                  
                  **2004*****(In
                      thousands)*****ASSETS****UTILITY
                      PLANT:**In
                      service
                  
                  $
                  4,497,877
                  
                  $
                  4,418,313Less
                      -
                      Accumulated provision for depreciation
                  
                  
                  2,000,871
                  
                  
                  1,961,7372,497,006
                  
                  
                  2,456,576Construction
                      work in progress -Electric
                      plant
                  
                  
                  79,897
                  
                  
                  85,258Nuclear
                      fuel
                  
                  
                  4,330
                  
                  
                  30,82784,227
                  
                  
                  116,0852,581,233
                  
                  
                  2,572,661**OTHER
                      PROPERTY AND INVESTMENTS:**Investment
                      in
                      lessor notes
                  
                  
                  564,172
                  
                  
                  596,645Nuclear
                      plant
                      decommissioning trusts
                  
                  
                  401,610
                  
                  
                  383,875Long-term
                      notes receivable from associated companies
                  
                  
                  7,546
                  
                  
                  97,489Other
                  
                  
                  15,945
                  
                  
                  17,001989,273
                  
                  
                  1,095,010**CURRENT
                      ASSETS:**Cash
                      and cash
                      equivalents
                  
                  
                  207
                  
                  
                  197Receivables-Customers
                      (less accumulated provision of $4,510,000 for uncollectible
                      accounts in
                      2005)
                  
                  
                  255,422
                  
                  
                  11,537Associated
                      companies
                  
                  
                  29,279
                  
                  
                  33,414Other
                      (less
                      accumulated provisions of $19,000 and $293,000, respectively,for
                      uncollectible accounts)
                  
                  
                  11,109
                  
                  
                  152,785Notes
                      receivable from associated companies
                  
                  
                  23,537
                  
                  
                  521Materials
                      and
                      supplies, at average cost
                  
                  
                  87,713
                  
                  
                  58,922Prepayments
                      and other
                  
                  
                  1,948
                  
                  
                  2,136409,215
                  
                  
                  259,512**DEFERRED
                      CHARGES:**Goodwill
                  
                  
                  1,693,629
                  
                  
                  1,693,629Regulatory
                      assets
                  
                  
                  902,137
                  
                  
                  958,986Property
                      taxes
                  
                  
                  77,792
                  
                  
                  77,792Other
                  
                  
                  36,471
                  
                  
                  32,8752,710,029
                  
                  
                  2,763,282$
                  6,689,750
                  
                  $
                  6,690,465**CAPITALIZATION
                      AND LIABILITIES****CAPITALIZATION:**Common
                      stockholder's equity-Common
                      stock,
                      without par value, authorized 105,000,000 shares -79,590,689
                      shares outstanding
                  
                  $
                  1,356,983
                  
                  $
                  1,281,962Accumulated
                      other comprehensive income
                  
                  
                  16,212
                  
                  
                  17,859Retained
                      earnings
                  
                  
                  480,957
                  
                  
                  553,740Total
                      common
                      stockholder's equity
                  
                  
                  1,854,152
                  
                  
                  1,853,561Preferred
                      stock
                  
                  
                  -
                  
                  
                  96,404Long-term
                      debt
                      and other long-term obligations
                  
                  
                  1,948,083
                  
                  
                  1,970,1173,802,235
                  
                  
                  3,920,082**CURRENT
                      LIABILITIES:**Currently
                      payable long-term debt
                  
                  
                  75,694
                  
                  
                  76,701Short-term
                      borrowings-Associated
                      companies
                  
                  
                  404,290
                  
                  
                  488,633Other
                  
                  
                  155,000
                  
                  
                  -Accounts
                      payable-Associated
                      companies
                  
                  
                  191,959
                  
                  
                  150,141Other
                  
                  
                  5,733
                  
                  
                  9,271Accrued
                      taxes
                  
                  
                  122,675
                  
                  
                  129,454Accrued
                      interest
                  
                  
                  21,782
                  
                  
                  22,102Lease
                      market
                      valuation liability
                  
                  
                  60,200
                  
                  
                  60,200Other
                  
                  
                  43,841
                  
                  
                  61,1311,081,174
                  
                  
                  997,633**NONCURRENT
                      LIABILITIES:**Accumulated
                      deferred income taxes
                  
                  
                  543,554
                  
                  
                  540,211Accumulated
                      deferred investment tax credits
                  
                  
                  58,241
                  
                  
                  60,901Asset
                      retirement obligation
                  
                  
                  281,206
                  
                  
                  272,123Retirement
                      benefits
                  
                  
                  84,428
                  
                  
                  82,306Lease
                      market
                      valuation liability
                  
                  
                  638,100
                  
                  
                  668,200Other
                  
                  
                  200,812
                  
                  
                  149,0091,806,341
                  
                  
                  1,772,750**COMMITMENTS
                      AND CONTINGENCIES (Note 13)**$
                  6,689,750
                  
                  $
                  6,690,465The
                      preceding
                      Notes to Consolidated Financial Statements as they relate to
                      The Cleveland
                      Electric Illuminating Company arean
                      integral
                      part of these balance sheets.
    77
   **THE
                      CLEVELAND ELECTRIC ILLUMINATING COMPANY****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004*****(In
                      thousands)*****CASH
                      FLOWS FROM OPERATING ACTIVITIES:**Net
                      income
                  
                  $
                  38,669
                  
                  $
                  49,725
                  
                  $
                  54,141
                  
                  $
                  98,200Adjustments
                      to reconcile net income to net cash fromoperating
                      activities -Provision
                      for
                      depreciation
                  
                  
                  33,387
                  
                  
                  32,776
                  
                  
                  64,502
                  
                  
                  64,964Amortization
                      of regulatory assets
                  
                  
                  55,016
                  
                  
                  50,022
                  
                  
                  109,042
                  
                  
                  98,090Deferral
                      of
                      new regulatory assets
                  
                  
                  (40,701
                  )
                  
                  (32,956
                  )
                  
                  (65,989
                  )
                  
                  (51,436
                  )Nuclear
                      fuel
                      and capital lease amortization
                  
                  
                  6,171
                  
                  
                  7,509
                  
                  
                  10,781
                  
                  
                  12,616Amortization
                      of electric service obligation
                  
                  
                  (4,672
                  )
                  
                  (4,818
                  )
                  
                  (10,123
                  )
                  
                  (9,541
                  )Deferred
                      rents and lease market valuation liability
                  
                  
                  (222
                  )
                  
                  (223
                  )
                  
                  (53,691
                  )
                  
                  (41,858
                  )Deferred
                      income taxes and investment tax credits, net
                  
                  
                  8,956
                  
                  
                  2,412
                  
                  
                  4,450
                  
                  
                  (1,627
                  )Accrued
                      retirement benefit obligations
                  
                  
                  2,600
                  
                  
                  2,314
                  
                  
                  2,122
                  
                  
                  8,046Accrued
                      compensation, net
                  
                  
                  230
                  
                  
                  476
                  
                  
                  (2,495
                  )
                  
                  1,929Decrease
                      (increase) in operating assets-Receivables
                  
                  
                  (182,964
                  )
                  
                  (33,923
                  )
                  
                  (98,074
                  )
                  
                  109,843Materials
                      and
                      supplies
                  
                  
                  (6,455
                  )
                  
                  (3,118
                  )
                  
                  (28,791
                  )
                  
                  (5,473
                  )Prepayments
                      and other current assets
                  
                  
                  (439
                  )
                  
                  2
                  
                  
                  188
                  
                  
                  1,897Increase
                      (decrease) in operating liabilities-Accounts
                      payable
                  
                  
                  (958
                  )
                  
                  (80,735
                  )
                  
                  38,280
                  
                  
                  (58,348
                  )Accrued
                      taxes
                  
                  
                  14,419
                  
                  
                  31,061
                  
                  
                  (6,779
                  )
                  
                  (36,865
                  )Accrued
                      interest
                  
                  
                  (12,351
                  )
                  
                  (7,392
                  )
                  
                  (320
                  )
                  
                  847Prepayment
                      for electric service - education programs
                  
                  
                  67,589
                  
                  
                  -
                  
                  
                  67,589
                  
                  
                  -Other
                  
                  
                  (4,513
                  )
                  
                  (7,070
                  )
                  
                  (7,871
                  )
                  
                  (36,858
                  )Net
                      cash
                      provided from (used for) operating activities
                  
                  
                  (26,238
                  )
                  
                  6,062
                  
                  
                  76,962
                  
                  
                  154,426**CASH
                      FLOWS FROM FINANCING ACTIVITIES:**New
                      Financing-Long-term
                      debt
                  
                  
                  53,284
                  
                  
                  -
                  
                  
                  53,284
                  
                  
                  80,908Short-term
                      borrowings, net
                  
                  
                  88,557
                  
                  
                  101,255
                  
                  
                  58,874
                  
                  
                  -Equity
                      contributions from parent
                  
                  
                  75,000
                  
                  
                  -
                  
                  
                  75,000
                  
                  
                  -Redemptions
                      and Repayments-Preferred
                      stock
                  
                  
                  (4,000
                  )
                  
                  -
                  
                  
                  (101,900
                  )
                  
                  -Long-term
                      debt
                  
                  
                  (56,600
                  )
                  
                  (175
                  )
                  
                  (56,930
                  )
                  
                  (8,101
                  )Short-term
                      borrowings, net
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (80,912
                  )Dividend
                      Payments-Common
                      stock
                  
                  
                  (69,000
                  )
                  
                  (90,000
                  )
                  
                  (124,000
                  )
                  
                  (145,000
                  )Preferred
                      stock
                  
                  
                  -
                  
                  
                  (1,754
                  )
                  
                  (2,260
                  )
                  
                  (3,498
                  )Net
                      cash
                      provided from (used for) financing activities
                  
                  
                  87,241
                  
                  
                  9,326
                  
                  
                  (97,932
                  )
                  
                  (156,603
                  )**CASH
                      FLOWS FROM INVESTING ACTIVITIES:**Property
                      additions
                  
                  
                  (26,561
                  )
                  
                  (20,861
                  )
                  
                  (60,244
                  )
                  
                  (38,729
                  )Loan
                      repayments from (loans to) associated companies, net
                  
                  
                  (23,861
                  )
                  
                  13,736
                  
                  
                  66,927
                  
                  
                  10,814Investments
                      in lessor notes
                  
                  
                  3
                  
                  
                  -
                  
                  
                  32,473
                  
                  
                  20,965Contributions
                      to nuclear decommissioning trusts
                  
                  
                  (7,256
                  )
                  
                  (7,256
                  )
                  
                  (14,512
                  )
                  
                  (14,512
                  )Other
                  
                  
                  (3,328
                  )
                  
                  (1,007
                  )
                  
                  (3,664
                  )
                  
                  (943
                  )Net
                      cash
                      provided from (used for) investing activities
                  
                  
                  (61,003
                  )
                  
                  (15,388
                  )
                  
                  20,980
                  
                  
                  (22,405
                  )Net
                      increase
                      (decrease) in cash and cash equivalents
                  
                  
                  -
                  
                  
                  -
                  
                  
                  10
                  
                  
                  (24,582
                  )Cash
                      and cash
                      equivalents at beginning of period
                  
                  
                  207
                  
                  
                  200
                  
                  
                  197
                  
                  
                  24,782Cash
                      and cash
                      equivalents at end of period
                  
                  $
                  207
                  
                  $
                  200
                  
                  $
                  207
                  
                  $
                  200The
                      preceding
                      Notes to Consolidated Financial Statements as they relate to
                      The Cleveland
                      Electric Illuminating Company are anintegral
                      part
                      of these statements.











78





***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of The
      Cleveland Electric Illuminating Company:





We
      have reviewed
      the accompanying consolidated balance sheet of The Cleveland Electric
      Illuminating Company and its subsidiaries as of June 30, 2005, and the
      related consolidated statements of income and comprehensive income and cash
      flows for each of the three-month and six-month periods ended June 30,
      2005
      and 2004. These interim financial statements are the responsibility of the
      Company’s management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 6 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005





79





**THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








CEI
      is a wholly
      owned, electric utility subsidiary of FirstEnergy. CEI conducts business in
      portions of Ohio, providing regulated electric distribution services. CEI also
      provides generation services to those customers electing to retain CEI as their
      power supplier. CEI provides power directly to alternative energy suppliers
      under CEI’s transition plan. CEI has unbundled the price of electricity into its
      component elements -- including generation, transmission, distribution and
      transition charges. Power supply requirements of CEI are provided by FES --
      an
      affiliated company.





**Results
      of Operations**




Earnings
      on common
      stock in the second quarter of 2005 decreased to $39 million from $48 million
      in
      the second quarter of 2005. For the first six months of 2005, earnings on common
      stock decreased to $51 million from $95 million in the same period of 2004.
      The
      decrease in earnings in both 2005 periods primarily resulted from increases
      in
      nuclear operating costs, purchased power costs, regulatory asset amortization
      and a one-time income tax charge, which were partially offset by higher
      operating revenues, increased regulatory asset deferrals and lower net interest
      charges.





Operating
      revenues
      increased by $8 million or 1.8% in the second quarter of 2005 from the same
      period in 2004. Higher revenues for the quarter primarily resulted from
      increases in retail generation and distribution revenues of $4 million and
      $10
      million, respectively, partially offset by a $3 million decrease in revenues
      from wholesale sales. During the first six months of 2005 compared to the same
      period in 2004, operating revenues increased by $15 million or 1.7%. Higher
      revenues for the first half of 2005 were due to increases in retail generation
      and distribution revenues of $10 million and $5 million, respectively, partially
      offset by a $3 million reduction in revenues from wholesale sales.





Increased retail generation
      revenues for the second quarter and first six months of 2005 resulted from
      higher commercial and industrial unit prices, and higher residential KWH sales,
      partially offset by lower industrial KWH sales. A 16.8% increase in residential
      KWH sales during the second quarter was primarily due to warmer weather in
      CEI's
      service area, as compared to last year. A decrease in residential customer
      shopping by 4.1 percentage points in the second quarter and 2.1 percentage
      points in the first six months of 2005 also contributed to the higher generation
      KWH sales for each period as compared to 2004.





Revenue
      from
      wholesale sales decreased by $3 million during the second quarter of 2005,
      reflecting the effect of a 7.5% net decrease in KWH sales. Under its Ohio
      transition plan, CEI is required to provide MSG to non-affiliated alternative
      suppliers (see Outlook - Regulatory Matters). Sales to FES decreased by $12
      million (10.6% KWH decrease) due to a decrease in nuclear generation available
      for sale. The decrease in sales to FES was partially offset by a $9 million
      increase in MSG sales to non-affiliated wholesale customers (29.7% KWH increase)
      during the second quarter of 2005. In the first six months of 2005, wholesale
      sales revenue decreased by $3 million, reflecting the effect of a 5.4% net
      decrease in KWH sales. A decrease in sales to FES of $20 million (8.9% KWH
      decrease) was partially offset by a $17 million increase (33.9% KWH increase)
      in
      MSG sales to non-affiliated wholesale customers.





Revenues
      from
      distribution throughput increased $10 million in the second quarter of 2005
      compared with the same quarter of 2004. The increase was due to higher
      residential and commercial revenues ($13 million and $3 million, respectively),
      reflecting increased distribution deliveries in the second quarter of 2005,
      in
      part due to warmer weather. These increases were partially offset by lower
      industrial revenues of $6 million as a result of lower unit prices and decreases
      in KWH sales.





Revenues
      from
      distribution throughput increased $5 million in the first six months of 2005
      compared with the same period in 2004 due to higher revenues in the residential
      ($9 million) and commercial ($5 million) sectors, partially offset by lower
      industrial revenues ($9 million). Higher distribution deliveries in the
      residential and commercial sectors were partially offset by lower unit prices
      and decreases in KWH sales in the industrial sector.








80




Changes
      in electric
      generation sales and distribution deliveries in the second quarter and first
      six
      months of 2005 from the corresponding periods of 2004 are summarized in the
      following table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Electric
                Generation:Retail
            
            
            (0.9
            )%
            
            (0.8
            )%Wholesale
            
            
            (7.5
            )%
            
            (5.4
            )%**Total
                Electric Generation Sales**
            
            
            **(4.8**
            **)%**
            
            **(3.4**
            **)%**Distribution
                Deliveries:Residential
            
            
            16.8
            %
            
            5.0
            %Commercial
            
            
            3.1
            %
            
            4.3
            %Industrial
            
            
            (3.4
            )%
            
            (2.9
            )%**Total
                Distribution Deliveries**
            
            
            **3.0**
            **%**
            
            **1.0**
            **%**





*Operating
      Expenses and Taxes*





Total
      operating
      expenses and taxes increased by $27 million in the second quarter and $61
      million in the first six months of 2005 from the same periods of 2004. The
      following table presents changes from the prior year by expense
      category.





**Three**
            
            **Six****Operating
                Expenses and Taxes - Changes**
            
            **Months**
            
            **Months****Increase
                (Decrease)**
            
            ***(In
                millions)***Fuel
                costs
            
            $
            2
            
            $
            3Purchased
                power costs
            
            
            2
            
            
            10Nuclear
                operating costs
            
            
            18
            
            
            44Other
                operating costs
            
            
            (5
            )
            
            (5
            )Provision
                for
                depreciation
            
            
            1
            
            
            -Amortization
                of regulatory assets
            
            
            5
            
            
            11Deferral
                of
                new regulatory assets
            
            
            (8
            )
            
            (15
            )General
                taxes
            
            
            2
            
            
            2Income
                taxes
            
            
            10
            
            
            11**Net
                increase in operating expenses and taxes**
            
            $
            27
            
            $
            61





Higher
      purchased
      power costs in the second quarter of 2005, compared with the second quarter
      of
      2004, reflected higher unit costs, partially offset by lower KWH purchased.
      Higher purchased power costs in the first six months of 2005 compared to the
      same period last year reflected both higher unit costs and higher KWH purchased.
      The increase in nuclear operating costs in the second quarter and first six
      months of 2005, compared to the same periods of 2004, was primarily due to
      a
      refueling outage (including an unplanned extension) at the Perry Plant and
      a
      refueling outage at Beaver Valley Unit 2. A mid-cycle inspection outage at
      the
      Davis-Besse Plant in the first quarter of 2005 also contributed to higher
      nuclear operating costs in the first six months of 2005. There were no scheduled
      outages in the first six months of 2004.





Higher
      regulatory
      asset amortization in the second quarter and first six months of 2005, compared
      to the same periods last year, was primarily due to increased amortization
      of
      transition costs being recovered under the Rate Stabilization Plan. Increases
      in
      regulatory asset deferrals for both the second quarter and first six months
      in
      2005 as compared to the same periods in 2004 resulted from higher shopping
      incentive deferrals and related interest, and the PUCO-approved MISO cost deferrals,
      including interest, beginning in the second quarter of 2005 (see Outlook -
      Regulatory Matters).




On
      June 30,
      2005, the State of Ohio enacted new tax legislation that creates a new
      Commercial Activity Tax (CAT), which is based on qualifying "taxable gross
      receipts" and will not consider any expenses or costs incurred to generate
      such
      receipts, except for items such as cash discounts, returns and allowances,
      and
      bad debts. The CAT tax is effective July 1, 2005, and replaces the Ohio
      income-based franchise tax and the Ohio personal property tax. The CAT tax
      is
      phased-in while the current income-based franchise tax is phased-out over a
      five-year period at a rate of 20% annually, beginning with the year ended 2005,
      and personal property tax is phased-out over a four-year period at a rate of
      25%
      annually, beginning with the year ended 2005. For example, during the phase-out
      period the Ohio income-based franchise tax will be computed consistently with
      prior tax law, except that the tax liability as computed will be multiplied
      by
      4/5 in 2005; 3/5 in 2006; 2/5 in 2007 and 1/5 in 2008, therefore eliminating
      the
      current income-based franchise tax over a five-year period. As a result of
      the
      new tax structure, all net deferred tax benefits that are not expected to
      reverse during the five-year phase-in period were written-off as of
      June 30, 2005. The impact on income taxes associated with the required
      adjustment to net deferred taxes for the second quarter of 2005 was additional
      tax expense of approximately $8 million, which was partially offset by the
      phase-out of the Ohio income tax which reduced income taxes by approximately
      $1
      million in the second quarter of 2005. See Note 12 to the consolidated financial
      statements.






81





*Net
      Interest
      Charges*





Net
      interest
      charges continued to trend lower, decreasing by $8 million in the second quarter
      and $10 million in the first six months of 2005 from the same periods last
      year,
      reflecting the effects of redemptions and refinancings of $286 million and
      $100
      million, respectively, since July 1, 2004.





**Capital
      Resources and Liquidity**





CEI’s
      cash
      requirements in 2005 for operating expenses, construction expenditures and
      scheduled debt maturities are expected to be met without increasing net debt.
      Thereafter, CEI expects to use a combination of cash from operations and funds
      from the capital markets.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005, CEI had $207,000 of cash and cash equivalents, compared with $197,000
      as
      of December 31, 2004. The major sources of changes in these balances
      are
      summarized below.





*Cash
      Flows from
      Operating Activities*





Cash
      provided by
      operating activities during the second quarter and first six months of 2005,
      compared with the corresponding periods in 2004, were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings(*)
            
            $
            100
            
            $
            107
            
            $
            113
            
            $
            179Working
                capital and other
            
            
            (126
            )
            
            (101
            )
            
            (36
            )
            
            (25
            )Total
                cash
                flows form operating activities
            
            $
            (26
            )
            $
            6
            
            $
            77
            
            $
            154(*)Cash
                earnings is a non-GAAP measure (see reconciliation below).





Cash
      earnings (in
      the table above) are not a measure of performance calculated in accordance
      with
      GAAP. CEI believes that cash earnings is a useful financial measure because
      it
      provides investors and management with an additional means of evaluating its
      cash-based operating performance. The following table reconciles cash earnings
      with net income.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            39
            
            $
            50
            
            $
            54
            
            $
            98Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            34
            
            
            33
            
            
            65
            
            
            65Amortization
                of regulatory assets
            
            
            55
            
            
            50
            
            
            109
            
            
            98Deferral
                of
                new regulatory assets
            
            
            (41
            )
            
            (33
            )
            
            (66
            )
            
            (51
            )Nuclear
                fuel
                and capital lease amortization
            
            
            7
            
            
            8
            
            
            11
            
            
            13Amortization
                of electric service obligation
            
            
            (5
            )
            
            (6
            )
            
            (10
            )
            
            (10
            )Deferred
                rents and lease market valuation liability
            
            
            (1
            )
            
            -
            
            
            (54
            )
            
            (42
            )Deferred
                income taxes and investment tax credits, net
            
            
            9
            
            
            2
            
            
            5
            
            
            (2
            )Accrued
                retirement benefit obligations
            
            
            3
            
            
            2
            
            
            2
            
            
            8Accrued
                compensation, net
            
            
            -
            
            
            1
            
            
            (3
            )
            
            2Cash
                earnings
                (Non-GAAP)
            
            $
            100
            
            $
            107
            
            $
            113
            
            $
            179








82




The
      decrease in
      cash earnings of $7
      million for the
      second quarter and $66 million for the first six months of 2005, as compared
      to
      the respective periods of 2004, are described above under "Results of
      Operations". The largest factors contributing to the changes in working capital
      and other operating cash flows for the second quarter and first six months
      of
      2005 are increases in accounts receivable related to the conversion of the
      CFC
      receivables financing ($155 million) to on-balance sheet transactions, offset
      in
      part by funds received for prepaid electric service under the Energy for
      Education Program and changes in accounts payable.





*Cash
      Flows from
      Financing Activities*




Net
      cash provided
      from financing activities increased $78 million in the second quarter of 2005
      from the second quarter of 2004. The increase resulted from a $75 million equity
      contribution from FirstEnergy and lower common stock dividends to FirstEnergy
      of
      $21 million, partially offset by a $20 million increase in net debt
      redemptions.





Net
      cash used for
      financing activities decreased $59 million in the first six months of 2005
      from
      the same period last year. The decrease resulted from a $75 million equity
      contribution from FirstEnergy in the second quarter of 2005, lower common stock
      dividends to FirstEnergy and an increase in short-term financing, partially
      offset by an increase in preferred stock redemptions.





CEI
      had $207,000 of
      cash and temporary investments and approximately $559 million of short-term
      indebtedness as of June 30, 2005. CEI has obtained authorization from
      the
      PUCO to incur short-term debt of up to $500 million (including the utility
      money
      pool described below). CEI had the capability to issue $1.3 billion of
      additional FMB on the basis of property additions and retired bonds under the
      terms of its mortgage indenture. The issuance of FMB by CEI is subject to a
      provision of its senior note indenture generally limiting the incurrence of
      additional secured debt, subject to certain exceptions that would permit, among
      other things, the issuance of secured debt (including FMB) (i) supporting
      pollution control notes or similar obligations, or (ii) as an extension, renewal
      or replacement of previously outstanding secured debt. In addition, this
      provision would permit CEI to incur additional secured debt not otherwise
      permitted by a specified exception of up to $570 million as of June 30,
      2005. CEI has no restrictions on the issuance of preferred stock.





On
      April 20,
      2005, Beaver County Industrial Development Authority pollution control bonds
      aggregating $53.9 million were refunded by CEI. The new bonds were issued in
      a
      Dutch Auction interest rate mode, insured with municipal bond insurance and
      secured by FMB.





On
      May 1,
      2005, CEI redeemed $1.7 million of 7.00% Series B and Series C Pollution Control
      Revenue Bonds. The bonds were redeemed at par, plus accrued interest to the
      date
      of redemption. On
      June 6,
      2005, CEI redeemed all 40,000 outstanding shares of $7.35 Series C preferred
      stock at $101.00 per share, plus accrued interest to the date of
      redemption.





On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. CEI’s
      borrowing limit under the facility is $250 million.




On
        July 1, 2005,
        Ohio Air Quality Development Authority, Ohio Water Development Authority
        and
        Beaver County Industrial Development Authority pollution control bonds
        aggregating $2.9 million, $40.9 million and $45.15 million, respectively,
        were
        refunded by CEI. The new bonds were issued in a Dutch Auction interest rate
        mode, insured with municipal bond insurance. CEI provided FMB collateral
        to the
        bond insurer.


CEI
      has the ability
      to borrow from its regulated affiliates and FirstEnergy to meet its short-term
      working capital requirements. FESC administers this money pool and tracks
      surplus funds of FirstEnergy and its regulated subsidiaries. Companies receiving
      a loan under the money pool agreements must repay the principal amount, together
      with accrued interest, within 364 days of borrowing the funds. The rate of
      interest is the same for each company receiving a loan from the pool and is
      based on the average cost of funds available through the pool. The average
      interest rate for borrowings in the second quarter of 2005 was
      2.93%.





CEI’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and the securities of FirstEnergy. The ratings outlook from the
      rating agencies on all such securities is positive.





On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy and
      its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and its nuclear operations further stabilize.





On
      July 18,
      2005, Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s outlook
      resulted from steady financial improvement and steps taken by management to
      improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in its outlook recognized management’s
      regional strategy of focusing on its core utility businesses and the improvement
      in FirstEnergy’s credit profile stemming from the application of free cash flow
      toward debt reduction. Moody’s noted that a ratings upgrade could be considered
      if FirstEnergy continues to achieve planned improvements in its operations
      and
      balance sheet.






83




*Cash
      Flows from
      Investing Activities*





In
      the second
      quarter of 2005, net cash used for investing activities increased $46 million
      from the second quarter of 2004. The increase in funds used for investing
      activities primarily reflected increased property additions and an increase
      in
      loans to associated companies. The $43 million increase in net cash provided
      from investing activities for the first six months of 2005 as compared to the
      same period last year was primarily due to increases in loan payments received
      from associated companies, partially offset by increased property
      additions.





During
      the second
      half of 2005, capital requirements for property additions are expected to be
      about $68 million, including $4 million for nuclear fuel. These cash
      requirements are expected to be satisfied from internal cash and short-term
      credit arrangements. CEI has no additional requirements for sinking fund
      requirements for preferred stock and debt during the remainder of 2005.





CEI’s
      capital
      spending for the period 2005-2007 is expected to be about $368 million
      (excluding nuclear fuel) of which approximately $118 million applies to 2005.
      Investments for additional nuclear fuel during the 2005-2007 period are
      estimated to be approximately $79 million, of which about $13 million applies
      to
      2005. During the same periods, CEI’s nuclear fuel investments are expected to be
      reduced by approximately $91 million and $27 million, respectively, as the
      nuclear fuel is consumed.





**Off-Balance
      Sheet Arrangements**





Obligations
      not
      included on CEI’s Consolidated Balance Sheet primarily consist of sale and
      leaseback arrangements involving the Bruce Mansfield Plant. As of June 30,
      2005, the present value of these operating lease commitments, net of trust investments,
      total
      $101 million.





CEI
      sells
      substantially all of its retail customer receivables to CFC, its wholly owned
      subsidiary. As of June 16, 2005, the CFC receivables financing structure
      was renewed and restructured from an off-balance sheet transaction to an
      on-balance sheet transaction. Under the new structure, any borrowings under
      the
      facility appear on the balance sheet as short-term debt.





**Equity
      Price Risk**




Included
      in CEI’s
      nuclear decommissioning trust investments are marketable equity securities
      carried at their market value of approximately $254 million and $242 million
      as
      of June 30, 2005 and December 31, 2004, respectively. A hypothetical
      10% decrease in prices quoted by stock exchanges would result in a $25 million
      reduction in fair value as of June 30, 2005.





**Outlook**





The
      electric
      industry continues to transition to a more competitive environment and all
      of
      CEI's customers can select alternative energy suppliers. CEI continues to
      deliver power to residential homes and businesses through its existing
      distribution system, which remains regulated. Customer rates have been
      restructured into separate components to support customer choice. CEI has a
      continuing responsibility to provide power to those customers not choosing
      to
      receive power from an alternative energy supplier subject to certain limits.
      Adopting new approaches to regulation and experiencing new forms of competition
      have created new uncertainties.





*FirstEnergy
      Intra-System Generation Asset Transfers*




On
      May 18,
      2005, OE, CEI and TE, entered into the agreements described below (Agreements)
      implementing a series of intra-system generation asset transfers. When
      concluded, the asset transfers will result in the respective undivided ownership
      interests of the Ohio Companies in FirstEnergy’s nuclear, fossil and
      hydroelectric plants being owned by NGC, and FGCO, respectively. The generating
      plant interests that are being transferred do not include leasehold interests
      of
      CEI, TE and OE in plants that are currently subject to sale and leaseback
      arrangements with non-affiliates.





These
      transactions
      are being undertaken in connection with the Ohio Companies’ restructuring plans
      that were approved by the PUCO. Consistent with the restructuring plans,
      generation assets that had been owned by the Ohio Companies were required to
      be
      separated from the regulated delivery business of those companies through
      transfer to a separate corporate entity. FENOC, a subsidiary of FirstEnergy,
      currently operates and maintains the nuclear generation assets to be
      transferred. FGCO, as lessee under a master facility lease, leases the
      non-nuclear generation assets to be transferred and operates and maintains
      those
      assets. The transactions will essentially complete the divestitures contemplated
      by the restructuring plans by transferring the ownership interests to NGC and
      FGCO, respectively, without impacting the operation of the plants.






84




As
      contemplated by
      the Agreements, CEI intends to transfer its interests in the nuclear generation
      assets to NGC through a sale at net book value. FGCO
      intends to
      exercise a purchase option under the Master Lease to acquire CEI’s non-nuclear
      generation assets at the values approved in the Ohio Transition
      Case.





Consummation
      of the
      transactions contemplated by each of the Agreements is subject to receipt of
      all
      necessary regulatory authorizations and other consents and approvals.
      FirstEnergy currently expects to complete the various asset transfers in the
      second half of 2005.





*Regulatory
      Matters*





In
      2001, Ohio
      customer rates were restructured to establish separate charges for transmission,
      distribution, transition cost recovery and a generation-related component.
      When
      one of CEI's customers elects to obtain power from an alternative supplier,
      CEI
      reduces the customer's bill with a "generation shopping credit," based on the
      generation component (plus an incentive), and the customer receives a generation
      charge from the alternative supplier. CEI has continuing PLR responsibility
      to
      its franchise customers through December 31, 2008 unless the PUCO accepts
      future competitive bid results prior to the end of that period under the revised
      Rate Stabilization Plan. As part of CEI's transition plan, it is obligated
      to
      supply electricity to customers who do not choose an alternative supplier.
      CEI
      is also required to provide 400 MW of low cost supply (MSG) to unaffiliated
      alternative suppliers who serve customers within its service area. FES acts
      as
      an alternate supplier for a portion of the load in CEI's franchise area.





CEI's
      Rate
      Stabilization Plan extends current generation prices through 2008, ensuring
      adequate generation supply at stabilized prices, and continues CEI's support
      of
      energy efficiency and economic development efforts. On October 1 and
      October 4, 2004, the OCC and NOAC, respectively, filed appeals with
      the
      Supreme Court of Ohio to overturn the June 9, 2004 PUCO order and
      associated entries on rehearing. Other key components of the Rate Stabilization
      Plan include the following:





·
            Amortization
                period for transition costs being recovered through the RTC for CEI
                extends to as late as mid-2009;





·
            Deferral
                of
                interest costs on the accumulated customer shopping incentives as
                new
                regulatory assets; and





·
            Ability
                to
                request increases in generation charges during 2006 through 2008,
                under
                certain limited conditions, for increases in fuel costs and
                taxes.





On
      May 27,
      2005, CEI filed an application with the PUCO to establish a generation rate
      adjustment rider under the Rate Stabilization Plan. The application seeks to
      implement recovery of increased fuel costs from 2006 through 2008 applicable
      to
      CEI’s retail customers through a tariff rider to be implemented January 1,
      2006. The application reflects projected increases in fuel costs in 2006
      compared to 2002 baseline costs. The new rider is seeking to recover all costs
      above the baseline. Various parties including the OCC have intervened in this
      case. The Ohio Companies have received discovery requests from the OCC and
      the
      PUCO staff. A procedural schedule has been established by the PUCO, with a
      hearing scheduled for October 4, 2005.





On
      December 9,
      2004, the PUCO rejected the auction price results from a required competitive
      bid process and issued an entry stating that the pricing under the approved
      Rate
      Stabilization Plan will take effect on January 1, 2006. The PUCO may
      require CEI to undertake, no more often than annually, a similar competitive
      bid
      process to secure generation for the years 2007 and 2008. On July 22, 2005,
      FirstEnergy filed a competitive bid process for the period beginning in 2007
      that is similar to the competitive bid process approved by the PUCO for CEI
      in
      2004. Any acceptance of future competitive bid results would terminate the
      Rate
      Stabilization Plan pricing, but not the related approved accounting, and not
      until twelve months after the PUCO authorizes such termination.





On
      December 30, 2004, CEI filed with the PUCO two applications related
      to the
      recovery of transmission and ancillary service related costs. The first
      application seeks recovery of these costs beginning January 1, 2006. At the
      time
      of filing the application, these costs were estimated to be approximately $16
      million per year; however, CEI anticipates that this amount will increase.
      CEI
      requested that these costs be recovered through a rider that would be effective
      on January 1, 2006 and adjusted thereafter each July 1. CEI reached a settlement
      with OCC, PUCO staff, Industrial Energy Users - Ohio and OPAE. The only other
      party in this proceeding, Dominion Retail, Inc., agreed not to oppose the
      settlement. This settlement, which was filed with the PUCO on July 22, 2005,
      provides for the rider recovery requested by CEI, with carrying charges applied
      in the subsequent year’s rider for any over or under collection while the
      then-current rider is in effect. If the settlement stipulation is approved
      by
      the PUCO, the actual amounts to be recovered through the January 1, 2006 rider
      will be submitted to the PUCO on or before November 1, 2005.






85




The
      second
      application seeks authority to defer costs associated with transmission and
      ancillary service related costs incurred during the period from October 1,
      2003 through December 31, 2005. On May 18, 2005, the PUCO granted
      the
      accounting authority for CEI to defer incremental transmission and ancillary
      service-related charges incurred as a participant in the MISO, but only for
      those costs incurred during the period December 30, 2004 through
      December 31, 2005. Deferral of all costs incurred prior to December
      31,
      2004 was denied. The PUCO also authorized CEI to accrue carrying charges on
      the
      deferred balances. An application filed with the PUCO to recover these deferred
      charges over a five-year period through the rider, beginning in 2006, is
      pending. The OCC, OPAE and CEI each filed applications for rehearing. CEI sought
      authority to defer the transmission and ancillary service related costs incurred
      during the period October 1, 2003 through December 29, 2004, while both OCC
      and
      OPAE sought to have the PUCO deny deferral of all costs. On
      July 6,
      2005, the PUCO denied CEI's and OCC’s applications and, at the request of CEI,
      struck as untimely OPAE’s application. CEI and the OCC have sixty days from that
      date to file a notice of appeal with the Ohio Supreme Court.





On
      September 16, 2004, the FERC issued an order that imposed additional
      obligations on CEI under certain pre-Open Access transmission contracts among
      CEI and the cities of Cleveland and Painesville, Ohio. Under the FERC's original
      decision, CEI would have been responsible for a portion of new energy market
      charges imposed by MISO when its energy markets began in the spring of 2005.
      CEI
      filed for rehearing of the order from the FERC on October 18, 2004.
      On
      April 15, 2005, FERC issued an order on rehearing that "carves out"
      these
      contracts from the MISO Day 2 market, which became effective April 1, 2005.
      While the order on rehearing is favorable to CEI, the impact of the FERC
      decision on CEI is dependent upon many factors, including the arrangements
      made
      by the cities for transmission service and MISO's ability to administer the
      contracts. Accordingly, the impact of this decision cannot be determined at
      this
      time.





Regulatory
      assets
      are costs which have been authorized by the PUCO and the FERC for recovery
      from
      customers in future periods and, without such authorization, would have been
      charged to income when incurred. CEI's regulatory assets as of June 30,
      2005 and December 2004 were $0.9 billion and $1.0 billion, respectively. CEI
      is
      deferring customer shopping incentives and interest costs as new regulatory
      assets in accordance with its transition and rate stabilization plans. These
      regulatory assets total $354 million as of June 30, 2005 and will be
      recovered through a surcharge rate equal to the RTC rate in effect when the
      transition costs have been fully recovered. Recovery of the new regulatory
      assets will begin at that time and amortization of the regulatory assets for
      each accounting period will be equal to the surcharge revenue recognized during
      that period.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Ohio.





*Environmental
      Matters*





CEI
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in CEI's determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





*National
      Ambient Air Quality Standards*




In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Ohio and Pennsylvania)
      and the District of Columbia based on proposed findings that air emissions
      from
      28 eastern states and the District of Columbia significantly contribute to
      nonattainment of the NAAQS for fine particles and/or the "8-hour" ozone NAAQS
      in
      other states. CAIR will require additional reductions of NO x and SO 2 emissions in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      CEI's Ohio and
      Pennsylvania fossil-fuel generation facilities will be subject to the caps
      on
      SO 2 and NO x emissions.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these regulations may be
      substantial and will depend on how they are ultimately implemented by the states
      in which CEI operates affected facilities.







86





*Mercury
      Emissions*




In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission caps
      under the EPA's CAIR program. Phase II of the mercury cap-and-trade program
      will
      cap nationwide mercury emissions from coal-fired power plants at 15 tons per
      year by 2018. The future cost of compliance with these regulations may be
      substantial.





*Climate
      Change*





In
      December 1997,
      delegates to the United Nations' climate summit in Japan adopted an agreement,
      the Kyoto Protocol (Protocol), to address global warming by reducing the amount
      of man-made greenhouse gases emitted by developed countries by 5.2% from 1990
      levels between 2008 and 2012. The United States signed the Protocol in 1998
      but
      it failed to receive the two-thirds vote of the United States Senate required
      for ratification. However, the Bush administration has committed the United
      States to a voluntary climate change strategy to reduce domestic greenhouse
      gas
      intensity - the ratio of emissions to economic output - by 18 percent through
      2012.





CEI
      cannot
      currently estimate the financial impact of climate change policies, although
      the
      potential restrictions on CO 2 emissions could
      require significant capital and other expenditures. However, the CO 2 emissions per KWH
      of electricity generated by CEI is lower than many regional competitors due
      to
      CEI's diversified generation sources which include low or non-CO 2 emitting gas-fired
      and nuclear generators.





*Regulation
      of
      Hazardous Waste*





CEI
      has been named
      a PRP at waste disposal sites, which may require cleanup under the Comprehensive
      Environmental Response, Compensation and Liability Act of 1980. Allegations
      of
      disposal of hazardous substances at historical sites and the liability involved
      are often unsubstantiated and subject to dispute; however, federal law provides
      that all PRPs for a particular site are liable on a joint and several basis.
      Therefore, environmental liabilities that are considered probable have been
      recognized on the Consolidated Balance Sheet as of June 30, 2005, based
      on
      estimates of the total costs of cleanup, CEI's proportionate responsibility
      for
      such costs and the financial ability of other nonaffiliated entities to pay.
      Included in Current Liabilities are accrued liabilities aggregating
      approximately $2.3 million as of June 30, 2005.





See
      Note 13(B) to
      the consolidated financial statements for further details and a complete
      discussion of environmental matters.





*Other
      Legal
      Proceedings*





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to CEI's normal business operations pending against CEI and its
      subsidiaries. The most significant not otherwise discussed above are described
      below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.






87




Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.





One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





FENOC
      received a
      subpoena in late 2003 from a grand jury sitting in the United States District
      Court for the Northern District of Ohio, Eastern Division requesting the
      production of certain documents and records relating to the inspection and
      maintenance of the reactor vessel head at the Davis-Besse Nuclear Power Station,
      in which CEI has a 51.38% interest. On December 10, 2004, FirstEnergy
      received a letter from the United States Attorney's Office stating that FENOC
      is
      a target of the federal grand jury investigation into alleged false statements
      made to the NRC in the Fall of 2001 in response to NRC Bulletin 2001-01. The
      letter also said that the designation of FENOC as a target indicates that,
      in
      the view of the prosecutors assigned to the matter, it is likely that federal
      charges will be returned against FENOC by the grand jury. On February 10,
      2005, FENOC received an additional subpoena for documents related to root cause
      reports regarding reactor head degradation and the assessment of reactor head
      management issues at Davis-Besse. On May 11,
      2005, FENOC received a subpoena for documents related to outside meetings
      attended by Davis-Besse personnel on corrosion and cracking of control rod
      drive
      mechanisms and additional root cause evaluations.





On
      April 21,
      2005, the NRC issued a NOV and proposed a $5.45 million civil penalty related
      to
      the degradation of the Davis-Besse reactor vessel head described above. On
      July
      8, 2005, FENOC requested an additional 120 days to respond to the NOV. CEI
      has
      accrued the remaining liability for its share of the proposed fine of $1.8
      million during the first quarter of 2005.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      based on the events surrounding Davis-Besse, it could have a material adverse
      effect on FirstEnergy's or its subsidiaries' financial condition and results
      of
      operations.





Effective
      July 1, 2005 the NRC oversight panel for Davis-Besse was terminated
      and
      Davis-Besse returned to the standard NRC reactor oversight process. At that
      time, NRC inspections were augmented to include inspections to support the
      NRC's
      Confirmatory Order dated March 8, 2004 that was issued at the time of
      startup and to address an NRC White Finding related to emergency
      sirens.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, which is currently owned and/or leased by OE, CEI, TE and Penn (however,
      see Note 17 regarding FirstEnergy’s pending intra-system generation asset
      transfers, which will include owned portions of the plant). On
      April 4,
      2005, the NRC held a public forum to discuss FENOC’s performance at the Perry
      Nuclear Power Plant as identified in the NRC's annual assessment letter to
      FENOC. Similar public meetings are held with all nuclear power plant licensees
      following issuance by the NRC of their annual assessments. According to the
      NRC,
      overall the Perry Plant operated "in a manner that preserved public health
      and
      safety" and met all cornerstone objectives although it remained under the
      heightened NRC oversight since August 2004. During the public forum and in
      the
      annual assessment, the NRC indicated that additional inspections will continue
      and that the plant must improve performance to be removed from the
      Multiple/Repetitive Degraded Cornerstone Column of the Action Matrix. On
      May 26, 2005, the NRC held a public meeting to discuss its oversight
      of the
      Perry Plant. While the NRC stated that the plant continued to operate safely,
      the NRC also stated that the overall performance had not substantially improved
      since the heightened inspection was initiated. If performance does not improve,
      the NRC has a range of options under the Reactor Oversight Process, from
      increased oversight to possible impact to the plant’s operating authority. As a
      result, these matters could have a material adverse effect on FirstEnergy's
      or
      its subsidiaries' financial condition.







88





On
      October 20, 2004,
      FirstEnergy was notified by the SEC that the previously disclosed informal
      inquiry initiated by the SEC's Division of Enforcement in September 2003
      relating to the restatements in August 2003 of previously reported results
      by
      FirstEnergy and CEI, and the Davis-Besse extended outage, have become the
      subject of a formal order of investigation. The SEC's formal order of
      investigation also encompasses issues raised during the SEC's examination of
      FirstEnergy and the Companies under the PUHCA. Concurrent with this
      notification, FirstEnergy received a subpoena asking for background documents
      and documents related to the restatements and Davis-Besse issues. On
      December 30, 2004, FirstEnergy received a subpoena asking for documents
      relating to issues raised during the SEC's PUHCA examination. FirstEnergy has
      cooperated fully with the informal inquiry and will continue to do so with
      the
      formal investigation.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      or are otherwise made subject to liability based on the above matters, it could
      have a material adverse effect on FirstEnergy's or its subsidiaries' financial
      condition and results of operations.





See
      Note 13(C) to
      the consolidated financial statements for further details and a complete
      discussion of other legal proceedings.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. FirstEnergy will adopt this Statement effective
      January 1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the second period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, FirstEnergy will adopt this
      Interpretation in the fourth quarter of 2005. FirstEnergy is currently
      evaluating the effect this Interpretation will have on its financial
      statements.








89





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, FirstEnergy
      continues to evaluate its investments as required by existing authoritative
      guidance.








90


**THE
                    TOLEDO EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****STATEMENTS
                    OF INCOME****OPERATING
                    REVENUES**
                
                $
                259,109
                
                $
                243,366
                
                $
                500,864
                
                $
                478,764**OPERATING
                    EXPENSES AND TAXES:**Fuel
                
                
                14,404
                
                
                13,073
                
                
                26,973
                
                
                23,287Purchased
                    power
                
                
                72,300
                
                
                74,687
                
                
                152,456
                
                
                157,095Nuclear
                    operating costs
                
                
                46,689
                
                
                36,166
                
                
                105,852
                
                
                78,858Other
                    operating costs
                
                
                41,311
                
                
                41,155
                
                
                75,659
                
                
                77,363Provision
                    for
                    depreciation
                
                
                15,209
                
                
                14,380
                
                
                29,889
                
                
                28,433Amortization
                    of regulatory assets
                
                
                33,231
                
                
                27,362
                
                
                68,096
                
                
                61,028Deferral
                    of
                    new regulatory assets
                
                
                (12,670
                )
                
                (10,192
                )
                
                (22,094
                )
                
                (17,222
                )General
                    taxes
                
                
                13,620
                
                
                12,028
                
                
                27,801
                
                
                26,328Income
                    taxes
                
                
                27,817
                
                
                8,080
                
                
                23,849
                
                
                6,502Total
                    operating expenses and taxes
                
                
                251,911
                
                
                216,739
                
                
                488,481
                
                
                441,672**OPERATING
                    INCOME**
                
                
                7,198
                
                
                26,627
                
                
                12,383
                
                
                37,092**OTHER
                    INCOME (net of income taxes)**
                
                
                3,231
                
                
                4,719
                
                
                5,890
                
                
                10,552**NET
                    INTEREST CHARGES:**Interest
                    on
                    long-term debt
                
                
                4,523
                
                
                9,581
                
                
                8,743
                
                
                19,042Allowance
                    for
                    borrowed funds used during construction
                
                
                (188
                )
                
                (702
                )
                
                255
                
                
                (2,102
                )Other
                    interest expense
                
                
                (1,582
                )
                
                889
                
                
                1,234
                
                
                1,595Net
                    interest
                    charges
                
                
                2,753
                
                
                9,768
                
                
                10,232
                
                
                18,535**NET
                    INCOME**
                
                
                7,676
                
                
                21,578
                
                
                8,041
                
                
                29,109**PREFERRED
                    STOCK DIVIDEND REQUIREMENTS**
                
                
                2,211
                
                
                2,211
                
                
                4,422
                
                
                4,422**EARNINGS
                    ON COMMON STOCK**
                
                $
                5,465
                
                $
                19,367
                
                $
                3,619
                
                $
                24,687**STATEMENTS
                    OF COMPREHENSIVE INCOME****NET
                    INCOME**
                
                $
                7,676
                
                $
                21,578
                
                $
                8,041
                
                $
                29,109**OTHER
                    COMPREHENSIVE INCOME (LOSS):**Unrealized
                    loss on available for sale securities
                
                
                (501
                )
                
                (6,974
                )
                
                (2,184
                )
                
                (1,292
                )Income
                    tax
                    benefit related to other comprehensive income
                
                
                96
                
                
                2,861
                
                
                791
                
                
                530Other
                    comprehensive income (loss), net of tax
                
                
                (405
                )
                
                (4,113
                )
                
                (1,393
                )
                
                (762
                )**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                7,271
                
                $
                17,465
                
                $
                6,648
                
                $
                28,347The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    The Toledo
                    Edison Company are an integral part ofthese
                    statements.
    91
   **THE
                    TOLEDO EDISON COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                1,902,930
                
                $
                1,856,478Less
                    -
                    Accumulated provision for depreciation
                
                
                802,653
                
                
                778,8641,100,277
                
                
                1,077,614Construction
                    work in progress -Electric
                    plant
                
                
                52,465
                
                
                58,535Nuclear
                    fuel
                
                
                4,063
                
                
                15,99856,528
                
                
                74,5331,156,805
                
                
                1,152,147**OTHER
                    PROPERTY AND INVESTMENTS:**Investment
                    in
                    lessor notes
                
                
                178,797
                
                
                190,692Nuclear
                    plant
                    decommissioning trusts
                
                
                315,142
                
                
                297,803Long-term
                    notes receivable from associated companies
                
                
                40,014
                
                
                39,975Other
                
                
                1,784
                
                
                2,031535,737
                
                
                530,501**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                15
                
                
                15Receivables
                    -Customers
                    (less accumulated provisions of $1,000 and $2,000,
                    respectively,for
                    uncollectible accounts)
                
                
                2,105
                
                
                4,858Associated
                    companies
                
                
                19,373
                
                
                36,570Other
                
                
                3,182
                
                
                3,842Notes
                    receivable from associated companies
                
                
                16,099
                
                
                135,683Materials
                    and
                    supplies, at average cost
                
                
                46,192
                
                
                40,280Prepayments
                    and other
                
                
                742
                
                
                1,15087,708
                
                
                222,398**DEFERRED
                    CHARGES:**Goodwill
                
                
                504,522
                
                
                504,522Regulatory
                    assets
                
                
                330,192
                
                
                374,814Property
                    taxes
                
                
                24,100
                
                
                24,100Other
                
                
                39,189
                
                
                25,424898,003
                
                
                928,860$
                2,678,253
                
                $
                2,833,906**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity -Common
                    stock,
                    $5 par value, authorized 60,000,000 shares -39,133,887
                    shares outstanding
                
                $
                195,670
                
                $
                195,670Other
                    paid-in
                    capital
                
                
                428,566
                
                
                428,559Accumulated
                    other comprehensive income
                
                
                18,646
                
                
                20,039Retained
                    earnings
                
                
                184,678
                
                
                191,059Total
                    common
                    stockholder's equity
                
                
                827,560
                
                
                835,327Preferred
                    stock
                
                
                126,000
                
                
                126,000Long-term
                    debt
                
                
                296,482
                
                
                300,2991,250,042
                
                
                1,261,626**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                90,950
                
                
                90,950Accounts
                    payable -Associated
                    companies
                
                
                34,806
                
                
                110,047Other
                
                
                3,117
                
                
                2,247Notes
                    payable
                    to associated companies
                
                
                333,136
                
                
                429,517Accrued
                    taxes
                
                
                57,466
                
                
                46,957Lease
                    market
                    valuation liability
                
                
                24,600
                
                
                24,600Other
                
                
                25,802
                
                
                53,055569,877
                
                
                757,373**NONCURRENT
                    LIABILITIES:**Accumulated
                    deferred income taxes
                
                
                235,448
                
                
                221,950Accumulated
                    deferred investment tax credits
                
                
                24,024
                
                
                25,102Retirement
                    benefits
                
                
                41,464
                
                
                39,227Asset
                    retirement obligation
                
                
                200,867
                
                
                194,315Lease
                    market
                    valuation liability
                
                
                255,700
                
                
                268,000Other
                
                
                100,831
                
                
                66,313858,334
                
                
                814,907**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                2,678,253
                
                $
                2,833,906The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    The Toledo
                    Edison Company are an integral partof
                    these
                    balance sheets.
    92
   **THE
                    TOLEDO EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                7,676
                
                $
                21,578
                
                $
                8,041
                
                $
                29,109Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                15,209
                
                
                14,380
                
                
                29,889
                
                
                28,433Amortization
                    of regulatory assets
                
                
                33,231
                
                
                27,362
                
                
                68,096
                
                
                61,028Deferral
                    of
                    new regulatory assets
                
                
                (12,670
                )
                
                (10,192
                )
                
                (22,094
                )
                
                (17,222
                )Nuclear
                    fuel
                    and capital lease amortization
                
                
                3,266
                
                
                5,032
                
                
                8,134
                
                
                10,538Amortization
                    of electric service obligation
                
                
                (1,391
                )
                
                -
                
                
                (1,391
                )
                
                -Deferred
                    rents and lease market valuation liability
                
                
                (29,242
                )
                
                (28,582
                )
                
                (44,466
                )
                
                (36,274
                )Deferred
                    income taxes and investment tax credits, net
                
                
                9,580
                
                
                (2,651
                )
                
                8,193
                
                
                (4,682
                )Accrued
                    retirement benefit obligations
                
                
                1,626
                
                
                1,124
                
                
                2,237
                
                
                3,409Accrued
                    compensation, net
                
                
                528
                
                
                1,694
                
                
                (737
                )
                
                961Decrease
                    (increase) in operating assets -Receivables
                
                
                (28,936
                )
                
                5,440
                
                
                12,539
                
                
                25,475Materials
                    and
                    supplies
                
                
                577
                
                
                (2,217
                )
                
                (5,912
                )
                
                (3,651
                )Prepayments
                    and other current assets
                
                
                464
                
                
                1,910
                
                
                408
                
                
                5,294Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                (81,306
                )
                
                (9,696
                )
                
                (74,371
                )
                
                (15,770
                )Accrued
                    taxes
                
                
                25,771
                
                
                17,820
                
                
                10,509
                
                
                3,735Accrued
                    interest
                
                
                (1,049
                )
                
                1,910
                
                
                (196
                )
                
                (371
                )Prepayment
                    for electric service -- education programs
                
                
                37,954
                
                
                -
                
                
                37,954
                
                
                -Other
                
                
                (6,618
                )
                
                8,488
                
                
                (8,607
                )
                
                341Net
                    cash
                    provided from (used for) operating activities
                
                
                (25,330
                )
                
                53,400
                
                
                28,226
                
                
                90,353**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing
                    -Long-term
                    debt
                
                
                45,000
                
                
                -
                
                
                45,000
                
                
                73,000Redemptions
                    and Repayments -Long-term
                    debt
                
                
                (46,933
                )
                
                -
                
                
                (46,933
                )
                
                (15,000
                )Short-term
                    borrowings, net
                
                
                (61,388
                )
                
                (23,761
                )
                
                (96,381
                )
                
                (117,060
                )Dividend
                    Payments -Common
                    stock
                
                
                (10,000
                )
                
                -
                
                
                (10,000
                )
                
                -Preferred
                    stock
                
                
                (2,211
                )
                
                (2,211
                )
                
                (4,422
                )
                
                (4,422
                )Net
                    cash used
                    for financing activities
                
                
                (75,532
                )
                
                (25,972
                )
                
                (112,736
                )
                
                (63,482
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (14,249
                )
                
                (10,987
                )
                
                (32,168
                )
                
                (19,427
                )Loan
                    repayments from (loans to) associated companies, net
                
                
                121,155
                
                
                (3,263
                )
                
                119,545
                
                
                (657
                )Investments
                    in lessor notes
                
                
                (33
                )
                
                -
                
                
                11,895
                
                
                10,280Contributions
                    to nuclear decommissioning trusts
                
                
                (7,136
                )
                
                (7,136
                )
                
                (14,271
                )
                
                (14,271
                )Other
                
                
                1,125
                
                
                (6,043
                )
                
                (491
                )
                
                (5,018
                )Net
                    cash
                    provided from (used for) investing activities
                
                
                100,862
                
                
                (27,429
                )
                
                84,510
                
                
                (29,093
                )Net
                    decrease
                    in cash and cash equivalents
                
                
                -
                
                
                (1
                )
                
                -
                
                
                (2,222
                )Cash
                    and cash
                    equivalents at beginning of period
                
                
                15
                
                
                16
                
                
                15
                
                
                2,237Cash
                    and cash
                    equivalents at end of period
                
                $
                15
                
                $
                15
                
                $
                15
                
                $
                15The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    The Toledo
                    Edison Company are an integral part ofthese
                    statements.
    93






***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of The
      Toledo Edison Company:





We
      have reviewed
      the accompanying consolidated balance sheet of The Toledo Edison Company and
      its
      subsidiary as of June 30, 2005, and the related consolidated statements
      of
      income and comprehensive income and cash flows for each of the three-month
      and
      six-month periods ended June 30, 2005 and 2004. These interim financial
      statements are the responsibility of the Company’s management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 6 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005





94





**THE
      TOLEDO
      EDISON COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








TE
      is a wholly
      owned electric utility subsidiary of FirstEnergy. TE conducts business in
      northwestern Ohio, providing regulated electric distribution services. TE also
      provides generation services to those customers electing to retain TE as their
      power supplier. TE provides power directly to some alternative energy suppliers
      under TE’s transition plan. TE has unbundled the price of electricity into its
      component elements - including generation, transmission, distribution and
      transition charges. TE’s power supply requirements are provided by FES - an
      affiliated company.





**Results
      of Operations**





Earnings
      on common
      stock in the second quarter of 2005 decreased to $5 million from earnings of
      $19
      million in the second quarter of 2004. Earnings on common stock in the first
      six
      months of 2005 decreased to $4 million from $25 million in the first six months
      of 2004. The decrease in earnings in both periods of 2005 resulted principally
      from higher nuclear operating costs and a one-time income tax charge, partially
      offset by higher operating revenues and lower financing costs compared to the
      same period of 2004.





Operating
      revenues
      increased by $16 million, or 6.5%, in the second quarter of 2005 compared to
      the
      second quarter of 2004. Higher revenues in the second quarter of 2005 resulted
      from increased retail generation sales revenues of $11 million, distribution
      revenues of $4 million and wholesales sales (primarily to FES) of $2 million,
      partially offset by an increase in shopping incentive credits of $1 million.
      Retail generation sales revenues increased as a result of increased KWH sales
      (residential - $1 million, commercial - $2 million, industrial - $8 million).
      Higher residential and commercial revenues reflected increased KWH sales (24.5%
      and 23.2%, respectively), partially offset by lower unit prices. Residential
      and
      commercial sales volumes increased primarily due to warmer weather in TE’s
      service area. The commercial generation sales volume increase also reflects
      a
      reduction by 4.7 percentage points in customer shopping compared with the second
      quarter of 2004. Industrial revenues increased as a result of higher unit
      prices, partially offset by a 3.9% decrease in KWH sales.





Revenues
      from
      distribution throughput increased by $4 million in the second quarter of 2005
      from the corresponding quarter of 2004. The increase was due to higher
      residential and commercial revenues ($9 million and $4 million, respectively)
      partially offset by a decrease in industrial revenues ($9 million). The impact
      of higher residential and commercial KWH sales contributed to the increase
      and
      offset the lower industrial sales volume and unit prices.





Operating
      revenues
      increased by $22 million, or 4.6% in the first six months of 2005 compared
      to
      the same period of 2004. Higher revenues in the first six months of 2005
      resulted primarily from increased retail generation sales revenues of $21
      million and wholesales sales (primarily to FES) of $5 million, partially offset
      by a decrease in distribution revenues of $2 million. Retail generation sales
      revenues increased as result of higher KWH sales in all customer sectors
      (residential - $1 million, commercial - $3 million, industrial - $17 million).
      Increases in residential and commercial revenues reflected increased KWH sales
      (6.3% and 13.9%, respectively) due to warmer weather, partially offset by lower
      unit prices. The higher industrial revenues resulted primarily from higher
      unit
      prices.





Revenues
      from
      distribution throughput decreased by $2 million in the first six months of
      2005
      compared to the same period in 2004 as a result of lower industrial KWH sales
      and reduced unit prices, which offset increases in KWH sales to residential
      and
      commercial customers.





Under
      the Ohio
      transition plan, TE provides incentives to customers to encourage switching
      to
      alternative energy providers. TE’s revenues were reduced by $1 million from
      additional credits in the second quarter and $2 million in the first six months
      of 2005 compared with the same periods of 2004. These revenue reductions are
      deferred for future recovery under TE’s transition plan and do not affect
      current period earnings (see Regulatory Matters below).








95




Changes
      in electric
      generation sales and distribution deliveries in the second quarter and first
      six
      months of 2005 from the corresponding periods of 2004, are summarized in the
      following table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Electric
                Generation:Retail
            
            
            4.6
            %
            
            2.8
            %Wholesale
            
            
            (6.5
            )%
            
            3.4
            %**Total
                Electric Generation Sales**
            
            
            **(1.8**
            **)%**
            
            **3.1**
            **%**Distribution
                Deliveries:Residential
            
            
            25.5
            %
            
            9.3
            %Commercial
            
            
            12.1
            %
            
            8.0
            %Industrial
            
            
            (3.1
            )%
            
            (0.6
            )%**Total
                Distribution Deliveries**
            
            
            **6.4**
            **%**
            
            **3.9**
            **%**





*Operating
      Expenses and Taxes*





Total
      operating
      expenses and taxes increased by $35 million in the second quarter and $47
      million in the first six months of 2005 from the same periods in 2004. The
      following table presents changes from the prior year by expense category.





**Three**
            
            **Six****Operating
                Expenses and Taxes - Changes**
            
            **Months**
            
            **Months****Increase
                (Decrease)**
            
            ***(In
                millions)***Fuel
                costs
            
            $
            1
            
            $
            4Purchased
                power costs
            
            
            (2
            )
            
            (5
            )Nuclear
                operating costs
            
            
            10
            
            
            27Other
                operating costs
            
            
            -
            
            
            (2
            )Provision
                for
                depreciation
            
            
            1
            
            
            1Amortization
                of regulatory assets
            
            
            6
            
            
            7Deferral
                of
                new regulatory assets
            
            
            (3
            )
            
            (5
            )General
                taxes
            
            
            2
            
            
            2Income
                taxes
            
            
            20
            
            
            18**Net
                increase in operating expenses and taxes**
            
            $
            35
            
            $
            47





Higher
      fuel costs
      in the second quarter and first six months of 2005, compared with the same
      periods of 2004, resulted principally from increased fossil generation — up
      12.4% and 19.8%, respectively. Lower purchased power costs in both periods
      reflect lower unit costs and a reduction in KWH purchased in the second quarter
      of 2005. Nuclear operating costs increased in both periods due to a scheduled
      refueling outage (including an unplanned extension) at the Perry Plant, a
      mid-cycle inspection outage at the Davis-Besse Plant during the first quarter
      of
      2005, and the Beaver Valley Unit 2 refueling outage in the second quarter of
      2005. Other operating costs remained unchanged in the second quarter of 2005
      compared to the same period of 2004. MISO Day 2 expenses that began in the
      second quarter of 2005 were offset by decreased vegetation management expenses.
      Other operating costs decreased in the first six months of 2005 compared to
      the
      same period of 2004 in part from lower employee benefits costs.





Depreciation
      charges increased by $1 million in the second quarter and first six months
      of
      2005 compared to the same periods of 2004 due to an increase in depreciable
      assets. This increase was partially offset by the effect of revised service
      life
      assumptions for fossil generating plants (See Note 3). Regulatory asset
      amortization increased in both periods due to the increased amortization of
      transition costs being recovered under the Rate Stabilization Plan. Deferrals
      of
      new regulatory assets increased in the second quarter and first six months
      of
      2005 compared to the same periods of 2004, primarily due to higher shopping
      incentives and related interest ($1 million and $3 million, respectively) and
      the deferral of the PUCO-approved MISO administrative expenses and related
      interest ($1 million) that began in the second quarter of 2005.





On
      June 30,
      2005, the State of Ohio enacted new tax legislation that creates a new
      Commercial Activity Tax (CAT), which is based on qualifying "taxable gross
      receipts" and will not consider any expenses or costs incurred to generate
      such
      receipts, except for items such as cash discounts, returns and allowances,
      and
      bad debts. The CAT tax is effective July 1, 2005, and replaces the Ohio
      income-based franchise tax and the Ohio personal property tax. The CAT tax
      is
      phased-in while the current income-based franchise tax is phased-out over a
      five-year period at a rate of 20% annually, beginning with the year ended 2005,
      and personal property tax is phased-out over a four-year period at a rate of
      approximately 25%, annually beginning with the year ended 2005. For example,
      during the phase-out period the Ohio income-based franchise tax will be computed
      consistently with the prior tax law, except that the tax liability as computed
      will be multiplied by 4/5 in 2005; 3/5 in 2006; 2/5 in 2007 and 1/5 in 2008,
      therefore eliminating the current income-based franchise tax over a five-year
      period. As a result of the new tax structure, all net deferred tax benefits
      that
      are not expected to reverse during the five-year phase-in period were
      written-off as of June 30, 2005. The impact on income taxes associated
      with
      the required adjustment to net deferred taxes for the second quarter of 2005
      was
      additional tax expense of approximately $18 million, which was partially offset
      by the phase-out of the Ohio income tax which reduced income taxes by
      approximately $1 million in the second quarter of 2005. See Note 12 to the
      consolidated financial statements.







96





*Other
      Income*




Other
      income
      decreased by $2 million in the second quarter of 2005 and $5 million in the
      first six months of 2005 from the same periods of 2004, primarily due to a
      decrease in earnings on nuclear decommissioning trust investments and the
      absence of interest income earned on associated company notes receivable that
      were repaid in May 2005. Additionally, the recognition of a $1.6 million
      proposed NRC fine related to the Davis-Besse Plant (see Outlook - Other Legal
      Proceedings) during the first quarter of 2005, caused other income to decrease
      during the first six months of 2005.





*Net
      Interest
      Charges*





Net
      interest
      charges continued to trend lower, decreasing by $7 million in the second quarter
      of 2005 and $8 million in the first six months of 2005 from the same periods
      of
      2004, reflecting redemptions and refinancings subsequent to the end of the
      second quarter of 2004.





**Capital
      Resources and Liquidity**





TE’s
      cash
      requirements in 2005 for operating expenses, construction expenditures and
      scheduled debt maturities are expected to be met without increasing its net debt and
      preferred stock outstanding. Thereafter, TE expects to meet its contractual
      obligations with a combination of cash from operations and funds from the
      capital markets.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005, TE's cash and cash equivalents of $15,000 remained unchanged from its
      December 31, 2004 balance.





*Cash
      Flows From
      Operating Activities*





Cash
      provided from
      operating activities during the second quarter and first six months of 2005,
      compared with the corresponding period of 2004 were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings*
            
            $
            28
            
            $
            30
            
            $
            56
            
            $
            75Working
                capital and other
            
            
            (53
            )
            
            23
            
            
            (28
            )
            
            15Total
                cash
                flows form operating activities
            
            $
            (25
            )
            $
            53
            
            $
            28
            
            $
            90*Cash
                earnings
                are a non-GAAP measure (see reconciliation below).





Cash
      earnings, as
      disclosed in the table above, are not a measure of performance calculated in
      accordance with GAAP. TE believes that cash
      earnings is a useful financial measure because it provides investors and
      management with an additional means of evaluating its cash-based operating
      performance. The following table reconciles cash earnings with net
      income.








97





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            8
            
            $
            22
            
            $
            8
            
            $
            29Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            15
            
            
            14
            
            
            30
            
            
            29Amortization
                of regulatory assets
            
            
            33
            
            
            27
            
            
            68
            
            
            61Deferral
                of
                new regulatory assets
            
            
            (13
            )
            
            (10
            )
            
            (22
            )
            
            (17
            )Nuclear
                fuel
                and capital lease amortization
            
            
            3
            
            
            5
            
            
            8
            
            
            10Amortization
                of electric service obligation
            
            
            (1
            )
            
            -
            
            
            (1
            )
            
            -Deferred
                rents and above-market lease liability
            
            
            (29
            )
            
            (28
            )
            
            (44
            )
            
            (36
            )Deferred
                income taxes and investment tax credits, net
            
            
            10
            
            
            (3
            )
            
            8
            
            
            (5
            )Accrued
                retirement benefits obligations
            
            
            2
            
            
            1
            
            
            2
            
            
            3Accrued
                compensation, net
            
            
            -
            
            
            2
            
            
            (1
            )
            
            1Cash
                earnings
                (Non-GAAP)
            
            $
            28
            
            $
            30
            
            $
            56
            
            $
            75





Net
      cash provided
      from operating activities decreased by $78 million in the second quarter of
      2005
      from the second quarter of 2004 as a result of a $76 million decrease in working
      capital and $2 million decrease in cash earnings described above and under
      "Results of Operations". Net cash provided from operating activities decreased
      by $62 million in the first six months of 2005 compared to the same period
      last
      year as a result of a $43 million decrease in working capital and a $19 million
      decrease in cash earnings described above and under "Results of Operations".
      The
      change in working capital for both periods was primarily due to changes in
      accounts payable and accounts receivable, partially offset by funds received
      for
      prepaid electric service under the Ohio Schools Council’s Energy for Education
      Program that began in the second quarter of 2005.





*Cash
      Flows From
      Financing Activities*





Net
      cash used for
      financing activities increased by $50 million in the second quarter and first
      six months of 2005, as compared to the same periods of 2004, and resulted from
      an increase in net debt redemptions in both periods. The increase was also
      due
      to a $10 million increase in common stock dividends to FirstEnergy during the
      second quarter of 2005.





TE
      had $16 million
      of cash and temporary investments (which included short-term notes receivable
      from associated companies) and $333 million of short-term indebtedness as of
      June 30, 2005. TE has authorization from the PUCO to incur short-term
      debt
      of up to $500 million (including the utility money pool described below). As
      of
      June 30, 2005, TE had the capability to issue $890 million of additional
      FMB on the basis of property additions and retired bonds under the terms of
      its
      mortgage indenture. Based upon applicable earnings coverage tests, TE could
      issue up to $950 million of preferred stock (assuming no additional debt was
      issued as of June 30, 2005).





On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. TE's borrowing
      limit under the facility is $250 million.





TE
      has the ability
      to borrow from its regulated affiliates and FirstEnergy to meet its short-term
      working capital requirements. FESC administers this money pool and tracks
      surplus funds of FirstEnergy and its regulated subsidiaries. Companies receiving
      a loan under the money pool agreements must repay the principal, together with
      accrued interest, within 364 days of borrowing the funds. The rate of interest
      is the same for each company receiving a loan from the pool and is based on
      the
      average cost of funds available through the pool. The average interest rate
      for
      borrowings in the second quarter of 2005 was 2.93%.





On
      April 20,
      2005, Beaver County Industrial Development Authority pollution control bonds
      aggregating $45 million were refunded by TE. The new bonds were issued in a
      Dutch Auction interest rate mode, insured with municipal bond insurance and
      secured by FMB.





On
      July 1,
      2005, TE redeemed all of its 1.2 million outstanding shares of 7.00% Series
      A
      preferred stock at $25.00 per share, plus accrued dividends to the date of
      redemption.





TE’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and the securities of FirstEnergy. On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy and
      its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and its nuclear operations further stabilize.






98




On
      July 18,
      2005, Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s outlook
      resulted from steady financial improvement and steps taken by management to
      improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in their outlook recognized
      management’s regional strategy of focusing on its core utility businesses and
      the improvement in FirstEnergy’s credit profile stemming from the application of
      free cash flow toward debt reduction. Moody’s noted that a ratings upgrade could
      be considered if FirstEnergy continues to achieve planned improvements in its
      operations and balance sheet.





*Cash
      Flows From
      Investing Activities*





Net
      cash provided
      from investing activities increased by $128 million in the second quarter and
      $114 million in the first six months of 2005, from the same periods of 2004.
      These increases were primarily due to higher loan repayments from associated
      companies during the second quarter of 2005, partially offset by increased
      property additions.





TE’s
      capital
      spending for the last two quarters of 2005 is expected to be about $36 million
      (excluding $3 million for nuclear fuel). These cash requirements are expected
      to
      be satisfied from internal cash and short-term borrowings.





TE’s
      capital
      spending for the period 2005-2007 is expected to be about $192 million
      (excluding nuclear fuel), of which approximately $56 million applies to 2005.
      Investments for additional nuclear fuel during the 2005-2007 period are
      estimated to total approximately $56 million, of which about $10 million applies
      to 2005. During the same periods, TE’s nuclear fuel investments are expected to
      be reduced by approximately $64 million and $20 million, respectively, as the
      nuclear fuel is consumed.





**Off-Balance
      Sheet Arrangements**





Obligations
      not
      included on TE’s Consolidated Balance Sheet primarily consist of sale and
      leaseback arrangements involving the Bruce Mansfield Plant and Beaver Valley
      Unit 2. As of June 30, 2005, the present value of these operating lease
      commitments, net of trust investments, totaled $531 million.





TE
      sells
      substantially all of its retail customer receivables to CFC, a wholly owned
      subsidiary of CEI. As of June 16, 2005, the CFC receivables financing structure
      was renewed and restructured from an off-balance sheet transaction to an
      on-balance sheet transaction. Under the new structure, any borrowings under
      the
      facility appear on the balance sheet as short-term debt.





**Equity
      Price Risk**





Included
      in TE’s
      nuclear decommissioning trust investments are marketable equity securities
      carried at their market value of approximately $199 million and $188 million
      as
      of June 30, 2005 and December 31, 2004, respectively. A hypothetical
      10% decrease in prices quoted by stock exchanges would result in a $20 million
      reduction in fair value as of June 30, 2005. Changes in the fair value
      of
      these investments are recorded in OCI unless recognized as a result of
      sales.





**Outlook**





The
      electric
      industry continues to transition to a more competitive environment and all
      of
      TE's customers can select alternative energy suppliers. TE continues to deliver
      power to residential homes and businesses through its existing distribution
      system, which remains regulated. Customer rates have been restructured into
      separate components to support customer choice. TE has a continuing
      responsibility to provide power to those customers not choosing to receive
      power
      from an alternative energy supplier subject to certain limits. Adopting new
      approaches to regulation and experiencing new forms of competition have created
      new uncertainties.





**FirstEnergy
      Intra-System Generation Asset Transfers**




On
      May 18,
      2005, OE, CEI and TE, entered into the agreements described below (Agreements)
      implementing a series of intra-system generation asset transfers. When
      concluded, the asset transfers will result in the respective undivided ownership
      interests of the Ohio Companies in FirstEnergy’s nuclear, fossil and
      hydroelectric plants being owned by NGC, and FGCO, respectively. The generating
      plant interests that are being transferred do not include leasehold interests
      of
      CEI, TE and OE in plants that are currently subject to sale and leaseback
      arrangements with non-affiliates.






99




These
      transactions
      are being undertaken in connection with the Ohio Companies’ restructuring plans
      that were approved by the PUCO under applicable Ohio electric utility
      restructuring legislation. Consistent with the restructuring plans, generation
      assets that had been owned by the Ohio Companies were required to be separated
      from the regulated delivery business of those companies through transfer to
      a
      separate corporate entity. FENOC, a subsidiary of FirstEnergy, currently
      operates and maintains the nuclear generation assets to be transferred. FGCO,
      as
      lessee under a master facility lease, leases the non-nuclear generation assets
      to be transferred and operates and maintains those assets. The transactions
      will
      essentially complete the divestitures contemplated by the restructuring plans
      by
      transferring the ownership interests to NGC and FGCO, respectively, without
      impacting the operation of the plants.





As
      contemplated by
      the Agreements, TE intends to transfer its interests in the nuclear generation
      assets to NGC through a sale at net book value. FGCO intends to exercise a
      purchase option under the Master Lease to acquire TE’s non-nuclear generation
      assets at the values approved in the Ohio Transition case.





Consummation
      of the
      transactions contemplated by each of the Agreements is subject to receipt of
      all
      necessary regulatory authorizations and other consents and approvals.
      FirstEnergy currently expects to complete the various asset transfers in the
      second half of 2005.





***Regulatory
      Matters***





In
      2001, Ohio
      customer rates were restructured to establish separate charges for transmission,
      distribution, transition cost recovery and a generation-related component.
      When
      one of TE's customers elects to obtain power from an alternative supplier,
      TE
      reduces the customer's bill with a "generation shopping credit," based on the
      generation component plus an incentive, and the customer receives a generation
      charge from the alternative supplier. TE has continuing PLR responsibility
      to
      its franchise customers through December 31, 2008 unless the PUCO accepts
      future competitive bid results prior to the end of that period under the revised
      Rate Stabilization Plan.





As
      part of TE's
      transition plan, it is obligated to supply electricity to customers who do
      not
      choose an alternative supplier. TE is also required to provide 160 MW of low
      cost supply (MSG) to unaffiliated alternative suppliers who serve customers
      within its service area. FES acts as an alternate supplier for a portion of
      the
      load in TE's franchise area.





TE's
      Rate
      Stabilization Plan extends current generation prices through 2008, ensuring
      adequate generation supply at stabilized prices, and continues TE's support
      of
      energy efficiency and economic development efforts. On October 1 and
      October 4, 2004, the OCC and NOAC, respectively, filed appeals with
      the
      Supreme Court of Ohio to overturn the June 9, 2004 PUCO order and
      associated entries on rehearing. Other key components of the revised Rate
      Stabilization Plan include the following:





·
            Amortization
                period for transition costs being recovered through the RTC extends
                to as
                late as mid-2008;





·
            Deferral
                of
                interest costs on the accumulated customer shopping incentives as
                new
                regulatory assets; and





·
            Ability
                to
                request increases in generation charges during 2006 through 2008,
                under
                certain limited conditions, for increases in fuel costs and
                taxes.





On
      May 27,
      2005, TE filed an application with the PUCO to establish a generation rate
      adjustment rider under its Rate Stabilization Plan. The application seeks to
      implement recovery of increased fuel costs from 2006 through 2008 applicable
      to
      TE’s retail customers through a tariff rider to be implemented January 1,
      2006. The application reflects projected increases in fuel costs in 2006
      compared to 2002 baseline costs. The new rider is seeking to recover all costs
      above the baseline. Various parties including the OCC have intervened in this
      case. TE has received discovery requests from the OCC and the PUCO staff. A
      procedural schedule has been established by the PUCO, with a hearing scheduled
      for October 4, 2005.





On
      December 9,
      2004, the PUCO rejected the auction price results from a required competitive
      bid process and issued an entry stating that the pricing under the approved
      Rate
      Stabilization Plan will take effect on January 1, 2006. The PUCO may
      require the Ohio Companies to undertake, no more often than annually, a similar
      competitive bid process to secure generation for the years 2007 and 2008. On
      July 22, 2005, FirstEnergy filed a competitive bid process for the period
      beginning in 2007 that is similar to the competitive bid process approved by
      the
      PUCO for the Ohio Companies in 2004. Any acceptance of future competitive bid
      results would terminate the Rate Stabilization Plan pricing, but not the related
      approved accounting, and not until twelve months after the PUCO authorizes
      such
      termination.






100




On
      December 30, 2004, TE filed with the PUCO two applications related to
      the
      recovery of transmission and ancillary service related costs. The first
      application seeks recovery of these costs beginning January 1, 2006. At the
      time
      of filing the application, these costs were estimated to be approximately $0.1
      million per year; however, TE anticipates that this amount will increase. TE
      requested that these costs be recovered through a rider that would be effective
      on January 1, 2006 and adjusted thereafter each July 1. TE reached a
      settlement with OCC, PUCO staff, Industrial Energy Users - Ohio and OPAE. The
      only other party in this proceeding, Dominion Retail, Inc. agreed not to oppose
      the settlement. This settlement, which was filed with the PUCO on July 22,
      2005,
      provides for the rider recovery requested by TE, with carrying charges applied
      in the subsequent year’s rider for any over or under collection while the
      then-current rider is in effect. If the settlement stipulation is approved
      by
      the PUCO, the actual amounts to be recovered through the January 1, 2006 rider
      will be submitted to the PUCO on or before November 1, 2005.





The
      second
      application seeks authority to defer costs associated with transmission and
      ancillary service related costs incurred during the period from October 1,
      2003 through December 31, 2005. On May 18, 2005, the PUCO granted
      the
      accounting authority for TE to defer incremental transmission and ancillary
      service-related charges incurred as a participant in the MISO, but only for
      those costs incurred during the period December 30, 2004, through
      December 31, 2005. Deferral of all costs incurred prior to December
      31,
      2004 was denied. The PUCO also authorized TE to accrue carrying charges on
      the
      deferred balances. An application filed with the PUCO to recover these deferred
      charges over a five-year period through the rider, beginning in 2006, is
      pending. The OCC, OPAE and TE each filed applications for rehearing. TE sought
      authority to defer the transmission and ancillary service related costs incurred
      during the period October 1, 2003 through December 29, 2004, while both
      OCC
      and OPAE sought to have the PUCO deny deferral of all costs. On
      July 6,
      2005, the PUCO denied TE's and OCC’s applications and, at the request of TE,
      struck as untimely OPAE’s application. TE and the OCC have sixty days from that
      date to file a notice of appeal with the Ohio Supreme Court.





TE
      records as
      regulatory assets costs which have been authorized by the PUCO and the FERC
      for
      recovery from customers in future periods and, without such authorization,
      would
      have been charged to income when incurred. TE's regulatory assets as of
      June 30, 2005 and December 31, 2004, were $330 million and $375 million,
      respectively. TE is deferring customer shopping incentives and interest costs
      as
      new regulatory assets in accordance with its transition and rate stabilization
      plans. These regulatory assets total $108 million as of June 30, 2005
      and
      will be recovered through a surcharge rate equal to the RTC rate in effect
      when
      the transition costs have been fully recovered. Recovery of the new regulatory
      assets will begin at that time and amortization of the regulatory assets for
      each accounting period will be equal to the surcharge revenue recognized during
      that period.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Ohio.





***Environmental
      Matters***





TE
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in TE's determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its website, www.firstenergycorp.com .





*National
      Ambient Air Quality Standards*





In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Ohio and Pennsylvania)
      and the District of Columbia based on proposed findings that air emissions
      from
      28 eastern states and the District of Columbia significantly contribute to
      nonattainment of the NAAQS for fine particles and/or the "8-hour" ozone NAAQS
      in
      other states. CAIR will require additional reductions of NO x and SO 2 emissions in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      TE's Ohio and
      Pennsylvania fossil-fuel generation facilities will be subject to the caps
      on
      SO 2 and NO x emissions.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these regulations may be
      substantial and will depend on how they are ultimately implemented by the states
      in which TE operates affected facilities.






101




*Mercury
      Emissions*




In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission caps
      under the EPA's CAIR program. Phase II of the mercury cap-and-trade program
      will
      cap nationwide mercury emissions from coal-fired power plants at 15 tons per
      year by 2018. The future cost of compliance with these regulations may be
      substantial.





*Climate
      Change*





In
      December 1997,
      delegates to the United Nations' climate summit in Japan adopted an agreement,
      the Kyoto Protocol (Protocol), to address global warming by reducing the amount
      of man-made greenhouse gases emitted by developed countries by 5.2% from 1990
      levels between 2008 and 2012. The United States signed the Protocol in 1998
      but
      it failed to receive the two-thirds vote of the United States Senate required
      for ratification. However, the Bush administration has committed the United
      States to a voluntary climate change strategy to reduce domestic greenhouse
      gas
      intensity - the ratio of emissions to economic output - by 18 percent through
      2012.





TE
      cannot currently
      estimate the financial impact of climate change policies, although the potential
      restrictions on CO 2 emissions could
      require significant capital and other expenditures. However, the CO 2 emissions per KWH
      of electricity generated by TE is lower than many regional competitors due
      to
      TE's diversified generation sources which include low or non-CO 2 emitting gas-fired
      and nuclear generators.





*Regulation
      of
      Hazardous Waste*




TE
      has been named a
      PRP at waste disposal sites, which may require cleanup under the Comprehensive
      Environmental Response, Compensation and Liability Act of 1980. Allegations
      of
      disposal of hazardous substances at historical sites and the liability involved
      are often unsubstantiated and subject to dispute; however, federal law provides
      that all PRPs for a particular site are liable on a joint and several basis.
      Therefore, environmental liabilities that are considered probable have been
      recognized on the Consolidated Balance Sheet as of June 30, 2005, based
      on
      estimates of the total costs of cleanup, TE's proportionate responsibility
      for
      such costs and the financial ability of other nonaffiliated entities to pay.
      Included in Current Liabilities are accrued liabilities aggregating
      approximately $0.2 million as of June 30, 2005. TE accrues environmental
      liabilities only when it concludes that it is probable that it has an obligation
      for such costs and can reasonably determine the amount of such costs. Unasserted
      claims are reflected in TE's determination of environmental liabilities and
      are
      accrued in the period that they are both probable and reasonably
      estimable.





See
      Note 13(B) to
      the consolidated financial statements for further details and a complete
      discussion of environmental matters.





***Other
      Legal Proceedings***





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to TE's normal business operations pending against TE and its
      subsidiaries. The most significant are described below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.






102




Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





FENOC
      received a
      subpoena in late 2003 from a grand jury sitting in the United States District
      Court for the Northern District of Ohio, Eastern Division requesting the
      production of certain documents and records relating to the inspection and
      maintenance of the reactor vessel head at the Davis-Besse Nuclear Power Station,
      in which TE has a 48.62% interest. On December 10, 2004, FirstEnergy
      received a letter from the United States Attorney's Office stating that FENOC
      is
      a target of the federal grand jury investigation into alleged false statements
      made to the NRC in the Fall of 2001 in response to NRC Bulletin 2001-01. The
      letter also said that the designation of FENOC as a target indicates that,
      in
      the view of the prosecutors assigned to the matter, it is likely that federal
      charges will be returned against FENOC by the grand jury. On February 10,
      2005, FENOC received an additional subpoena for documents related to root cause
      reports regarding reactor head degradation and the assessment of reactor head
      management issues at Davis-Besse. On May 11,
      2005, FENOC received a subpoena for documents related to outside meetings
      attended by Davis-Besse personnel on corrosion and cracking of control rod
      drive
      mechanisms and additional root cause evaluations.





On
      April 21,
      2005, the NRC issued a NOV and proposed a $5.45 million civil penalty related
      to
      the degradation of the Davis-Besse reactor vessel head described above. On
      July
      8, 2005, FENOC requested an additional 120 days to respond to the NOV. TE has
      accrued the remaining liability for its share of the proposed fine of $1.6
      million during the first quarter of 2005.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries has legal liability
      based on events surrounding Davis-Besse, it could have a material adverse effect
      on FirstEnergy's or any of its subsidiaries' financial condition and results
      of
      operations.





Effective
      July 1, 2005 the NRC oversight panel for Davis-Besse was terminated
      and
      Davis-Besse returned to the standard NRC reactor oversight process. At that
      time, NRC inspections were augmented to include inspections to support the
      NRC's
      Confirmatory Order dated March 8, 2004 that was issued at the time of
      startup and to address an NRC White Finding related to the performance of the
      emergency sirens.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, in which TE has a 19.91% interest (however,
      See Note
      17 regarding FirstEnergy’s pending intra-system generation asset transfers,
      which will include owned portions of the plant) .
      On April 4,
      2005, the NRC held a public forum to discuss FENOC’s performance at the Perry
      Nuclear Power Plant as identified in the NRC's annual assessment letter to
      FENOC. Similar public meetings are held with all nuclear power plant licensees
      following issuance by the NRC of their annual assessments. According to the
      NRC,
      overall the Perry Plant operated "in a manner that preserved public health
      and
      safety" and met all cornerstone objectives although it remained under the
      heightened NRC oversight since August 2004. During the public forum and in
      the
      annual assessment, the NRC indicated that additional inspections will continue
      and that the plant must improve performance to be removed from the
      Multiple/Repetitive Degraded Cornerstone Column of the Action Matrix. On
      May 26, 2005, the NRC held a public meeting to discuss its oversight
      of the
      Perry Plant. While the NRC stated that the plant continued to operate safely,
      the NRC also stated that the overall performance had not substantially improved
      since the heightened inspection was initiated. If performance does not improve,
      the NRC has a range of options under the Reactor Oversight Process from
      increased oversight to possible impact to the plant’s operating authority. As a
      result, these matters could have a material adverse effect on FirstEnergy's
      or
      its subsidiaries' financial condition.






103




On
      October 20,
      2004, FirstEnergy was notified by the SEC that the previously disclosed informal
      inquiry initiated by the SEC's Division of Enforcement in September 2003
      relating to the restatements in August 2003 of previously reported results
      by
      FirstEnergy and TE, and the Davis-Besse extended outage, have become the subject
      of a formal order of investigation. The SEC's formal order of investigation
      also
      encompasses issues raised during the SEC's examination of FirstEnergy and the
      Companies under the PUHCA. Concurrent with this notification, FirstEnergy
      received a subpoena asking for background documents and documents related to
      the
      restatements and Davis-Besse issues. On December 30, 2004, FirstEnergy
      received a subpoena asking for documents relating to issues raised during the
      SEC's PUHCA examination. FirstEnergy has cooperated fully with the informal
      inquiry and will continue to do so with the formal investigation.





If
      it were
      ultimately determined that FirstEnergy or its subsidiaries have legal liability
      or are otherwise made subject to liability based on the above matters, it could
      have a material adverse effect on FirstEnergy's or its subsidiaries' financial
      condition and results of operations.





See
      Note 13(C) to
      the consolidated financial statements for further details and a complete
      discussion of other legal proceedings.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. TE will adopt this Statement effective January
      1,
      2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, TE will adopt this Interpretation
      in
      the fourth quarter of 2005. TE is currently evaluating the effect this
      Interpretation will have on its financial statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by
      the
      issuance of FSP EITF 03-1-1 in September 2004. During the period of delay,
      TE
      continues to evaluate its investments as required by existing authoritative
      guidance.











104





**PENNSYLVANIA
                    POWER COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****STATEMENTS
                    OF INCOME****OPERATING
                    REVENUES**
                
                $
                134,282
                
                $
                134,615
                
                $
                268,766
                
                $
                277,238**OPERATING
                    EXPENSES AND TAXES:**Fuel
                
                
                5,526
                
                
                5,855
                
                
                11,146
                
                
                12,061Purchased
                    power
                
                
                42,726
                
                
                44,095
                
                
                89,706
                
                
                92,603Nuclear
                    operating costs
                
                
                19,765
                
                
                17,180
                
                
                39,713
                
                
                35,803Other
                    operating costs
                
                
                16,743
                
                
                15,474
                
                
                29,511
                
                
                29,159Provision
                    for
                    depreciation
                
                
                3,810
                
                
                3,472
                
                
                7,504
                
                
                6,834Amortization
                    of regulatory assets
                
                
                9,833
                
                
                10,027
                
                
                19,715
                
                
                20,103General
                    taxes
                
                
                6,444
                
                
                4,488
                
                
                12,916
                
                
                11,122Income
                    taxes
                
                
                13,232
                
                
                14,846
                
                
                25,653
                
                
                29,884Total
                    operating expenses and taxes
                
                
                118,079
                
                
                115,437
                
                
                235,864
                
                
                237,569**OPERATING
                    INCOME**
                
                
                16,203
                
                
                19,178
                
                
                32,902
                
                
                39,669**OTHER
                    INCOME (net of income taxes)**
                
                
                819
                
                
                560
                
                
                74
                
                
                1,542**NET
                    INTEREST CHARGES:**Interest
                    expense
                
                
                2,787
                
                
                2,798
                
                
                5,106
                
                
                5,523Allowance
                    for
                    borrowed funds used during construction
                
                
                (1,476
                )
                
                (1,004
                )
                
                (2,843
                )
                
                (1,926
                )Net
                    interest
                    charges
                
                
                1,311
                
                
                1,794
                
                
                2,263
                
                
                3,597**NET
                    INCOME**
                
                
                15,711
                
                
                17,944
                
                
                30,713
                
                
                37,614**PREFERRED
                    STOCK DIVIDEND REQUIREMENTS**
                
                
                738
                
                
                640
                
                
                1,378
                
                
                1,280**EARNINGS
                    ON COMMON STOCK**
                
                $
                14,973
                
                $
                17,304
                
                $
                29,335
                
                $
                36,334**STATEMENTS
                    OF COMPREHENSIVE INCOME****NET
                    INCOME**
                
                $
                15,711
                
                $
                17,944
                
                $
                30,713
                
                $
                37,614**OTHER
                    COMPREHENSIVE INCOME**
                
                
                -
                
                
                -
                
                
                -
                
                
                -**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                15,711
                
                $
                17,944
                
                $
                30,713
                
                $
                37,614The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Power Company are an integral part ofthese
                    statements.
    105
   **PENNSYLVANIA
                    POWER COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                892,826
                
                $
                866,303Less
                    -
                    Accumulated provision for depreciation
                
                
                371,569
                
                
                356,020521,257
                
                
                510,283Construction
                    work in progress -Electric
                    plant
                
                
                122,232
                
                
                104,366Nuclear
                    fuel
                
                
                -
                
                
                3,362122,232
                
                
                107,728643,489
                
                
                618,011**OTHER
                    PROPERTY AND INVESTMENTS:**Nuclear
                    plant
                    decommissioning trusts
                
                
                144,704
                
                
                143,062Long-term
                    notes receivable from associated companies
                
                
                32,795
                
                
                32,985Other
                
                
                526
                
                
                722178,025
                
                
                176,769**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                24
                
                
                38Notes
                    receivable from associated companies
                
                
                448
                
                
                431Receivables
                    -Customers
                    (less accumulated provisions of $966,000 and $888,000,respectively,
                    for uncollectible accounts)
                
                
                46,545
                
                
                44,282Associated
                    companies
                
                
                10,632
                
                
                23,016Other
                
                
                939
                
                
                1,656Materials
                    and
                    supplies, at average cost
                
                
                38,729
                
                
                37,923Prepayments
                    and other
                
                
                17,184
                
                
                8,924114,501
                
                
                116,270**DEFERRED
                    CHARGES**
                
                
                9,915
                
                
                10,106$
                945,930
                
                $
                921,156**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity -Common
                    stock,
                    $30 par value, authorized 6,500,000 shares -6,290,000
                    shares outstanding
                
                $
                188,700
                
                $
                188,700Other
                    paid-in
                    capital
                
                
                65,035
                
                
                64,690Accumulated
                    other comprehensive loss
                
                
                (13,706
                )
                
                (13,706
                )Retained
                    earnings
                
                
                109,030
                
                
                87,695Total
                    common
                    stockholder's equity
                
                
                349,059
                
                
                327,379Preferred
                    stock
                
                
                14,105
                
                
                39,105Long-term
                    debt
                    and other long-term obligations
                
                
                121,167
                
                
                133,887484,331
                
                
                500,371**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                25,774
                
                
                26,524Short-term
                    borrowings -Associated
                    companies
                
                
                25,597
                
                
                11,852Other
                
                
                20,000
                
                
                -Accounts
                    payable -Associated
                    companies
                
                
                25,282
                
                
                46,368Other
                
                
                2,627
                
                
                1,436Accrued
                    taxes
                
                
                26,158
                
                
                14,055Accrued
                    interest
                
                
                1,988
                
                
                1,872Other
                
                
                8,712
                
                
                8,802136,138
                
                
                110,909**NONCURRENT
                    LIABILITIES:**Accumulated
                    deferred income taxes
                
                
                84,400
                
                
                93,418Asset
                    retirement obligation
                
                
                142,872
                
                
                138,284Retirement
                    benefits
                
                
                50,697
                
                
                49,834Regulatory
                    liabilities
                
                
                36,888
                
                
                18,454Other
                
                
                10,604
                
                
                9,886325,461
                
                
                309,876**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                945,930
                
                $
                921,156The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Power Company are an integral part ofthese
                    balance
                    sheets.
    106
  **PENNSYLVANIA
                    POWER COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                15,711
                
                $
                17,944
                
                $
                30,713
                
                $
                37,614Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                3,810
                
                
                3,472
                
                
                7,504
                
                
                6,834Amortization
                    of regulatory assets
                
                
                9,833
                
                
                10,027
                
                
                19,715
                
                
                20,103Nuclear
                    fuel
                    and other amortization
                
                
                4,138
                
                
                4,431
                
                
                8,278
                
                
                8,996Deferred
                    income taxes and investment tax credits, net
                
                
                (2,644
                )
                
                (545
                )
                
                (4,955
                )
                
                (2,351
                )Decrease
                    (increase) in operating assets -Receivables
                
                
                (1,054
                )
                
                19,948
                
                
                10,838
                
                
                19,734Materials
                    and
                    supplies
                
                
                (1,024
                )
                
                (1,221
                )
                
                (806
                )
                
                (2,296
                )Prepayments
                    and other current assets
                
                
                5,221
                
                
                5,192
                
                
                (8,260
                )
                
                (8,141
                )Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                (17,005
                )
                
                (22,368
                )
                
                (19,895
                )
                
                (18,628
                )Accrued
                    taxes
                
                
                683
                
                
                (4,023
                )
                
                12,103
                
                
                4,786Accrued
                    interest
                
                
                374
                
                
                527
                
                
                116
                
                
                (1,429
                )Other
                
                
                (315
                )
                
                1,084
                
                
                463
                
                
                3,941Net
                    cash
                    provided from operating activities
                
                
                17,728
                
                
                34,468
                
                
                55,814
                
                
                69,163**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing
                    -Short-term
                    borrowings, net
                
                
                34,953
                
                
                -
                
                
                33,745
                
                
                22,203Redemptions
                    and Repayments -Preferred
                    stock
                
                
                (37,750
                )
                
                -
                
                
                (37,750
                )
                
                -Long-term
                    debt
                
                
                (810
                )
                
                (487
                )
                
                (810
                )
                
                (42,789
                )Short-term
                    borrowings, net
                
                
                -
                
                
                (6,881
                )
                
                -
                
                
                -Dividend
                    Payments -Common
                    stock
                
                
                -
                
                
                (15,000
                )
                
                (8,000
                )
                
                (23,000
                )Preferred
                    stock
                
                
                (738
                )
                
                (640
                )
                
                (1,378
                )
                
                (1,280
                )Net
                    cash used
                    for financing activities
                
                
                (4,345
                )
                
                (23,008
                )
                
                (14,193
                )
                
                (44,866
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (12,571
                )
                
                (17,412
                )
                
                (41,093
                )
                
                (31,410
                )Contributions
                    to nuclear decommissioning trusts
                
                
                (398
                )
                
                (398
                )
                
                (797
                )
                
                (797
                )Loan
                    repayments from associated companies
                
                
                192
                
                
                6,127
                
                
                173
                
                
                6,011Other
                
                
                (620
                )
                
                221
                
                
                82
                
                
                1,897Net
                    cash used
                    for investing activities
                
                
                (13,397
                )
                
                (11,462
                )
                
                (41,635
                )
                
                (24,299
                )Net
                    decrease
                    in cash and cash equivalents
                
                
                (14
                )
                
                (2
                )
                
                (14
                )
                
                (2
                )Cash
                    and cash
                    equivalents at beginning of period
                
                
                38
                
                
                40
                
                
                38
                
                
                40Cash
                    and cash
                    equivalents at end of period
                
                $
                24
                
                $
                38
                
                $
                24
                
                $
                38The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Power Company are an integral part ofthese
                    statements.
   107







***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of
      Pennsylvania Power Company:





We
      have reviewed
      the accompanying consolidated balance sheet of Pennsylvania Power Company and
      its subsidiary as of June 30, 2005, and the related consolidated statements
      of income and comprehensive income and cash flows for each of the three-month
      and six-month periods ended June 30, 2005 and 2004. These interim financial
      statements are the responsibility of the Company’s management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements) dated March 7, 2005, we expressed
      unqualified opinions thereon. The consolidated financial statements and
      management’s assessment of the effectiveness of internal control over financial
      reporting referred to above are not presented herein. In our opinion, the
      information set forth in the accompanying consolidated balance sheet information
      as of December 31, 2004, is fairly stated in all material respects in
      relation to the consolidated balance sheet from which it has been
      derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005








108





**PENNSYLVANIA
      POWER COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**







Penn
      is a wholly
      owned, electric utility subsidiary of OE. Penn conducts business in western
      Pennsylvania, providing regulated electric distribution services. Penn also
      provides generation services to those customers electing to retain Penn as
      their
      power supplier. Penn provides power directly to wholesale customers under
      previously negotiated contracts. Penn has unbundled the price of electricity
      into its component elements - including generation, transmission, distribution
      and transition charges. Its power supply requirements are provided by FES -
      an
      affiliated company.





**Results
      of Operations**





Earnings
      on common
      stock in the second quarter of 2005 decreased to $15 million from $17 million
      in
      the second quarter of 2004. The lower earnings resulted primarily from increased
      operating expenses and taxes. Earnings on common stock in the first six months
      of 2005 decreased to $29 million from $36 million in the same period of 2004.
      The lower earnings resulted from decreased operating revenues and other income,
      partially offset by lower operating expenses and taxes and lower net interest
      charges.





Operating
      revenues
      decreased by $0.3 million in the second quarter of 2005 compared with the second
      quarter of 2004. The lower revenues primarily resulted from a $9 million
      decrease in wholesale sales to FES due to less nuclear generation available
      for
      sale. Higher retail electric generation revenues of $5 million resulted from
      increased KWH sales to residential and commercial customers, primarily due
      to
      cooler weather in the second quarter of 2005 in Penn's service area. These
      increases were partially offset by a $0.2 million decrease in revenues from
      industrial customers, reflecting lower KWH sales volume (11.7%) due in part
      to a
      30.4% decrease in sales to a steel customer.





A
      $3 million
      increase in distribution throughput revenues was primarily due to higher KWH
      deliveries to residential and commercial customers due to the changes in
      weather. This increase in revenue was partially offset by lower KWH sales and
      unit prices for industrial customers. The changes in unit prices are
      attributable to changes in Penn's CTC rate schedules in April 2005 as a result
      of the annual CTC reconciliation.





Operating
      revenues
      decreased by $8 million, or 3%, in the first six months of 2005 compared with
      the same period of 2004. The lower revenues primarily resulted from an $18
      million decrease in wholesale sales to FES due to less nuclear generation
      available for sale. Retail generation electric revenues increased by $8 million
      in all customer sectors due to higher retail generation KWH sales and higher
      composite unit prices. Industrial revenues increased by $2 million due to higher
      unit prices ($4 million), partially offset by a $2 million decrease due to
      lower
      KWH sales, which reflect in part an 18.6% decrease in sales to a steel
      customer.





In
      the first six
      months of 2005, distribution throughput revenues increased by $0.2 million
      primarily due to higher KWH deliveries to residential and commercial customers,
      partially offset by lower unit prices for commercial and industrial customers.
      Colder weather contributed to the higher KWH deliveries, and the changes in
      unit
      prices are attributable to changes in Penn's CTC rate schedules in April
      2005.





Changes
      in
      kilowatt-hour sales by customer class in the second quarter and first six months
      of 2005 from the corresponding periods of 2004 are summarized in the following
      table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Electric
                Generation:Retail
            
            
            4.5
            %
            
            2.5
            %Wholesale
            
            
            (7.4
            )%
            
            (7.6
            )%**Total
                Electric Generation Sales**
            
            
            **(2.8**
            **)%**
            
            **(3.6**
            **)%**Distribution
                Deliveries:Residential
            
            
            22.6
            %
            
            8.2
            %Commercial
            
            
            11.7
            %
            
            6.5
            %Industrial
            
            
            (11.7
            )%
            
            (5.7
            )%**Total
                Distribution Deliveries**
            
            
            **4.5**
            **%**
            
            **2.5**
            **%**








109




*Operating
      Expenses and Taxes*




Total
      operating
      expenses and taxes increased by $3 million in the second quarter and decreased
      by $2 million in the first six months of 2005 from the same periods last year.
      The following table presents changes from the prior year by expense
      category.


**Three**
              
              **Six****Operating
                  Expenses and Taxes - Changes**
              
              **Months**
              
              **Months*****(In
                  millions)*****Increase
                  (Decrease)**Fuel
                  costs
              
              $
              -
              
              $
              (1
              )Purchased
                  power costs
              
              
              (1
              )
              
              (3
              )Nuclear
                  operating costs
              
              
              3
              
              
              4Other
                  operating costs
              
              
              1
              
              
              -General
                  taxes
              
              
              2
              
              
              2Income
                  taxes
              
              
              (2
              )
              
              (4
              )**Net
                  increase (decrease) in operating expenses and
                  taxes**
              
              $
              3
              
              $
              (2
              )




Lower
      fuel costs in
      the first six months of 2005, compared with the same period of 2004, resulted
      from reduced nuclear generation. Lower purchased power costs in the second
      quarter and first half of 2005 reflected lower unit prices for power. Nuclear
      operating costs increased in both periods of 2005, compared to the corresponding
      periods of 2004, due to a Perry scheduled refueling outage (including an
      unplanned extension) in the first and second quarters of 2005, a Beaver Valley
      Unit 2 scheduled refueling outage in the second quarter of 2005, and the absence
      of nuclear refueling outages in the first half of last year. Other operating
      costs increased in the second quarter of 2005 primarily due to increased
      vegetation management expenses and MISO Day 2 expenses that began in the second
      quarter of 2005. General taxes increased in both periods of 2005 primarily
      because of higher property and gross receipts taxes.





*Other
      Income*





Other
      income (net
      of income taxes) increased slightly in the second quarter of 2005 and decreased
      by $1 million in the first six months of 2005, compared with the same periods
      in
      2004. The decrease in the first half of 2005 was due to liabilities recognized
      in the first quarter of 2005 for a $0.7 million civil penalty and $0.8 million
      for probable future cash contributions toward environmentally beneficial
      projects related to the Sammis Plant settlement (see Outlook - Environmental
      Matters) and the absence of a $1 million gain from the sale of an investment
      in
      the first six months of 2004.





*Net
      Interest
      Charges*





Net
      interest
      charges continued to trend lower, decreasing by $0.5 million in the second
      quarter of 2005 and $1 million in the first six months of 2005 from the
      corresponding periods last year, reflecting redemptions of $35 million in total
      principal amount of debt securities since the second quarter of
      2004.





**Capital
      Resources and Liquidity**





Penn’s
      cash
      requirements for operating expenses, construction expenditures, scheduled debt
      maturities and preferred stock redemptions are expected to be met with
      a combination
      of cash from operations and funds from the capital markets. Available
      borrowing capacity under credit facilities will be used to manage working
      capital requirements.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005, Penn had $24,000 of cash and cash equivalents, compared with $38,000
      as of
      December 31, 2004. The major sources of changes in these balances are
      summarized below.








110




*Cash
      Flows From
      Operating Activities*





Net
      cash provided
      from operating activities in the second quarter and first six months of 2005,
      compared with the corresponding 2004 periods, was as follows:





**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****Operating
                  Cash Flows**
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004*****(In
                  millions)***Cash
                  earnings(*)
              
              $
              32
              
              $
              36
              
              $
              62
              
              $
              74Working
                  capital and other
              
              
              (14
              )
              
              (2
              )
              
              (6
              )
              
              (5
              )Total
                  cash
                  flows form operating activities
              
              $
              18
              
              $
              34
              
              $
              56
              
              $
              69(*)Cash
                  earnings is a non-GAAP measure (see reconciliation below).


Cash
      earnings (in
      the table above) are not a measure of performance calculated in accordance
      with
      GAAP. Penn believes that cash earnings is a useful financial measure because
      it
      provides investors and management with an additional means of evaluating its
      cash-based operating performance. The following table reconciles cash earnings
      with net income.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            16
            
            $
            18
            
            $
            31
            
            $
            38Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            4
            
            
            3
            
            
            8
            
            
            7Amortization
                of regulatory assets
            
            
            10
            
            
            10
            
            
            20
            
            
            20Nuclear
                fuel
                and other amortization
            
            
            4
            
            
            4
            
            
            8
            
            
            9Deferred
                income taxes and investment tax credits, net
            
            
            (3
            )
            
            -
            
            
            (5
            )
            
            (2
            )Other
                non-cash items
            
            
            1
            
            
            1
            
            
            -
            
            
            2Cash
                earnings
                (Non-GAAP)
            
            $
            32
            
            $
            36
            
            $
            62
            
            $
            74




The
      $4 million and
      $12 million decreases in cash earnings in the second quarter and six-month
      period, respectively, are described under "Results of Operations." The $12
      million working capital change in the second quarter was primarily due to a
      $21
      million change in receivables, partially offset by changes of $5 million in
      accounts payable and $5 million in accrued taxes. The $1 million working capital
      change in the six month period was primarily due to a $9 million change in
      receivables, almost entirely offset by changes of $1 million in accounts payable
      and $7 million in accrued taxes.





*Cash
      Flows From
      Financing Activities*





Net
      cash used for
      financing activities totaled $4 million in the second quarter of 2005, compared
      with $23 million in the same period last year. The $19 million decrease resulted
      primarily from an increase in net short-term borrowings, higher optional
      redemptions of preferred stock and reduced common stock dividends to OE in
      the
      second quarter of 2005, compared with the second quarter of 2004.





On
      May 16,
      2005, Penn redeemed all 127,500 outstanding shares of 7.625% preferred stock
      at
      $102.29 per share and all 250,000 outstanding shares of 7.75% preferred stock
      at
      $100 per share, both plus accrued dividends to the date of redemption. The
      total
      par value of the preferred stock redeemed was $37.8 million.





Net
      cash used for
      financing activities totaled $14 million in the first six months of 2005,
      compared with $45 million in the same period last year. The $31 million decrease
      resulted primarily from increased short-term borrowings and optional redemptions
      of preferred stock, reduced debt redemptions and a decrease in common stock
      dividends to OE in the first six months of 2005, compared with the corresponding
      2004 period.





Penn
      had $472,000
      of cash and temporary investments (which included short-term notes receivable
      from associated companies) and $46 million of short-term indebtedness as of
      June
      30, 2005. Penn has authorization from the SEC to incur short-term debt up to
      its
      charter limit of $49 million (including the utility money pool). Penn had the
      capability to issue $498 million of additional FMB on the basis of property
      additions and retired bonds as of June 30, 2005. Based upon applicable
      earnings coverage tests, Penn could issue up to $373 million of preferred stock
      (assuming no additional debt was issued) as of June 30, 2005.






111




On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. Penn's
      borrowing limit under the facility is $50 million.





Penn
      has the
      ability to borrow from its regulated affiliates and FirstEnergy to meet its
      short-term working capital requirements. FESC administers this money pool and
      tracks surplus funds of FirstEnergy and its regulated subsidiaries. Companies
      receiving a loan under the money pool agreements must repay the principal amount
      of such a loan, together with accrued interest, within 364 days of borrowing
      the
      funds. The rate of interest is the same for each company receiving a loan from
      the pool and is based on the average cost of funds available through the pool.
      The average interest rate for borrowings under these arrangements in the second
      quarter of 2005 was 2.93%.





In
      addition, Penn
      Power Funding LLC (Penn Funding), a wholly owned subsidiary of Penn, is a
      limited liability company whose borrowings are secured by customer accounts
      receivable purchased from Penn. Penn Funding can borrow up to $25 million under
      a receivables financing arrangement. As a separate legal entity with separate
      creditors, Penn Funding would have to satisfy its obligations to creditors
      before any of its remaining assets could be made available to Penn. As of
      June 30, 2005, the facility was drawn for $20 million. On July 15,
      2005, the facility was renewed until June 29, 2006. The annual facility fee
      is
      0.25% on the entire finance limit.





Penn’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and the securities of OE and FirstEnergy. The ratings outlook on
      all
      securities is positive.





On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy and
      its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and its nuclear operations further stabilize.





On
      July 18,
      2005, Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s outlook
      resulted from steady financial improvement and steps taken by management to
      improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in their outlook recognized
      management’s regional strategy of focusing on its core utility businesses and
      the improvement in FirstEnergy’s credit profile stemming from the application of
      free cash flow toward debt reduction. Moody’s noted that a ratings upgrade could
      be considered if FirstEnergy continues to achieve planned improvements in its
      operations and balance sheet.





*Cash
      Flows From
      Investing Activities*





Net
      cash used in
      investing activities totaled $13 million in the second quarter of 2005, compared
      with $11 million in the second quarter of 2004. The $2 million increase reflects
      a decrease in loan repayments from associated companies, partially offset by
      a
      decrease in property additions. Net cash used in investing activities totaled
      $42 million in the first six months of 2005, compared with $24 million in the
      same period last year. The $18 million increase was primarily a result of
      increased property additions and reduced loan repayments from associated
      companies.





During
      the second
      half of 2005, capital requirements for property additions are expected to be
      about $54 million, including $10 million for nuclear fuel. Penn expects to
      contribute up to $65 million (unfunded liability recognized as of June 30,
      2005)
      for nuclear decommissioning in connection with the generation asset transfers
      described below, and has additional requirements of $0.5 million to meet sinking
      fund requirements for long-term debt during the remainder of 2005. These cash
      requirements are expected to be satisfied from internal cash and short-term
      credit arrangements.





Penn’s
      capital
      spending for the period 2005-2007 is expected to be about $227 million
      (excluding nuclear fuel), of which approximately $81 million applies to 2005.
      Investments for additional nuclear fuel during the 2005-2007 period are
      estimated to be approximately $66 million, of which about $15 million relates
      to
      2005. During the same periods, Penn’s nuclear fuel investments are expected to
      be reduced by approximately $53 million and $17 million, respectively, as the
      nuclear fuel is consumed. After completion of the asset transfers described
      further below, Penn’s future capital requirements are expected to be
      substantially reduced and the nuclear fuel obligations would be terminated.
      Penn
      had no other material obligations as of June 30, 2005 that have not
      been
      recognized on its Consolidated Balance Sheet.





On July 22, 2005, the Philadelphia Stock Exchange filed an application
      with the SEC for termination of the listing of the following three series of
      Penn’s cumulative preferred stock, $100 par value, as such series no longer met
      the Exchange’s technical listing requirements regarding the number of
      outstanding shares and the number of holders: 4.24% Series, 4.25% Series and
      4.64% Series. The Exchange requested an effective date of August 12,
      2005.






112




**Equity
      Price Risk**





Included
      in Penn’s
      nuclear decommissioning trust investments are marketable equity securities
      carried at their market value of approximately $57 million as of both dates,
      June 30, 2005 and December 31, 2004. A hypothetical 10% decrease
      in
      prices quoted by stock exchanges would result in a $6 million reduction in
      fair
      value as of June 30, 2005.





**FirstEnergy
      Intra-System Generation Asset Transfers**




On
      May 13,
      2005, Penn entered into an agreement to transfer its ownership interests in
      its
      nuclear and fossil generating facilities to NGC and FGCO, respectively.  These
      transactions
      are being undertaken in connection with Penn’s restructuring plan that was
      approved by the PPUC under applicable Pennsylvania electric utility
      restructuring legislation. Consistent with the restructuring plan, Penn’s
      generation assets were required to be separated from the regulated delivery
      business through transfers to a separate corporate entity. FENOC, a subsidiary
      of FirstEnergy, currently operates and maintains the nuclear generation assets
      to be transferred. FGCO, as lessee under a master facility lease, leases the
      non-nuclear generation assets to be transferred and operates and maintains
      those
      assets. The transactions will essentially complete the divestitures contemplated
      by the restructuring plans by transferring the ownership interests to NGC and
      FGCO, respectively, without impacting the operation of the plants.





Penn
      intends to
      transfer its interests in the nuclear generation assets to NGC through a
      spin-off by way of a dividend. FGCO intends to exercise a purchase option under
      the Master Lease to acquire Penn’s fossil generation assets. Consummation of the
      transactions is subject to receipt of all necessary regulatory authorizations
      and other consents and approvals. Penn expects to complete the asset transfers
      in the second half of 2005.





**Regulatory
      Matters**




Regulatory
      assets
      and liabilities are costs which have been authorized by the PPUC and the FERC
      for recovery from or credit to customers in future periods and, without such
      authorization, would have been charged or credited to income when incurred.
      Penn's net regulatory liabilities were approximately $37 million and $18 million
      as of June 30, 2005 and December 31, 2004, respectively, and
      are
      included in Noncurrent Liabilities on the Consolidated Balance
      Sheets.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Pennsylvania, including a more detailed discussion
      of
      reliability initiatives.





**Environmental
      Matters**





Penn
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in Penn’s determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





*National
      Ambient Air Quality Standards*





In
      July 1997, the
      EPA promulgated changes in the NAAQS for ozone and proposed a new NAAQS for
      fine
      particulate matter. On March 10, 2005, the EPA finalized the "Clean
      Air
      Interstate Rule" covering a total of 28 states (including Ohio and Pennsylvania)
      and the District of Columbia based on proposed findings that air emissions
      from
      28 eastern states and the District of Columbia significantly contribute to
      nonattainment of the NAAQS for fine particles and/or the "8-hour" ozone NAAQS
      in
      other states. CAIR will require additional reductions of NO x and SO 2 emissions
      in two
      phases (Phase I in 2009 for NO x ,
      2010 for
      SO 2 and Phase II in
      2015 for both NO x and SO 2 ).
      Penn's Ohio and
      Pennsylvania fossil-fuel generation facilities will be subject to the caps
      on
      SO 2 and NO x emissions.
      According to the EPA, SO 2 emissions will be
      reduced by 45% (from 2003 levels) by 2010 across the states covered by the
      rule,
      with reductions reaching 73% (from 2003 levels) by 2015, capping SO 2 emissions in
      affected states to just 2.5 million tons annually. NO x emissions will be
      reduced by 53% (from 2003 levels) by 2009 across the states covered by the
      rule,
      with reductions reaching 61% (from 2003 levels) by 2015, achieving a regional
      NO x cap of 1.3 million
      tons annually. The future cost of compliance with these regulations may be
      substantial and will depend on how they are ultimately implemented by the states
      in which Penn operates affected facilities.








113




*Mercury
      Emissions*




In
      December 2000,
      the EPA announced it would proceed with the development of regulations regarding
      hazardous air pollutants from electric power plants, identifying mercury as
      the
      hazardous air pollutant of greatest concern. On March 14, 2005, the
      EPA
      finalized a cap-and-trade program to reduce mercury emissions in two phases
      from
      coal-fired power plants. Initially, mercury emissions will decline by 2010
      as a
      "co-benefit" from implementation of SO 2 and NO x emission caps
      under the EPA's CAIR program. Phase II of the mercury cap-and-trade program
      will
      cap nationwide mercury emissions from coal-fired power plants at 15 tons per
      year by 2018. The future cost of compliance with these regulations may be
      substantial.





*W.
      H. Sammis
      Plant*





In
      1999 and 2000,
      the EPA issued NOV or Compliance Orders to nine utilities covering 44 power
      plants, including the W. H. Sammis Plant, which is owned by OE and Penn. In
      addition, the U.S. Department of Justice (DOJ) filed eight civil complaints
      against various investor-owned utilities, including a complaint against OE
      and
      Penn in the U.S. District Court for the Southern District of Ohio. These cases
      are referred to as New Source Review cases. The NOV and complaint allege
      violations of the Clean Air Act based on operation and maintenance of the W.
      H.
      Sammis Plant dating back to 1984. The complaint requests permanent injunctive
      relief to require the installation of "best available control technology" and
      civil penalties of up to $27,500 per day of violation. On August 7,
      2003,
      the United States District Court for the Southern District of Ohio ruled that
      11
      projects undertaken at the W. H. Sammis Plant between 1984 and 1998 required
      pre-construction permits under the Clean Air Act. On March 18, 2005,
      OE and
      Penn announced that they had reached a settlement with the EPA, the DOJ and
      three states (Connecticut, New Jersey, and New York) that resolved all issues
      related to the W. H. Sammis Plant New Source Review litigation. This settlement
      agreement, which is in the form of a Consent Decree that was approved by the
      Court on July 11, 2005, requires OE and Penn to reduce emissions from the W.
      H.
      Sammis Plant and other plants through the installation of pollution control
      devices requiring capital expenditures currently estimated to be $1.1 billion
      (primarily in the 2008 to 2011 time period). The settlement agreement also
      requires OE and Penn to spend up to $25 million toward environmentally
      beneficial projects, which include wind energy purchase power agreements over
      a
      20-year term. OE and Penn agreed to pay a civil penalty of $8.5 million, of
      which Penn's share is $0.7 million. Results for the first quarter of 2005
      included the $0.7 million penalty payable by Penn and an $0.8 million liability
      for probable future cash contributions toward environmentally beneficial
      projects.





*Climate
      Change*





In
      December 1997,
      delegates to the United Nations' climate summit in Japan adopted an agreement,
      the Kyoto Protocol (Protocol), to address global warming by reducing the amount
      of man-made greenhouse gases emitted by developed countries by 5.2% from 1990
      levels between 2008 and 2012. The United States signed the Protocol in 1998
      but
      it failed to receive the two-thirds vote of the United States Senate required
      for ratification. However, the Bush administration has committed the United
      States to a voluntary climate change strategy to reduce domestic greenhouse
      gas
      intensity - the ratio of emissions to economic output - by 18 percent through
      2012.





Penn
      cannot
      currently estimate the financial impact of climate change policies, although
      the
      potential restrictions on CO 2 emissions could
      require significant capital and other expenditures. However, the CO 2 emissions per KWH
      of electricity generated by Penn is lower than many regional competitors due
      to
      Penn's diversified generation sources which include low or non-CO 2 emitting gas-fired
      and nuclear generators.





**Other
      Legal Proceedings**





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to Penn's normal business operations pending against Penn. The most
      significant not otherwise discussed above are described below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.






114




One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





On
      August 12,
      2004, the NRC notified FENOC that it would increase its regulatory oversight
      of
      the Perry Nuclear Power Plant as a result of problems with safety system
      equipment over the preceding two years. FENOC operates the Perry Nuclear Power
      Plant, in which Penn has a 5.24% interest (however, see Note 17 regarding
      FirstEnergy’s pending intra-system generation asset transfers, which will
      include owned portions of the plant). On April 4, 2005, the NRC held
      a
      public forum to discuss FENOC’s performance at the Perry Nuclear Power Plant as
      identified in the NRC's annual assessment letter to FENOC. Similar public
      meetings are held with all nuclear power plant licensees following issuance
      by
      the NRC of their annual assessments. According to the NRC, overall the Perry
      Plant operated "in a manner that preserved public health and safety" and met
      all
      cornerstone objectives although it remained under the heightened NRC oversight
      since August 2004. During the public forum and in the annual assessment, the
      NRC
      indicated that additional inspections will continue and that the plant must
      improve performance to be removed from the Multiple/Repetitive Degraded
      Cornerstone Column of the Action Matrix. On May 26, 2005, the NRC held
      a
      public meeting to discuss its oversight of the Perry Plant. While the NRC stated
      that the plant continued to operate safely, the NRC also stated that the overall
      performance had not substantially improved since the heightened inspection
      was
      initiated. If performance does not improve, the NRC has a range of options
      under
      the Reactor Oversight Process from increased oversight to possible impact to
      the
      plant’s operating authority. As a result, these matters could have a material
      adverse effect on FirstEnergy's or its subsidiaries' financial
      condition.





See
      Note 13(C) to
      the consolidated financial statements for further details and a complete
      discussion of other legal proceedings.





**New
      Accounting Standards and Interpretations**





*SFAS
      154 -
      "Accounting Changes and Error Corrections - a replacement of APB Opinion No.
      20
      and FASB Statement No. 3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Penn will adopt this Statement effective January
      1, 2006.






115




*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, Penn will adopt this Interpretation
      in
      the fourth quarter of 2005. Penn is currently evaluating the effect this
      Interpretation will have on its financial statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, Penn continues
      to
      evaluate its investments as required by existing authoritative
      guidance.











116





**JERSEY
                    CENTRAL POWER & LIGHT COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****STATEMENTS
                    OF INCOME****OPERATING
                    REVENUES**
                
                $
                595,291
                
                $
                549,665
                
                $
                1,124,383
                
                $
                1,047,789**OPERATING
                    EXPENSES AND TAXES:**Purchased
                    power
                
                
                321,393
                
                
                285,742
                
                
                598,525
                
                
                556,475Other
                    operating costs
                
                
                80,239
                
                
                80,844
                
                
                181,306
                
                
                167,660Provision
                    for
                    depreciation
                
                
                19,856
                
                
                19,093
                
                
                40,062
                
                
                38,168Amortization
                    of regulatory assets
                
                
                70,250
                
                
                67,949
                
                
                138,624
                
                
                132,434Deferral
                    of
                    new regulatory assets
                
                
                (27,765
                )
                
                -
                
                
                (27,765
                )
                
                -General
                    taxes
                
                
                14,824
                
                
                14,738
                
                
                30,264
                
                
                30,670Income
                    taxes
                
                
                42,366
                
                
                26,343
                
                
                54,849
                
                
                35,456Total
                    operating expenses and taxes
                
                
                521,163
                
                
                494,709
                
                
                1,015,865
                
                
                960,863**OPERATING
                    INCOME**
                
                
                74,128
                
                
                54,956
                
                
                108,518
                
                
                86,926**OTHER
                    INCOME (net of income taxes)**
                
                
                273
                
                
                1,104
                
                
                317
                
                
                2,607**NET
                    INTEREST CHARGES:**Interest
                    on
                    long-term debt
                
                
                19,276
                
                
                19,803
                
                
                38,681
                
                
                40,531Allowance
                    for
                    borrowed funds used during construction
                
                
                (437
                )
                
                (151
                )
                
                (840
                )
                
                (271
                )Deferred
                    interest
                
                
                (916
                )
                
                (891
                )
                
                (1,827
                )
                
                (1,814
                )Other
                    interest expense
                
                
                1,155
                
                
                463
                
                
                2,979
                
                
                853Net
                    interest
                    charges
                
                
                19,078
                
                
                19,224
                
                
                38,993
                
                
                39,299**NET
                    INCOME**
                
                
                55,323
                
                
                36,836
                
                
                69,842
                
                
                50,234**PREFERRED
                    STOCK DIVIDEND REQUIREMENTS**
                
                
                125
                
                
                125
                
                
                250
                
                
                250**EARNINGS
                    ON COMMON STOCK**
                
                $
                55,198
                
                $
                36,711
                
                $
                69,592
                
                $
                49,984**STATEMENTS
                    OF COMPREHENSIVE INCOME****NET
                    INCOME**
                
                $
                55,323
                
                $
                36,836
                
                $
                69,842
                
                $
                50,234**OTHER
                    COMPREHENSIVE INCOME:**Unrealized
                    gain on derivative hedges
                
                
                36
                
                
                59
                
                
                105
                
                
                44Unrealized
                    loss on available for sale securities
                
                
                -
                
                
                -
                
                
                -
                
                
                (8
                )Other
                    comprehensive income
                
                
                36
                
                
                59
                
                
                105
                
                
                36Income
                    tax
                    related to other comprehensive income
                
                
                (15
                )
                
                -
                
                
                (43
                )
                
                4Other
                    comprehensive income, net of tax
                
                
                21
                
                
                59
                
                
                62
                
                
                40**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                55,344
                
                $
                36,895
                
                $
                69,904
                
                $
                50,274The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Jersey
                    Central Power & Light Company are anintegral
                    part
                    of these statements.
   117
   **JERSEY
                    CENTRAL POWER & LIGHT COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                3,803,593
                
                $
                3,730,767Less
                    -
                    Accumulated provision for depreciation
                
                
                1,409,221
                
                
                1,380,7752,394,372
                
                
                2,349,992Construction
                    work in progress
                
                
                76,134
                
                
                75,0122,470,506
                
                
                2,425,004**OTHER
                    PROPERTY AND INVESTMENTS:**Nuclear
                    plant
                    decommissioning trusts
                
                
                139,831
                
                
                138,205Nuclear
                    fuel
                    disposal trust
                
                
                163,074
                
                
                159,696Long-term
                    notes receivable from associated companies
                
                
                19,767
                
                
                20,436Other
                
                
                16,459
                
                
                19,379339,131
                
                
                337,716**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                412
                
                
                162Receivables
                    -Customers
                    (less accumulated provisions of $3,101,000 and $3,881,000,respectively,
                    for uncollectible accounts)
                
                
                273,361
                
                
                201,415Associated
                    companies
                
                
                4,387
                
                
                86,531Other
                    (less
                    accumulated provisions of $241,000 and $162,000,respectively,
                    for uncollectible accounts)
                
                
                35,824
                
                
                39,898Materials
                    and
                    supplies, at average cost
                
                
                2,258
                
                
                2,435Prepayments
                    and other
                
                
                98,014
                
                
                31,489414,256
                
                
                361,930**DEFERRED
                    CHARGES:**Regulatory
                    assets
                
                
                2,137,692
                
                
                2,176,520Goodwill
                
                
                1,983,699
                
                
                1,985,036Other
                
                
                3,958
                
                
                4,9784,125,349
                
                
                4,166,534$
                7,349,242
                
                $
                7,291,184**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity -Common
                    stock,
                    $10 par value, authorized 16,000,000 shares -15,371,270
                    shares outstanding
                
                $
                153,713
                
                $
                153,713Other
                    paid-in
                    capital
                
                
                3,014,583
                
                
                3,013,912Accumulated
                    other comprehensive loss
                
                
                (55,472
                )
                
                (55,534
                )Retained
                    earnings
                
                
                72,863
                
                
                43,271Total
                    common
                    stockholder's equity
                
                
                3,185,687
                
                
                3,155,362Preferred
                    stock
                
                
                12,649
                
                
                12,649Long-term
                    debt
                    and other long-term obligations
                
                
                1,022,320
                
                
                1,238,9844,220,656
                
                
                4,406,995**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                166,868
                
                
                16,866Notes
                    payable
                    -Associated
                    companies
                
                
                279,105
                
                
                248,532Accounts
                    payable -Associated
                    companies
                
                
                13,900
                
                
                20,605Other
                
                
                163,524
                
                
                124,733Accrued
                    taxes
                
                
                59,844
                
                
                2,626Accrued
                    interest
                
                
                9,770
                
                
                10,359Other
                
                
                57,661
                
                
                65,130750,672
                
                
                488,851**NONCURRENT
                    LIABILITIES:**Power
                    purchase
                    contract loss liability
                
                
                1,202,184
                
                
                1,268,478Accumulated
                    deferred income taxes
                
                
                691,505
                
                
                645,741Nuclear
                    fuel
                    disposal costs
                
                
                172,207
                
                
                169,884Asset
                    retirement obligation
                
                
                74,869
                
                
                72,655Retirement
                    benefits
                
                
                99,755
                
                
                103,036Other
                
                
                137,394
                
                
                135,5442,377,914
                
                
                2,395,338**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                7,349,242
                
                $
                7,291,184The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Jersey
                    Central Power & Light Company are anintegral
                    part
                    of these balance sheets.
   118
  **JERSEY
                    CENTRAL POWER & LIGHT COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                55,323
                
                $
                36,836
                
                $
                69,842
                
                $
                50,234Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                19,856
                
                
                19,093
                
                
                40,062
                
                
                38,168Amortization
                    of regulatory assets
                
                
                70,250
                
                
                67,949
                
                
                138,624
                
                
                132,434Deferral
                    of
                    new regulatory assets
                
                
                (27,765
                )
                
                -
                
                
                (27,765
                )Deferred
                    purchased power and other costs
                
                
                (52,906
                )
                
                (40,408
                )
                
                (126,265
                )
                
                (78,390
                )Deferred
                    income taxes and investment tax credits, net
                
                
                9,258
                
                
                (19,977
                )
                
                16,426
                
                
                (19,747
                )Accrued
                    retirement benefit obligation
                
                
                1,447
                
                
                2,946
                
                
                (3,281
                )
                
                (8,768
                )Accrued
                    compensation, net
                
                
                (10,161
                )
                
                39
                
                
                (4,748
                )
                
                (816
                )NUG
                    power
                    contract restructuring
                
                
                -
                
                
                52,800
                
                
                -
                
                
                52,800Decrease
                    (increase) in operating assets -Receivables
                
                
                (577
                )
                
                6,405
                
                
                14,271
                
                
                7,843Materials
                    and
                    supplies
                
                
                95
                
                
                (11
                )
                
                177
                
                
                347Prepayments
                    and other current assets
                
                
                (75,775
                )
                
                (64,080
                )
                
                (66,525
                )
                
                (39,704
                )Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                62,477
                
                
                16,294
                
                
                32,087
                
                
                945Accrued
                    taxes
                
                
                18,341
                
                
                14,288
                
                
                57,218
                
                
                63,768Accrued
                    interest
                
                
                (15,308
                )
                
                (16,006
                )
                
                (589
                )
                
                (5,228
                )Other
                
                
                4,731
                
                
                (23,388
                )
                
                17,054
                
                
                (19,064
                )Net
                    cash
                    provided from operating activities
                
                
                59,286
                
                
                52,780
                
                
                156,588
                
                
                174,822**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing-Long-term
                    debt
                
                
                -
                
                
                300,000
                
                
                -
                
                
                300,000Short-term
                    borrowings, net
                
                
                74,310
                
                
                7,552
                
                
                30,572
                
                
                -Redemptions
                    and Repayments-Long-term
                    debt
                
                
                (59,444
                )
                
                (293,477
                )
                
                (63,327
                )
                
                (297,068
                )Short-term
                    borrowings, net
                
                
                -
                
                
                -
                
                
                -
                
                
                (72,192
                )Dividend
                    Payments-Common
                    stock
                
                
                (20,000
                )
                
                (15,000
                )
                
                (40,000
                )
                
                (20,000
                )Preferred
                    stock
                
                
                (125
                )
                
                (125
                )
                
                (250
                )
                
                (250
                )Net
                    cash used
                    for financing activities
                
                
                (5,259
                )
                
                (1,050
                )
                
                (73,005
                )
                
                (89,510
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (54,537
                )
                
                (55,213
                )
                
                (82,661
                )
                
                (83,425
                )Loan
                    repayments from (loans to) associated companies, net
                
                
                1,568
                
                
                645
                
                
                670
                
                
                (411
                )Other
                
                
                (687
                )
                
                2,838
                
                
                (1,342
                )
                
                (1,465
                )Net
                    cash used
                    for investing activities
                
                
                (53,656
                )
                
                (51,730
                )
                
                (83,333
                )
                
                (85,301
                )Net
                    increase
                    in cash and cash equivalents
                
                
                371
                
                
                -
                
                
                250
                
                
                11Cash
                    and cash
                    equivalents at beginning of period
                
                
                41
                
                
                282
                
                
                162
                
                
                271Cash
                    and cash
                    equivalents at end of period
                
                $
                412
                
                $
                282
                
                $
                412
                
                $
                282The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Jersey
                    Central Power & Light Company are an integralpart
                    of these
                    statements.








119





***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of Jersey
      Central


Power
&
      Light
      Company:





We
      have reviewed
      the accompanying consolidated balance sheet of Jersey Central Power & Light
      Company and its subsidiaries as of June 30, 2005, and the related
      consolidated statements of income and comprehensive income and cash flows for
      each of the three-month and six-month periods ended June 30, 2005 and
      2004.
      These interim financial statements are the responsibility of the Company’s
      management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 9
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 6 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005











120





**JERSEY
      CENTRAL POWER & LIGHT COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








JCP&L
      is a
      wholly owned, electric utility subsidiary of FirstEnergy. JCP&L conducts
      business in New Jersey, providing regulated electric transmission and
      distribution services. JCP&L also provides generation services to those
      customers electing to retain JCP&L as their power supplier. JCP&L has
      restructured its electric rates into unbundled service charges and transition
      cost recovery charges. JCP&L continues to deliver power to homes and
      businesses through its existing distribution system.





**Results
      of Operations**





Earnings
      on common
      stock in the second quarter of 2005 increased to $55 million from $37 million
      in
      2004. For the first six months of 2005, earnings on common stock increased
      to
      $70 million compared to $50 million for the same period of 2004. The increase
      in
      earnings for both periods was primarily due to higher operating revenues and
      the
      deferral of a new regulatory asset, partially offset by increases in purchased
      power costs. Other operating costs were also higher in the first six months
      of
      2005 compared to the same period in 2004.




Operating
      revenues
      increased $46 million or 8.3% in the second quarter and $77 million or 7.3%
      in
      the first six months of 2005 compared with the same periods in 2004. The higher
      revenues in both periods were primarily due to increased retail electric
      generation revenues ($33 million for the second quarter and $51 million for
      the
      first six months of 2005) and distribution revenues ($22 million for the second
      quarter and $34 million for the first six months of 2005), partially offset
      by a
      decline in wholesale revenues ($4 million for the second quarter and $8 million
      for the first six months of 2005).





Higher
      retail
      generation revenues in both the second quarter and first six months of 2005
      as
      compared to the previous year resulted from increased KWH sales to residential
      and commercial customers. Revenue from residential customers increased in the
      second quarter and first six months of 2005 by $22 million and $36 million,
      respectively. Commercial generation revenue increased for the same periods
      by
      $12 million and $20 million, respectively. The increases were attributable
      to
      higher KWH sales (residential - 18.2% and commercial - 10.0% in the second
      quarter of 2005; residential - 15.5% and commercial - 9.6% for the first six
      months of 2005) primarily due to lower customer shopping. Generation provided
      by
      alternative suppliers to residential and commercial customers as a percent
      of
      total sales delivered in JCP&L’s service area decreased by 11.1% and 5.4%,
      respectively, in the second quarter of 2005 and 11.6% and 4.5%, respectively,
      in
      the first six months of 2005. Industrial sales decreased by $0.4 million in
      the
      second quarter and $6 million in the first six months of 2005 reflecting the
      effect of 3.4% and 20.3% declines in KWH sales, respectively.





JCP&L's
      BGS
      obligation has been transferred to external parties as a result of an NJBPU
      auction process that extended the termination of JCP&L's BGS obligation
      through May 2006 (see Outlook - Regulatory Matters). Higher unit prices resulted
      from the BGS auction. The increase in total retail generation KWH sales reduced
      energy available for sale in the wholesale market which resulted in lower
      wholesale sales revenues of $4 million in the second quarter of 2005 and $8
      million in the first six months of 2005 as compared to the respective periods
      in
      2004.





Distribution
      revenues increased by $22 million in the second quarter and $34 million in
      the
      first six months of 2005, as compared to the same periods of 2004, due to higher
      composite unit prices, caused in part by the June 1, 2005 rate increase,
      and increased KWH sales to the residential and commercial sectors. The increase
      in distribution revenues from the industrial sector was partially offset by
      decreases in KWH sales.





Operating
      revenues
      also reflected a $2 million payment received in the first six months of 2005
      under a contract provision associated with the prior sale of TMI Unit 1. Under
      the contract, additional payments are received if subsequent energy prices
      rise
      above specified levels and are credited to JCP&L’s customers, resulting in
      no impact to current earnings.








121




Changes
      in
      kilowatt-hour sales by customer class in the second quarter and in the first
      six
      months of 2005 compared to the same periods of 2004 are summarized in the
      following table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Electric
                Generation:Retail
            
            
            13.5
            %
            
            10.9
            %Wholesale
            
            
            (15.0
            )%
            
            (15.2
            )%**Total
                Electric Generation Sales**
            
            
            **6.2**
            **%**
            
            **4.2**
            **%**Distribution
                Deliveries:Residential
            
            
            5.1
            %
            
            2.2
            %Commercial
            
            
            2.5
            %
            
            3.2
            %Industrial
            
            
            (4.2
            )%
            
            (2.2
            )%**Total
                Distribution Deliveries**
            
            
            **2.7**
            **%**
            
            **2.0**
            **%**





*Operating
      Expenses and Taxes*





Total
      operating
      expenses and taxes increased $26 million and $55 million in the second quarter
      and in the first six months of 2005, respectively, as compared to the prior
      year. The following table presents changes from the prior year by expense
      category.





**Three**
            
            **Six****Operating
                Expenses and Taxes - Changes**
            
            **Months**
            
            **Months*****(In
                millions)*****Increase
                (Decrease)**Purchased
                power costs
            
            $
            36
            
            $
            42Other
                operating costs
            
            
            (1
            )
            
            14Provision
                for
                depreciation
            
            
            -
            
            
            2Amortization
                of regulatory assets
            
            
            3
            
            
            6Deferral
                of
                new regulatory assets
            
            
            (28
            )
            
            (28
            )Income
                taxes
            
            
            16
            
            
            19**Net
                increase in operating expenses and taxes**
            
            $
            26
            
            $
            55





As
      the result of
      higher KWH purchases to supply the increased retail generation sales, purchased
      power costs increased by $36 million in the second quarter and $42 million
      in
      the first six months of 2005 as compared to the same periods in 2004. Other
      operating costs decreased $1 million in the second quarter of 2005, but
      increased $14 million in the first six months of 2005 compared to the same
      periods of 2004, reflecting in part the effects of a JCP&L labor strike. The
      JCP&L labor strike, which affected approximately 1,300 employees, began on
      December 8, 2004 and lasted until March 15, 2005.





Deferral
      of new
      regulatory assets decreased expenses by $28 million in both the second quarter
      and the first six months of 2005, reflecting NJBPU’s (see Regulatory Matters)
      approval to defer $28 million of previously incurred reliability expenses.
      Amortization of regulatory assets increased $3 million in the second quarter
      and
      $6 million in the first six months of 2005 due to an increase in the level
      of
      MTC revenue recovery.





**Capital
      Resources and Liquidity**





JCP&L’s
      cash
      requirements in 2005 for operating expenses, construction expenditures and
      scheduled debt maturities are expected to be met with a combination of cash
      from
      operations and funds from the capital markets. Thereafter, JCP&L expects to
      meet its contractual obligations with cash from operations.





***Changes
      in Cash Position***





As
      of June 30,
      2005, JCP&L had $412,000 of cash and cash equivalents compared with $162,000
      as of December 31, 2004. The major sources for changes in these balances
      are summarized below.








122




***Cash
      Flows From Operating Activities***





Cash
      provided from
      operating activities in the second quarter and in the first six months of 2005
      compared with 2004, were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings(*)
            
            $
            65
            
            $
            66
            
            $
            103
            
            $
            113Working
                capital and other
            
            
            (6
            )
            
            (13
            )
            
            54
            
            
            62Total
                cash
                flows from operating activities
            
            $
            59
            
            $
            53
            
            $
            157
            
            $
            175(*)Cash
                earnings is a non-GAAP measure (see reconciliation
                below).




Cash
      earnings (in
      the table above) are not a measure of performance calculated in accordance
      with
      GAAP. JCP&L believes that cash earnings is a useful financial measure
      because it provides investors and management with an additional means of
      evaluating its cash-based operating performance. The following table reconciles
      cash earnings with net income.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings******
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            55
            
            $
            37
            
            $
            70
            
            $
            50Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            20
            
            
            19
            
            
            40
            
            
            38Amortization
                of regulatory assets
            
            
            71
            
            
            68
            
            
            139
            
            
            132Deferral
                of
                new regulatory assets
            
            
            (28
            )
            
            -
            
            
            (28
            )
            
            -Deferred
                purchased power and other costs
            
            
            (53
            )
            
            (40
            )
            
            (126
            )
            
            (78
            )Deferred
                income taxes
            
            
            9
            
            
            (20
            )
            
            16
            
            
            (20
            )Other
                non-cash items
            
            
            (9
            )
            
            2
            
            
            (8
            )
            
            (9
            )Cash
                earnings
                (Non-GAAP)
            
            $
            65
            
            $
            66
            
            $
            103
            
            $
            113





The
      $1 million and
      $10 million decrease in cash earnings for the second quarter and the first
      six
      months of 2005 is described above and under "Results of Operations". The $7
      million increase for the second quarter and the $8 million decrease for the
      first six months of 2005 from working capital primarily resulted from changes
      in
      receivables.





***Cash
      Flows From Financing Activities***





Net
      cash used for
      financing activities was $5 million in the second quarter of 2005 compared
      to $1
      million in the second quarter of 2004. The increase resulted primarily from
      an
      increase in common stock dividends to FirstEnergy. Net cash used for financing
      activities was $73 million for the first six months of 2005 and $90 million
      for
      the same period of 2004. The $17 million reduction resulted from a $37 million
      decrease in net debt redemptions, partially offset by a $20 million increase
      in
      common stock dividends to FirstEnergy. JCP&L retired $63 million of First
      Mortgage Bonds, Medium Term Notes and Secured Transition Bonds in the first
      six
      months of 2005.





JCP&L
      had
      approximately $412,000 of cash and temporary investments and $279 million of
      short-term indebtedness as of June 30, 2005. JCP&L has authorization
      from the SEC to incur short-term debt up to its charter limit of $1.521 billion
      (including the utility money pool). JCP&L will not issue FMB other than as
      collateral for senior notes, since its senior note indentures prohibit (subject
      to certain exceptions) JCP&L from issuing any debt which is senior to the
      senior notes. As of June 30, 2005, JCP&L had the capability to issue
      $597 million of additional senior notes based upon FMB collateral. Based upon
      applicable earnings coverage tests and its charter, JCP&L could issue $866
      million of preferred stock (assuming no additional debt was issued) as of
      June 30, 2005.





On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. JCP&L’s
      borrowing limit under the facility is $425 million.






123




JCP&L
      has the
      ability to borrow from FirstEnergy and its regulated affiliates to meet its
      short-term working capital requirements. FESC administers this money pool and
      tracks surplus funds of FirstEnergy and its regulated subsidiaries. Companies
      receiving a loan under the money pool agreements must repay the principal,
      together with accrued interest, within 364 days of borrowing the funds. The
      rate
      of interest is the same for each company receiving a loan from the pool and
      is
      based on the average cost of funds available through the pool. The average
      interest rate for borrowings was 2.93% in the second quarter of 2005 and 2.79%
      in the first six months of 2005.





JCP&L’s
      access
      to capital markets and costs of financing are dependent on the ratings of its
      securities and the securities of FirstEnergy. The ratings outlook from the
      rating agencies on all such securities is positive.





On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy Corp.
      and its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and as the nuclear operations further stabilize.





On
      July 18, 2005,
      Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s rating
      outlook resulted from steady financial improvement and steps taken by management
      to improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in its outlook recognized management’s
      regional strategy of focusing on its core utility businesses and the improvement
      in FirstEnergy’s credit profile stemming from the application of free cash flow.
      Moody’s noted that a ratings upgrade could be considered if FirstEnergy
      continues to achieve planned improvements in its operations and balance
      sheet.





***Cash
      Flows From Investing Activities***





Net
      cash used for
      investing activities was $54 million in the second quarter and $83 million
      for
      the first six months of 2005 compared to $52 million and $85 million for the
      same periods of 2004. JCP&L’s capital spending for the period 2005-2007 is
      expected to be about $511 million for property additions, of which approximately
      $183 million applies to 2005. During the last two quarters of 2005, capital
      requirements for property additions and improvements are expected to be about
      $100 million.





**Market
      Risk Information**





JCP&L
      uses
      various market risk sensitive instruments, including derivative contracts,
      primarily to manage the risk of price fluctuations. Its Risk Policy Committee,
      comprised of members of senior management, provides general management oversight
      to risk management activities throughout JCP&L. The committee is responsible
      for promoting the effective design and implementation of sound risk management
      programs. The committee also oversees compliance with corporate risk management
      policies and established risk management practices.





*Commodity
      Price
      Risk*





JCP&L
      is
      exposed to market risk primarily due to fluctuations in electricity and natural
      gas prices. To manage the volatility relating to these exposures, it uses a
      variety of non-derivative and derivative instruments, including forward
      contracts, options and futures contracts. The derivatives are used for hedging
      purposes. Most of its non-hedge derivative contracts represent non-trading
      positions that do not qualify for hedge treatment under SFAS 133. As of
      June 30, 2005, JCP&L had commodity derivative contracts with a fair
      value of $14 million. A decrease of $1 million in the value of this asset was
      recorded in the first six months of 2005 as a decrease in a regulatory
      liability, and therefore, had no impact on net income.





The
      valuation of
      derivative contracts is based on observable market information to the extent
      that such information is available. In cases where such information is not
      available, JCP&L relies on model-based information. The model provides
      estimates of future regional prices for electricity and an estimate of related
      price volatility. JCP&L uses these results to develop estimates of fair
      value for financial reporting purposes and for internal management decision
      making. Sources of information for valuation of derivative contracts as of
      June 30, 2005 are summarized by year in the following table:








124





**Sources
                of Information****-****Fair
                Value by Contract Year**
            
            
            
            **2005**(1)
            
            **2006**
            
            **2007**
            
            **2008**
            
            **Thereafter**
            
            **Total**External
                sources(2)
            
            
            
            
            $
            3
            
            $
            2
            
            $
            2
            
            $
            -
            
            $
            -
            
            $
            7Prices
                based
                on models
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            2
            
            
            5
            
            
            7Total
            
            
            
            
            $
            3
            
            $
            2
            
            $
            2
            
            $
            2
            
            $
            5
            
            $
            14(1)For
                the
                last two quarters of 2005.(2)Broker
                quote sheets.





JCP&L
      performs
      sensitivity analyses to estimate its exposure to the market risk of its
      commodity position. A hypothetical 10% adverse shift in quoted market prices
      in
      the near term on derivative instruments would not have had a material effect
      on
      its consolidated financial position or cash flows as of June 30,
      2005.





***Equity
      Price Risk***





Included
      in nuclear
      decommissioning trusts are marketable equity securities carried at their current
      market value of approximately $79 million and $80 million as of June 30,
      2005 and December 31, 2004, respectively. A hypothetical 10% decrease
      in
      prices quoted by stock exchanges would result in an $8 million reduction in
      fair
      value as of June 30, 2005.





**Regulatory
      Matters**




Regulatory
      assets
      are costs which have been authorized by the NJBPU and the FERC for recovery
      from
      customers in future periods and, without such authorization, would have been
      charged to income when incurred. JCP&L's regulatory assets as of
      June 30, 2005 and December 31, 2004 were $2.1 billion and $2.2
      billion, respectively.





The
      2003 NJBPU
      decision on JCP&L's base electric rate proceeding ordered a Phase II
      proceeding in which the NJBPU would review whether JCP&L is in compliance
      with current service reliability and quality standards and determine whether
      the
      expenditures and projects undertaken by JCP&L to increase its system's
      reliability are prudent and reasonable for rate recovery. Depending on its
      assessment of JCP&L's service reliability, the NJBPU could have increased
      JCP&L’s return on equity to 9.75% or decreased it to 9.25%. On
      August 15, 2003 and June 1, 2004, JCP&L filed with the NJBPU an
      interim motion and a supplemental and amended motion for rehearing and
      reconsideration of the 2003 NJBPU decision, respectively. On July 16,
      2004,
      JCP&L filed the Phase II petition and testimony with the NJBPU, requesting
      an increase in base rates of $36 million for the recovery of system reliability
      costs and a 9.75% return on equity. The filing also requested an increase to
      the
      MTC deferred balance recovery of approximately $20 million annually.





On
      May 25,
      2005, the NJBPU approved two stipulated settlement agreements. The first
      stipulation between JCP&L and the NJBPU staff resolves all of the issues
      associated with JCP&L's motion for reconsideration of the 2003 NJBPU order
      (Phase I Order). The second stipulation between JCP&L, the NJBPU staff and
      the Ratepayer Advocate resolves all of the issues associated with JCP&L's
      Phase II proceeding. The
      stipulated
      settlements provide for, among other things, the following:





·
            An
                annual
                increase in distribution revenues of $23 million effective June 1,
                2005, associated with the Phase I Order
                reconsideration;





·
            An
                annual
                increase in distribution revenues of $36 million effective June 1,
                2005, related to JCP&L's Phase II
                Petition;





·
            An
                annual
                reduction in both rates and amortization expense of $8 million, effective
                June 1, 2005, in anticipation of an NJBPU order regarding
                JCP&L's
                request to securitize up to $277 million of its BGS/MTC deferred
                cost
                balance;





·
            An
                increase
                in JCP&L's authorized return on common equity from 9.5% to 9.75%;
                and





·
            A
                commitment
                by JCP&L to maintain a target level of customer service reliability
                with a reduction in JCP&L's authorized return on common equity to its
                previous level of 9.5% after the target is not met for two consecutive
                quarters. The authorized return on common equity would then be restored
                to
                9.75% when the target is met for two consecutive
                quarters.








125




The
      Phase II
      stipulation included an agreement that the distribution revenues increase
      reflects a three-year amortization of JCP&L's service reliability
      improvement costs incurred in 2003-2005. This resulted in the creation of a
      regulatory asset associated with the accelerated reliability costs which were
      expensed in 2003 and 2004. The establishment of the new regulatory asset of
      approximately $28 million resulted in an increase to net income of approximately
      $16 million in the second quarter of 2005.





JCP&L
      sells all
      self-supplied energy (NUGs and owned generation) to the wholesale market with
      offsetting credits to its deferred energy balance with the exception of 300
      MW
      from JCP&L's NUG committed supply currently being used to serve BGS
      customers pursuant to NJBPU order. New BGS tariffs reflecting the results of
      a
      February 2005 auction for the BGS supply became effective June 1, 2005.
      On
      May 5, 2005, the NJBPU issued an order that BGS procurement proposals
      for
      post transition year four be filed by July 1, 2005. The NJBPU requested
      that the filings address transmission rate issues and rate design alternatives.
      JCP&L filed its proposal on July 1, 2005. The next auction is scheduled
      to take place in February 2006 for the supply period beginning June 1,
      2006.





In
      accordance with
      an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
      2004 supporting a continuation of the current level and duration of the funding
      of TMI-2 decommissioning costs by New Jersey customers without a reduction,
      termination or capping of the funding. On September 30, 2004, JCP&L
      filed an updated TMI-2 decommissioning study. This study resulted in an updated
      total decommissioning cost estimate of $729 million (in 2003 dollars) compared
      to the estimated $528 million (in 2003 dollars) from the prior 1995
      decommissioning study. The Ratepayer Advocate filed comments on
      February 28, 2005. On March 18, 2005, JCP&L filed a response to
      those comments. A schedule for further proceedings has not yet been
      set.





As
      a result of
      outages experienced in JCP&L's service area in 2002 and 2003, the NJBPU had
      implemented reviews into JCP&L's service reliability. On March 29,
      2004, the NJBPU adopted a Memorandum of Understanding (MOU) that set out
      specific tasks related to service reliability to be performed by JCP&L and a
      timetable for completion and endorsed JCP&L's ongoing actions to implement
      the MOU. On June 9, 2004, the NJBPU approved a Stipulation that
      incorporates the final report of an SRM who made recommendations on appropriate
      courses of action necessary to ensure system-wide reliability and the Executive
      Summary and Recommendation portions of the final report of a focused audit
      of
      JCP&L's Planning and Operations and Maintenance programs and practices
      (Focused Audit). A Final Order in the Focused Audit docket was issued by the
      NJBPU on July 23, 2004. On February 11, 2005, JCP&L met with the
      Ratepayer Advocate to discuss reliability improvements. JCP&L continues to
      file compliance reports reflecting activities associated with the MOU and
      Stipulation.





On
      January 31,
      2005, certain PJM transmission owners made three filings pursuant to a
      settlement agreement previously approved by the FERC. JCP&L was a party to
      that proceeding and joined in two of the filings. In the first filing, the
      settling transmission owners submitted a filing justifying continuation of
      their
      existing rate design within the PJM RTO. In the second filing, the settling
      transmission owners proposed a revised Schedule 12 to the PJM tariff designed
      to
      harmonize the rate treatment of new and existing transmission facilities.
      Interventions and protests were filed on February 22, 2005. In the third
      filing, Baltimore Gas and Electric Company and Pepco Holdings, Inc. requested
      a
      formula rate for transmission service provided within their respective zones.
      On
      May 31, 2005, the FERC issued an order on these cases. First, it set
      for
      hearing the existing rate design and indicated that it will issue a final order
      within six months. Second, the FERC approved the proposed Schedule 12 rate
      harmonization. Third, the FERC accepted the proposed formula rate, subject
      to
      referral and hearing procedures. On June 30, 2005, the PJM transmission
      owners filed a request for rehearing of the May 31, 2005
      order.





See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in New Jersey.





**Environmental
      Matters**





JCP&L
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in JCP&L’s determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





JCP&L
      has been
      named as a PRP at waste disposal sites, which may require cleanup under the
      Comprehensive Environmental Response, Compensation and Liability Act of 1980.
      Allegations of disposal of hazardous substances at historical sites and the
      liability involved are often unsubstantiated and subject to dispute; however,
      federal law provides that all PRPs for a particular site are liable on a joint
      and several basis. Therefore, environmental liabilities that are considered
      probable have been recognized on the Consolidated Balance Sheet as of
      June 30, 2005, based on estimates of the total costs of cleanup,
      JCP&L's proportionate responsibility for such costs and the financial
      ability of other nonaffiliated entities to pay. In addition, JCP&L has
      accrued liabilities for environmental remediation of former manufactured gas
      plants in New Jersey; those costs are being recovered by JCP&L through a
      non-bypassable SBC. Included in Other Noncurrent Liabilities are accrued
      liabilities aggregating approximately $47 million as of June 30,
      2005.






126




FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





**Other
      Legal Proceedings**





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to normal business operations pending against JCP&L. The most
      significant are described below.




In
      July 1999, the
      Mid-Atlantic States experienced a severe heat wave, which resulted in power
      outages throughout the service territories of many electric utilities, including
      JCP&L's territory. In an investigation into the causes of the outages and
      the reliability of the transmission and distribution systems of all four of
      New
      Jersey’s electric utilities, the NJBPU concluded that there was not a prima
      facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or
      improper service to its customers. Two class action lawsuits (subsequently
      consolidated into a single proceeding) were filed in New Jersey Superior Court
      in July 1999 against JCP&L, GPU and other GPU companies, seeking
      compensatory and punitive damages arising from the July 1999 service
      interruptions in the JCP&L territory.





In
      August 2002, the
      trial court granted partial summary judgment to JCP&L and dismissed the
      plaintiffs' claims for consumer fraud, common law fraud, negligent
      misrepresentation, and strict product liability. In November 2003, the trial
      court granted JCP&L's motion to decertify the class and denied plaintiffs'
      motion to permit into evidence their class-wide damage model indicating damages
      in excess of $50 million. These class decertification and damage rulings were
      appealed to the Appellate Division. The Appellate Division issued a decision
      on
      July 8, 2004, affirming the decertification of the originally certified
      class, but remanding for certification of a class limited to those customers
      directly impacted by the outages of JCP&L transformers in Red Bank, New
      Jersey. On September 8, 2004, the New Jersey Supreme Court denied the
      motions filed by plaintiffs and JCP&L for leave to appeal the decision of
      the Appellate Division. JCP&L has filed a motion for summary judgment.
      FirstEnergy is unable to predict the outcome of these matters and no liability
      has been accrued as of June 30, 2005.




On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of
      June 30, 2005 for any expenditures in excess of those actually incurred
      through that date. FirstEnergy notes, however, that FERC or other applicable
      government agencies and reliability coordinators may take a different view
      as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.





Three
      substantially
      similar actions were filed in various Ohio State courts by plaintiffs seeking
      to
      represent customers who allegedly suffered damages as a result of the
      August 14, 2003 power outages. All three cases were dismissed for lack
      of
      jurisdiction and further appeals were unsuccessful. Two of these cases were
      refiled at the PUCO, one in 2004 and another in 2005. In each, individual
      complainants—three in one case and four in the other—seek damages related to the
      outages and also seek to represent others as part of a class action. FirstEnergy
      has filed responsive pleadings to both cases. The PUCO has dismissed the class
      allegations, stating that its rules of practice do not provide for class action
      complaints. Both cases are otherwise currently pending further proceedings.
      In
      addition to the two cases that were refiled at the PUCO, the Ohio Companies
      were
      named as respondents in a regulatory proceeding that was initiated at the PUCO
      in response to complaints alleging failure to provide reasonable and adequate
      service stemming primarily from the August 14, 2003 power outages.






127




One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. JCP&L will adopt this standard effective
      January 1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      Interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, JCP&L will adopt this
      Interpretation in the fourth quarter of 2005. JCP&L is currently evaluating
      the effect this Interpretation will have on its financial
      statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, JCP&L
      continues to evaluate its investments as required by existing authoritative
      guidance.











128





**METROPOLITAN
                    EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****OPERATING
                    REVENUES**
                
                $
                263,136
                
                $
                242,044
                
                $
                558,917
                
                $
                502,942**OPERATING
                    EXPENSES AND TAXES:**Purchased
                    power
                
                
                131,670
                
                
                131,266
                
                
                281,763
                
                
                274,722Other
                    operating costs
                
                
                52,648
                
                
                47,021
                
                
                111,118
                
                
                80,069Provision
                    for
                    depreciation
                
                
                11,377
                
                
                9,824
                
                
                22,898
                
                
                19,722Amortization
                    of regulatory assets
                
                
                25,286
                
                
                22,949
                
                
                53,907
                
                
                48,446General
                    taxes
                
                
                17,023
                
                
                16,687
                
                
                36,295
                
                
                34,423Income
                    taxes
                
                
                5,133
                
                
                751
                
                
                11,865
                
                
                8,731Total
                    operating expenses and taxes
                
                
                243,137
                
                
                228,498
                
                
                517,846
                
                
                466,113**OPERATING
                    INCOME**
                
                
                19,999
                
                
                13,546
                
                
                41,071
                
                
                36,829**OTHER
                    INCOME (net of income taxes)**
                
                
                6,989
                
                
                6,116
                
                
                13,438
                
                
                11,642**NET
                    INTEREST CHARGES:**Interest
                    on
                    long-term debt
                
                
                9,385
                
                
                12,238
                
                
                18,945
                
                
                22,385Allowance
                    for
                    borrowed funds used during construction
                
                
                (73
                )
                
                (72
                )
                
                (251
                )
                
                (143
                )Other
                    interest expense
                
                
                2,013
                
                
                831
                
                
                3,676
                
                
                1,520Net
                    interest
                    charges
                
                
                11,325
                
                
                12,997
                
                
                22,370
                
                
                23,762**NET
                    INCOME**
                
                
                15,663
                
                
                6,665
                
                
                32,139
                
                
                24,709**OTHER
                    COMPREHENSIVE INCOME (LOSS):**Unrealized
                    gain (loss) on derivative hedges
                
                
                84
                
                
                (6
                )
                
                168
                
                
                (3,266
                )Unrealized
                    loss on available for sale securities
                
                
                -
                
                
                (75
                )
                
                -
                
                
                (53
                )Other
                    comprehensive income (loss)
                
                
                84
                
                
                (81
                )
                
                168
                
                
                (3,319
                )Income
                    tax
                    (benefit) related to other comprehensive income
                
                
                35
                
                
                (37
                )
                
                70
                
                
                (28
                )Other
                    comprehensive income (loss), net of tax
                
                
                49
                
                
                (44
                )
                
                98
                
                
                (3,291
                )**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                15,712
                
                $
                6,621
                
                $
                32,237
                
                $
                21,418The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Metropolitan
                    Edison Company are an integral part ofthese
                    statements.
    129
   **METROPOLITAN
                    EDISON COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                1,814,049
                
                $
                1,800,569Less
                    -
                    Accumulated provision for depreciation
                
                
                704,247
                
                
                709,8951,109,802
                
                
                1,090,674Construction
                    work in progress
                
                
                15,716
                
                
                21,7351,125,518
                
                
                1,112,409**OTHER
                    PROPERTY AND INVESTMENTS:**Nuclear
                    plant
                    decommissioning trusts
                
                
                221,600
                
                
                216,951Long-term
                    notes receivable from associated companies
                
                
                11,053
                
                
                10,453Other
                
                
                29,079
                
                
                34,767261,732
                
                
                262,171**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                120
                
                
                120Notes
                    receivable from associated companies
                
                
                14,830
                
                
                18,769Receivables
                    -Customers
                    (less accumulated provisions of $4,109,000 and $4,578,000,respectively,
                    for uncollectible accounts)
                
                
                125,135
                
                
                119,858Associated
                    companies
                
                
                10,362
                
                
                118,245Other
                
                
                7,889
                
                
                15,493Prepayments
                    and other
                
                
                32,262
                
                
                11,057190,598
                
                
                283,542**DEFERRED
                    CHARGES:**Goodwill
                
                
                867,649
                
                
                869,585Regulatory
                    assets
                
                
                673,366
                
                
                693,133Other
                
                
                24,015
                
                
                24,4381,565,030
                
                
                1,587,156$
                3,142,878
                
                $
                3,245,278**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity -Common
                    stock,
                    without par value, authorized 900,000 shares -859,500
                    shares outstanding
                
                $
                1,290,287
                
                $
                1,289,943Accumulated
                    other comprehensive loss
                
                
                (43,392
                )
                
                (43,490
                )Retained
                    earnings
                
                
                37,106
                
                
                38,966Total
                    common
                    stockholder's equity
                
                
                1,284,001
                
                
                1,285,419Long-term
                    debt and other long-term obligations
                
                
                694,122
                
                
                701,7361,978,123
                
                
                1,987,155**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                -
                
                
                30,435Short-term
                    borrowings -Associated
                    companies
                
                
                34,021
                
                
                80,090Other
                
                
                67,000
                
                
                -Accounts
                    payable -Associated
                    companies
                
                
                32,941
                
                
                88,879Other
                
                
                31,442
                
                
                26,097Accrued
                    taxes
                
                
                6,773
                
                
                11,957Accrued
                    interest
                
                
                10,731
                
                
                11,618Other
                
                
                18,106
                
                
                23,076201,014
                
                
                272,152**NONCURRENT
                    LIABILITIES:**Accumulated
                    deferred income taxes
                
                
                316,005
                
                
                305,389Accumulated
                    deferred investment tax credits
                
                
                10,456
                
                
                10,868Power
                    purchase contract loss liability
                
                
                317,602
                
                
                349,980Nuclear
                    fuel
                    disposal costs
                
                
                38,900
                
                
                38,408Asset
                    retirement obligation
                
                
                137,074
                
                
                132,887Retirement
                    benefits
                
                
                79,014
                
                
                82,218Other
                
                
                64,690
                
                
                66,221963,741
                
                
                985,971**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                3,142,878
                
                $
                3,245,278The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Metropolitan
                    Edison Company are an integralpart
                    of these
                    balance sheets.
   130
  **METROPOLITAN
                    EDISON COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                15,663
                
                $
                6,665
                
                $
                32,139
                
                $
                24,709Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                11,377
                
                
                9,824
                
                
                22,898
                
                
                19,722Amortization
                    of regulatory assets
                
                
                25,286
                
                
                22,949
                
                
                53,907
                
                
                48,446Deferred
                    costs recoverable as regulatory assets
                
                
                (13,571
                )
                
                (13,195
                )
                
                (30,012
                )
                
                (29,987
                )Deferred
                    income taxes and investment tax credits, net
                
                
                (1,887
                )
                
                (7,952
                )
                
                (1,898
                )
                
                (5,519
                )Accrued
                    retirement benefit obligation
                
                
                (1,556
                )
                
                (309
                )
                
                (3,203
                )
                
                765Accrued
                    compensation, net
                
                
                407
                
                
                186
                
                
                (1,316
                )
                
                (448
                )Decrease
                    (increase) in operating assets -Receivables
                
                
                40,498
                
                
                26,775
                
                
                110,210
                
                
                32,542Materials
                    and
                    supplies
                
                
                -
                
                
                18
                
                
                (18
                )
                
                36Prepayments
                    and other current assets
                
                
                12,930
                
                
                7,293
                
                
                (21,187
                )
                
                (29,325
                )Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                (1,002
                )
                
                (12,169
                )
                
                (50,593
                )
                
                (5,321
                )Accrued
                    taxes
                
                
                4,487
                
                
                (4,564
                )
                
                (5,184
                )
                
                (6,110
                )Accrued
                    interest
                
                
                286
                
                
                7,344
                
                
                (887
                )
                
                2,879Other
                
                
                (7,228
                )
                
                6,040
                
                
                (16,362
                )
                
                (2,225
                )Net
                    cash
                    provided from operating activities
                
                
                85,690
                
                
                48,905
                
                
                88,494
                
                
                50,164**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing-Long-term
                    debt
                
                
                -
                
                
                -
                
                
                -
                
                
                247,607Short-term
                    borrowings, net
                
                
                (7,656
                )
                
                -
                
                
                20,931
                
                
                -Redemptions
                    and Repayments-Long-term
                    debt
                
                
                (37,395
                )
                
                (100,000
                )
                
                (37,830
                )
                
                (150,435
                )Short-term
                    borrowings, net
                
                
                -
                
                
                -
                
                
                -
                
                
                (65,335
                )Dividend
                    Payments-Common
                    stock
                
                
                (25,000
                )
                
                (20,000
                )
                
                (34,000
                )
                
                (25,000
                )Net
                    cash
                    provided from (used for) financing activities
                
                
                (70,051
                )
                
                (120,000
                )
                
                (50,899
                )
                
                6,837**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (18,196
                )
                
                (12,381
                )
                
                (34,395
                )
                
                (21,343
                )Contributions
                    to nuclear decommissioning trusts
                
                
                (2,371
                )
                
                (2,371
                )
                
                (4,742
                )
                
                (4,742
                )Loan
                    repayments from (loans to) associated companies, net
                
                
                6,489
                
                
                85,767
                
                
                3,339
                
                
                (31,035
                )Other
                
                
                (1,561
                )
                
                80
                
                
                (1,797
                )
                
                118Net
                    cash
                    provided from (used for) investing activities
                
                
                (15,639
                )
                
                71,095
                
                
                (37,595
                )
                
                (57,002
                )Net
                    change in
                    cash and cash equivalents
                
                
                -
                
                
                -
                
                
                -
                
                
                (1
                )Cash
                    and cash
                    equivalents at beginning of period
                
                
                120
                
                
                120
                
                
                120
                
                
                121Cash
                    and cash
                    equivalents at end of period
                
                $
                120
                
                $
                120
                
                $
                120
                
                $
                120The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Metropolitan
                    Edison Company are an integral part ofthese
                    statements.
   131


***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of
      Metropolitan Edison Company:





We
      have reviewed
      the accompanying consolidated balance sheet of Metropolitan Edison Company
      and
      its subsidiaries as of June 30, 2005, and the related consolidated
      statements of income and comprehensive income and cash flows for each of the
      three-month and six-month periods ended June 30, 2005 and 2004. These
      interim financial statements are the responsibility of the Company’s
      management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 6 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005











132





**METROPOLITAN
      EDISON COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








Met-Ed
      is a wholly
      owned, electric utility subsidiary of FirstEnergy. Met-Ed conducts business
      in
      eastern Pennsylvania, providing regulated electric transmission and distribution
      services. Met-Ed also provides generation service to those customers electing
      to
      retain Met-Ed as their power supplier. Met-Ed has unbundled the price for
      electricity into its component elements - including generation, transmission,
      distribution and transition charges. Met-Ed continues to deliver power to homes
      and businesses through its existing distribution system.





**Results
      of Operations**





Net
      income
      increased to $16 million for the second quarter of 2005 from $7 million in
      the
      second quarter of 2004. For the first six months of 2005, net income increased
      to $32 million from $25 million in the same period of 2004. The increase in
      net
      income for both periods reflects higher operating revenues and other income,
      and
      lower interest charges. Partially offsetting these items for both periods were
      increased operating expenses and taxes as discussed below.





Operating
      revenues
      increased by $21 million, or 8.7%, in the second quarter of 2005 and by $56
      million, or 11.1%, in the first six months of 2005, compared with the same
      periods of 2004. Increases in both periods were due in part to higher retail
      generation electric revenues from all customer sectors ($9 million for the
      quarter and $24 million for the first six months). The increase in retail
      generation KWH sales in both periods of 2005 are mainly attributable to weather
      and lower customer shopping -- primarily in the industrial sector. Shopping
      by
      industrial customers decreased by 10.8% and 14.3% in the second quarter and
      first six months of 2005, respectively. While the higher generation sales in
      the
      second quarter were offset by slightly lower composite unit prices, overall
      higher composite unit prices in the six-month period further contributed to
      the
      increase in generation revenues.





Revenues
      from
      distribution throughput increased by $4 million in the second quarter and by
      $10
      million in the first six months of 2005 compared with the respective prior
      year
      periods. Both increases were due to higher KWH deliveries and higher unit
      prices. Also contributing to the higher operating revenues was an increase
      in
      transmission revenues of $6 million in the second quarter and $16 million in
      the
      first six months of 2005. This increase was due to a change in the power supply
      agreement with FES in the second quarter of 2004. That change also resulted
      in
      higher transmission expenses as discussed further below. Operating revenues
      also
      included a $4 million payment received in the first six months of 2005 under
      a
      contract provision associated with the prior sale of TMI Unit 1. Under the
      contract, additional payments are received if subsequent energy prices rise
      above specific levels and are credited to Met-Ed’s customers, resulting in no
      net impact to current earnings.





Changes
      in
      kilowatt-hour sales by customer class in the second quarter and first six months
      of 2005 compared to the same periods of 2004 are summarized in the following
      table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Retail
                Electric Generation:Residential
            
            
            5.1
            %
            
            3.4
            %Commercial
            
            
            5.6
            %
            
            6.3
            %Industrial
            
            
            13.0
            %
            
            21.8
            %**Total
                Retail Electric Generation Sales**
            
            
            **7.4**
            **%**
            
            **8.8**
            **%**Distribution
                Deliveries:Residential
            
            
            5.0
            %
            
            3.4
            %Commercial
            
            
            4.2
            %
            
            4.8
            %Industrial
            
            
            (1.2
            )%
            
            1.3
            %**Total
                Distribution Deliveries**
            
            
            **2.7**
            **%**
            
            **3.2**
            **%**








133




*Operating
      Expenses and Taxes*





Total
      operating
      expenses and taxes increased by $15 million in the second quarter and by $52
      million in the first six months of 2005 compared with the same periods of 2004.
      The following table presents changes from the prior year by expense
      category:





**Three**
            
            **Six****Operating
                Expenses and Taxes - Increases**
            
            **Months**
            
            **Months*****(In
                millions)***Purchased
                power costs
            
            $
            -
            
            $
            7Other
                operating costs
            
            
            6
            
            
            31Provision
                for
                depreciation
            
            
            2
            
            
            3Amortization
                of regulatory assets
            
            
            2
            
            
            6General
                taxes
            
            
            1
            
            
            2Income
                taxes
            
            
            4
            
            
            3**Net
                increase in operating expenses and taxes**
            
            $
            15
            
            $
            52





Purchased
      power
      costs increased in both second quarter and first six months of 2005 as a result
      of higher two-party power purchases ($27 million in the second quarter and
      $45
      million in the first six months of 2005) and NUG contract purchases ($6 million
      in the second quarter and $8 million in the first six months of 2005), offset
      by
      a reduction in purchased power from FES ($33 million in the second quarter
      and
      $46 million in the first six months of 2005). The net increase in KWH purchases
      for both periods was required to meet higher retail generation
      demand.





Other
      operating
      costs increased in the second quarter and first six months of 2005 primarily
      due
      to higher PJM congestion charges and transmission expenses. The transmission
      expense increase for both periods resulted from the change in the power supply
      agreement with FES as discussed above.





Depreciation
      expense increased in the second quarter and first six months of 2005 due to
      an
      increase in the asset base. Depreciation expense also increased for the first
      six months due to higher estimated costs to decommission the Saxton nuclear
      plant. For both periods of 2005, regulatory asset amortization reflected
      increases associated with the level of CTC revenue recovery, partially offset
      by
      lower amortization related to above market NUG costs as compared to the prior
      year periods.





General
      taxes
      increased $2 million in the first six months of 2005 as the result of higher
      gross receipt taxes.





**Capital
      Resources and Liquidity**





Met-Ed’s
      cash
      requirements in 2005 and thereafter, for operating expenses, construction
      expenditures and scheduled debt maturities are expected to be met with a
      combination of cash from operations and funds from the capital
      markets.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005 and December 31, 2004, Met-Ed had $120,000 of cash and cash
      equivalents.





*Cash
      Flows From
      Operating Activities*





Cash
      provided from
      operating activities in 2005 and 2004 were as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings(*)
            
            $
            36
            
            $
            19
            
            $
            73
            
            $
            58Working
                capital and other
            
            
            50
            
            
            30
            
            
            16
            
            
            (8
            )Total
                cash
                flows form operating activities
            
            $
            86
            
            $
            49
            
            $
            89
            
            $
            50(*)Cash
                earnings is a non-GAAP measure (see reconciliation below).




Cash
      earnings (in
      the table above) is not a measure of performance calculated in accordance with
      GAAP. Met-Ed believes that cash earnings is a useful financial measure because
      it provides investors and management with an additional means of evaluating
      its
      cash-based operating performance. The following table reconciles cash earnings
      with net income.








134






**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            16
            
            $
            7
            
            $
            32
            
            $
            25Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            11
            
            
            10
            
            
            23
            
            
            20Amortization
                of regulatory assets
            
            
            25
            
            
            23
            
            
            54
            
            
            48Deferred
                costs recoverable as regulatory assets
            
            
            (14
            )
            
            (13
            )
            
            (30
            )
            
            (30
            )Deferred
                income taxes and investment tax credits, net
            
            
            (2
            )
            
            (8
            )
            
            (2
            )
            
            (5
            )Other
                non-cash charges
            
            
            -
            
            
            -
            
            
            (4
            )
            
            -Cash
                earnings
                (Non-GAAP)
            
            $
            36
            
            $
            19
            
            $
            73
            
            $
            58




The
      $17 million and
      $15 million increases in cash earnings for the second quarter and first six
      months of 2005, respectively, are described above under "Results of Operations".
      The $20 million increase in working capital in the second quarter of 2005
      primarily resulted from changes of $14 million in accounts receivable, $11
      million in accounts payable, and $9 million in accrued taxes, partially offset
      by a change of $7 million in accrued interest. The $24 million increase in
      working capital for the first six months of 2005 primarily resulted from changes
      of $78 million in accounts receivable, partially offset by changes of $45
      million in accounts payable and $4 million in accrued interest.





*Cash
      Flows From
      Financing Activities*





For
      the second
      quarter of 2005, net cash used for financing activities was $70 million compared
      to $120 million in the second quarter of 2004. The $50 million decrease resulted
      primarily from a reduction in debt redemptions -- $37 million in the second
      quarter of 2005 compared to $100 million in the second quarter of 2004 -
      partially offset by an $8 million increase in repayments on short-term
      borrowings and a $5 million increase in common stock dividends to FirstEnergy.
      For the first six months of 2005, net cash used for financing activities was
      $51
      million compared to $7 million of net cash provided from financing activities
      in
      the same period of 2004. The $58 million change in the six month period
      reflected new financings of $21 million (net short-term borrowings) in the
      first
      six months of 2005 compared to $247 million (long-term debt) in the same period
      of 2004. This change was partially offset by $38 million of debt redemptions
      in
      the first six months of 2005 compared to $216 million of debt redemptions in
      the
      first six months of 2004. In addition, common stock dividends to FirstEnergy
      increased by $9 million in the first six months of 2005.





As
      of June 30,
      2005, Met-Ed had approximately $15 million of cash and temporary investments
      (including short-term notes receivable from associated companies) and $101
      million of short-term borrowings outstanding. Met-Ed has authorization from
      the
      SEC to incur short-term debt up to $250 million (including the utility money
      pool). Under the terms of Met-Ed’s senior note indenture, no more first mortgage
      bonds can be issued as long as the senior bonds are outstanding. Met-Ed had
      no
      restrictions on the issuance of preferred stock.





Met-Ed
      Funding LLC
      (Met-Ed Funding), a wholly owned subsidiary of Met-Ed, is a limited liability
      company whose borrowings are secured by customer accounts receivable purchased
      from Met-Ed. Met-Ed Funding can borrow up to $80 million under a receivables
      financing arrangement. As a separate legal entity with separate creditors,
      Met-Ed Funding would have to satisfy its obligations to creditors before any
      of
      its remaining assets could be made available to Met-Ed. As
      of June 30,
      2005, the facility was drawn for $67 million. On July 15, 2005, the facility
      was
      renewed until June 29, 2006. The annual facility fee is 0.25% on the
      entire
      finance limit.





Met-Ed
      has the
      ability to borrow from its regulated affiliates and FirstEnergy to meet its
      short-term working capital requirements. FESC administers this money pool and
      tracks surplus funds of FirstEnergy and its regulated subsidiaries, as well
      as
      proceeds available from bank borrowings. Companies receiving a loan under the
      money pool agreements must repay the principal amount of such a loan, together
      with accrued interest, within 364 days of borrowing the funds. The rate of
      interest is the same for each company receiving a loan from the pool and is
      based on the average cost of funds available through the pool. The average
      interest rate for borrowings in the second quarter of 2005 was
      2.93%.





On
      June 14, 2005,
      FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI, as
      borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. Met-Ed’s
      borrowing limit under the facility is $250 million.





Met-Ed’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and that of FirstEnergy. The ratings outlook on all securities is
      positive.






135




On
      May 16,
      2005, S&P affirmed its 'BBB-' corporate credit ratings on FirstEnergy Corp.
      and its units and revised its outlook on the companies to positive from stable.
      S&P stated that the rating affirmation and outlook revision reflects the
      successful restart of the three nuclear units from their respective outages
      that
      occurred during the first half of 2005. S&P noted that a subsequent rating
      upgrade could follow if FirstEnergy's financial performance continues to improve
      as projected and as the nuclear operations further stabilize.





On
      July 18,
      2005, Moody’s revised its rating outlook on FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that the revision to FirstEnergy’s rating
      outlook resulted from steady financial improvement and steps taken by management
      to improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the revision in its outlook recognized management’s
      regional strategy of focusing on its core utility businesses and the improvement
      in FirstEnergy’s credit profile stemming from the application of free cash flow.
      Moody’s noted that a ratings upgrade could be considered if FirstEnergy
      continues to achieve planned improvements in its operations and balance
      sheet.





On
      May 1, 2005,
      Met-Ed redeemed all of its outstanding shares of 6.00% Series Pollution Control
      Revenue Bonds at par, plus accrued interest to the date of redemption.





*Cash
      Flows From
      Investing Activities*





In
      the second
      quarter of 2005, net cash used for investing activities totaled $16 million,
      compared to $71 million of net cash provided from investing activities in the
      second quarter of 2004. The change in the second quarter resulted from an $79
      million decrease in loan repayments from associated companies and a $6 million
      increase in property additions. In the first six months of 2005, net cash used
      for investing activities totaled $38 million, compared to $57 million in the
      first six months of 2004. The decrease in the first six months of 2005 resulted
      from a $34 million increase in loan repayments from associated companies,
      partially offset by a $13 million increase in property additions. Expenditures
      for property additions primarily support Met-Ed’s energy delivery
      operations.





Met-Ed's
      capital
      spending for the period 2005 through 2007 is expected to be about $205 million
      for property additions, of which approximately $66 million applies to 2005.
      During the remaining two quarters of 2005, capital requirements for property
      additions are expected to be about $32 million. These cash requirements are
      expected to be satisfied from internal cash and short-term credit arrangements.
      Met-Ed has no additional requirements for maturing long-term debt during the
      remainder of 2005.





**Market
      Risk Information**





Met-Ed
      uses various
      market-risk-sensitive instruments, including derivative contracts, primarily
      to
      manage the risk of price and interest rate fluctuations. FirstEnergy’s Risk
      Policy Committee, comprised of members of senior management, provides general
      management to risk management activities throughout the Company.





*Commodity
      Price
      Risk*





Met-Ed
      is exposed
      to market risk primarily resulting from fluctuating electricity and natural
      gas
      prices. To manage the volatility relating to these exposures, it uses a variety
      of non-derivative and derivative instruments, including options and futures
      contracts. The derivatives are used for hedging purposes. Most of Met-Ed's
      non-hedge derivative contracts represent non-trading positions that do not
      qualify for hedge treatment under SFAS 133. As of June 30, 2005, Met-Ed’s
      commodity derivative contract was an embedded option with a fair value of $27
      million. A decrease of $5 million in the value of this asset was recorded as
      a
      decrease in regulatory liabilities, and therefore, had no impact on net
      income.











136




The
      valuation of
      derivative contracts is based on observable market information to the extent
      that such information is available. In cases where such information is not
      available, Met-Ed relies on model-based information. The model provides
      estimates of future regional prices for electricity and an estimate of related
      price volatility. Met-Ed uses these results to develop estimates of fair value
      for financial reporting purposes and for internal management decision making. Sources
      of
      information for valuation of derivative contracts as of June 30, 2005
      are
      summarized by year in the following table:





**Sources
                of Information -****Fair
                Value by Contract Year**
            
            
            
            **2005**(1)
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **Thereafter**
            
            **Total**Prices
                based
                on external sources(2)
            
            
            
            
            $
            5
            
            $
            6
            
            $
            6
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            17Prices
                based
                on models
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            3
            
            
            3
            
            
            10Total
            
            
            
            
            $
            5
            
            $
            6
            
            $
            6
            
            $
            4
            
            $
            3
            
            $
            3
            
            $
            27(1)For
                the
                last two quarters of 2005.
              (2)Broker
                quote sheets.





Met-Ed
      performs
      sensitivity analyses to estimate its exposure to the market risk of its
      commodity positions. A hypothetical 10% adverse shift (an increase or decrease
      depending on the derivative position) in quoted market prices in the near term
      on derivative instruments would not have had a material effect on its
      consolidated financial position or cash flows as of June 30,
      2005.





*Equity
      Price
      Risk*





Included
      in
      Met-Ed's nuclear decommissioning trust investments are marketable equity
      securities carried at their market value of approximately $134 million as of
      June 30, 2005 and December 31, 2004. A hypothetical 10% decrease
      in
      prices quoted by stock exchanges would result in a $13 million reduction in
      fair
      value as of June 30, 2005.





**Regulatory
      Matters**




Regulatory
      assets
      are costs which have been authorized by the PPUC and the FERC for recovery
      from
      customers in future periods and, without such authorization, would have been
      charged to income when incurred. Met-Ed's regulatory assets as of June 30,
      2005 and December 31, 2004 were $673 million and $693 million,
      respectively.





In
      accordance with
      PPUC directives, Met-Ed and Penelec have been negotiating with interested
      parties in an attempt to resolve the merger savings issues that are the subject
      of remand from the Commonwealth Court. Met-Ed’s and Penelec’s combined portion
      of total merger savings is estimated to be approximately $31.5 million. On
      April 13, 2005, the Commonwealth Court issued an interim order in the
      remand proceeding that the parties should report the status of the negotiations
      to the PPUC with a copy to the ALJ. The parties exchanged settlement proposals
      in May and June 2005 and continue to have settlement discussions.





Met-Ed
      purchases a
      portion of its PLR requirements from FES through a wholesale power sales
      agreement. The PLR sale is automatically extended for each successive calendar
      year unless either party elects to cancel the agreement by November 1
      of
      the preceding year. Under the terms of the wholesale agreement, FES retains
      the
      supply obligation and the supply profit and loss risk, for the portion of power
      supply requirements not self-supplied by Met-Ed under its NUG contracts and
      other power contracts with nonaffiliated third party suppliers. This arrangement
      reduces Met-Ed's exposure to high wholesale power prices by providing power
      at a
      fixed price for its uncommitted PLR energy costs during the term of the
      agreement with FES. Met-Ed is authorized to defer differences between NUG
      contract costs and current market prices.





On
      January 12,
      2005, Met-Ed filed a request with the PPUC for deferral of transmission-related
      costs beginning January 1, 2005, estimated to be approximately $4 million
      per month.





On
      January 31,
      2005, certain PJM transmission owners made three filings pursuant to a
      settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
      Penelec were parties to that proceeding and joined in two of the filings. In
      the
      first filing, the settling transmission owners submitted a filing justifying
      continuation of their existing rate design within the PJM RTO. In the second
      filing, the settling transmission owners proposed a revised Schedule 12 to
      the
      PJM tariff designed to harmonize the rate treatment of new and existing
      transmission facilities. Interventions and protests were filed on
      February 22, 2005. In the third filing, Baltimore Gas and Electric Company
      and Pepco Holdings, Inc. requested a formula rate for transmission service
      provided within their respective zones. On May 31, 2005, the FERC issued
      an
      order on these cases. First, it set for hearing the existing rate design and
      indicated that it will issue a final order within six months. Second, the FERC
      approved the proposed Schedule 12 rate harmonization. Third, the FERC accepted
      the proposed formula rate, subject to referral and hearing procedures. On
      June 30, 2005, the PJM transmission owners filed a request for rehearing
      of
      the May 31, 2005 order.






137




See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Pennsylvania including a more detailed discussion
      of
      reliability initiatives, including actions by the PPUC, that impact
      Met-Ed.





**Environmental
      Matters**





Met-Ed
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in Met-Ed's determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





Met-Ed
      has been
      named a PRP at waste disposal sites, which may require cleanup under the
      Comprehensive Environmental Response, Compensation and Liability Act of 1980.
      Allegations of disposal of hazardous substances at historical sites and the
      liability involved are often unsubstantiated and subject to dispute; however,
      federal law provides that all PRPs for a particular site are liable on a joint
      and several basis. Therefore, environmental liabilities that are considered
      probable have been recognized on the Consolidated Balance Sheet as of
      June 30, 2005, based on estimates of the total costs of cleanup, Met-Ed's
      proportionate responsibility for such costs and the financial ability of other
      nonaffiliated entities to pay. Included in Other Noncurrent Liabilities are
      accrued liabilities aggregating approximately $47,000 as of June 30,
      2005.




FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





**Other
      Legal Proceedings**





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to Met-Ed's normal business operations pending against Met-Ed. The
      most
      significant are described below.




On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.






138




One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Met-Ed will adopt this Statement effective
      January
      1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, Met-Ed will adopt this Interpretation
      in the fourth quarter of 2005. Met-Ed is currently evaluating the effect this
      Interpretation will have on its financial statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, Met-Ed continues
      to evaluate its investments as required by existing authoritative
      guidance.











139





**PENNSYLVANIA
                    ELECTRIC COMPANY****CONSOLIDATED
                    STATEMENTS OF INCOME AND COMPREHENSIVE INCOME****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****OPERATING
                    REVENUES**
                
                $
                262,097
                
                $
                242,202
                
                $
                556,026
                
                $
                498,647**OPERATING
                    EXPENSES AND TAXES:**Purchased
                    power
                
                
                139,292
                
                
                139,452
                
                
                289,549
                
                
                295,828Other
                    operating costs
                
                
                62,794
                
                
                45,980
                
                
                116,607
                
                
                85,888Provision
                    for
                    depreciation
                
                
                12,479
                
                
                11,510
                
                
                24,985
                
                
                22,948Amortization
                    of regulatory assets
                
                
                13,118
                
                
                13,720
                
                
                26,303
                
                
                27,371General
                    taxes
                
                
                16,134
                
                
                16,920
                
                
                34,340
                
                
                33,882Income
                    taxes
                
                
                2,300
                
                
                1,744
                
                
                18,092
                
                
                4,307Total
                    operating expenses and taxes
                
                
                246,117
                
                
                229,326
                
                
                509,876
                
                
                470,224**OPERATING
                    INCOME**
                
                
                15,980
                
                
                12,876
                
                
                46,150
                
                
                28,423**OTHER
                    INCOME (EXPENSE) (net of income taxes)**
                
                
                (316
                )
                
                447
                
                
                420
                
                
                363**NET
                    INTEREST CHARGES:**Interest
                    on
                    long-term debt
                
                
                7,423
                
                
                7,568
                
                
                14,882
                
                
                15,015Allowance
                    for
                    borrowed funds used during construction
                
                
                (264
                )
                
                (62
                )
                
                (389
                )
                
                (132
                )Deferred
                    interest
                
                
                -
                
                
                -
                
                
                -
                
                
                190Other
                    interest expense
                
                
                2,668
                
                
                2,768
                
                
                4,856
                
                
                5,005Net
                    interest
                    charges
                
                
                9,827
                
                
                10,274
                
                
                19,349
                
                
                20,078**NET
                    INCOME**
                
                
                5,837
                
                
                3,049
                
                
                27,221
                
                
                8,708**OTHER
                    COMPREHENSIVE INCOME (LOSS):**Unrealized
                    gain (loss) on derivative hedges
                
                
                16
                
                
                (635
                )
                
                32
                
                
                (635
                )Unrealized
                    loss on available for sale securities
                
                
                (18
                )
                
                (18
                )
                
                (21
                )
                
                (10
                )Other
                    comprehensive income (loss)
                
                
                (2
                )
                
                (653
                )
                
                11
                
                
                (645
                )Income
                    tax
                    benefit related to other comprehensive income
                
                
                6
                
                
                5
                
                
                -
                
                
                2Other
                    comprehensive income (loss), net of tax
                
                
                4
                
                
                (648
                )
                
                11
                
                
                (643
                )**TOTAL
                    COMPREHENSIVE INCOME**
                
                $
                5,841
                
                $
                2,401
                
                $
                27,232
                
                $
                8,065The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Electric Company are an integral part ofthese
                    statements.
    140
   **PENNSYLVANIA
                    ELECTRIC COMPANY****CONSOLIDATED
                    BALANCE SHEETS****(Unaudited)****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004*****(In
                    thousands)*****ASSETS****UTILITY
                    PLANT:**In
                    service
                
                $
                1,979,489
                
                $
                1,981,846Less
                    -
                    Accumulated provision for depreciation
                
                
                763,857
                
                
                776,9041,215,632
                
                
                1,204,942Construction
                    work in progress
                
                
                23,471
                
                
                22,8161,239,103
                
                
                1,227,758**OTHER
                    PROPERTY AND INVESTMENTS:**Nuclear
                    plant
                    decommissioning trusts
                
                
                109,484
                
                
                109,620Non-utility
                    generation trusts
                
                
                96,968
                
                
                95,991Long-term
                    notes receivable from associated companies
                
                
                14,342
                
                
                14,001Other
                
                
                14,719
                
                
                18,746235,513
                
                
                238,358**CURRENT
                    ASSETS:**Cash
                    and cash
                    equivalents
                
                
                35
                
                
                36Notes
                    receivable from associated companies
                
                
                -
                
                
                7,352Receivables
                    -Customers
                    (less accumulated provisions of $4,102,000 and $4,712,000,respectively,
                    for uncollectible accounts)
                
                
                119,927
                
                
                121,112Associated
                    companies
                
                
                23,671
                
                
                97,528Other
                
                
                8,218
                
                
                12,778Prepayments
                    and other
                
                
                29,305
                
                
                7,198181,156
                
                
                246,004**DEFERRED
                    CHARGES:**Goodwill
                
                
                886,559
                
                
                888,011Regulatory
                    assets
                
                
                183,075
                
                
                200,173Other
                
                
                12,486
                
                
                13,4481,082,120
                
                
                1,101,632$
                2,737,892
                
                $
                2,813,752**CAPITALIZATION
                    AND LIABILITIES****CAPITALIZATION:**Common
                    stockholder's equity-Common
                    stock,
                    $20 par value, authorized 5,400,000 shares -5,290,596
                    shares outstanding
                
                $
                105,812
                
                $
                105,812Other
                    paid-in
                    capital
                
                
                1,206,351
                
                
                1,205,948Accumulated
                    other comprehensive loss
                
                
                (52,802
                )
                
                (52,813
                )Retained
                    earnings
                
                
                43,289
                
                
                46,068Total
                    common
                    stockholder's equity
                
                
                1,302,650
                
                
                1,305,015Long-term
                    debt
                    and other long-term obligations
                
                
                478,807
                
                
                481,8711,781,457
                
                
                1,786,886**CURRENT
                    LIABILITIES:**Currently
                    payable long-term debt
                
                
                8,017
                
                
                8,248Short-term
                    borrowings -Associated
                    companies
                
                
                65,888
                
                
                241,496Other
                
                
                139,000
                
                
                -Accounts
                    payable -Associated
                    companies
                
                
                29,825
                
                
                56,154Other
                
                
                31,956
                
                
                25,960Accrued
                    taxes
                
                
                18,727
                
                
                7,999Accrued
                    interest
                
                
                9,661
                
                
                9,695Other
                
                
                18,384
                
                
                23,750321,458
                
                
                373,302**NONCURRENT
                    LIABILITIES:**Power
                    purchase
                    contract loss liability
                
                
                336,696
                
                
                382,548Asset
                    retirement obligation
                
                
                68,537
                
                
                66,443Accumulated
                    deferred income taxes
                
                
                58,327
                
                
                37,318Retirement
                    benefits
                
                
                120,151
                
                
                118,247Other
                
                
                51,266
                
                
                49,008634,977
                
                
                653,564**COMMITMENTS
                    AND CONTINGENCIES (Note 13)**$
                2,737,892
                
                $
                2,813,752The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Electric Company are an integral partof
                    these
                    balance sheets.
   141
  **PENNSYLVANIA
                    ELECTRIC COMPANY****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(Unaudited)****Three
                    Months Ended**
                
                **Six
                    Months Ended****June
                    30,**
                
                **June
                    30,****2005**
                
                **2004**
                
                **2005**
                
                **2004*****(In
                    thousands)*****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                5,837
                
                $
                3,049
                
                $
                27,221
                
                $
                8,708Adjustments
                    to reconcile net income to net cash fromoperating
                    activities -Provision
                    for
                    depreciation
                
                
                12,479
                
                
                11,510
                
                
                24,985
                
                
                22,948Amortization
                    of regulatory assets
                
                
                13,118
                
                
                13,720
                
                
                26,303
                
                
                27,371Deferred
                    costs recoverable as regulatory assets
                
                
                (16,513
                )
                
                (18,511
                )
                
                (35,946
                )
                
                (36,504
                )Deferred
                    income taxes and investment tax credits, net
                
                
                201
                
                
                (23,508
                )
                
                2,647
                
                
                1,734Accrued
                    retirement benefit obligations
                
                
                1,037
                
                
                839
                
                
                1,905
                
                
                3,641Accrued
                    compensation, net
                
                
                244
                
                
                (878
                )
                
                (2,386
                )
                
                1,377Decrease
                    (increase) in operating assets -Receivables
                
                
                40,457
                
                
                65,624
                
                
                79,602
                
                
                53,495Prepayments
                    and other current assets
                
                
                13,012
                
                
                12,104
                
                
                (22,107
                )
                
                (34,950
                )Increase
                    (decrease) in operating liabilities -Accounts
                    payable
                
                
                3,901
                
                
                (4,022
                )
                
                (20,333
                )
                
                (14,760
                )Accrued
                    taxes
                
                
                523
                
                
                (1,091
                )
                
                10,728
                
                
                (7,574
                )Accrued
                    interest
                
                
                (5,615
                )
                
                (5,385
                )
                
                (34
                )
                
                (2,749
                )Other
                
                
                4,582
                
                
                20,635
                
                
                4,365
                
                
                24,289Net
                    cash
                    provided from operating activities
                
                
                73,263
                
                
                74,086
                
                
                96,950
                
                
                47,026**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**New
                    Financing
                    -Long-term
                    debt
                
                
                -
                
                
                -
                
                
                -
                
                
                150,000Short-term
                    borrowings, net
                
                
                -
                
                
                68,962
                
                
                -
                
                
                7,636Redemptions
                    and Repayments -Long-term
                    debt
                
                
                (3,508
                )
                
                (125,108
                )
                
                (3,521
                )
                
                (125,212
                )Short-term
                    borrowings, net
                
                
                (34,805
                )
                
                -
                
                
                (36,608
                )
                
                -Dividend
                    Payments -Common
                    stock
                
                
                (25,000
                )
                
                (5,000
                )
                
                (30,000
                )
                
                (5,000
                )Net
                    cash
                    provided from (used for) financing activities
                
                
                (63,313
                )
                
                (61,146
                )
                
                (70,129
                )
                
                27,424**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Property
                    additions
                
                
                (18,290
                )
                
                (12,042
                )
                
                (33,683
                )
                
                (23,236
                )Non-utility
                    generation trust contribution
                
                
                -
                
                
                -
                
                
                -
                
                
                (50,614
                )Loan
                    repayments from (loans to) associated companies, net
                
                
                10,093
                
                
                51
                
                
                7,011
                
                
                (20
                )Other,
                    net
                
                
                (1,753
                )
                
                (949
                )
                
                (150
                )
                
                (580
                )Net
                    cash used
                    for investing activities
                
                
                (9,950
                )
                
                (12,940
                )
                
                (26,822
                )
                
                (74,450
                )Net
                    change in
                    cash and cash equivalents
                
                
                -
                
                
                -
                
                
                (1
                )
                
                -Cash
                    and cash
                    equivalents at beginning of period
                
                
                35
                
                
                36
                
                
                36
                
                
                36Cash
                    and cash
                    equivalents at end of period
                
                $
                35
                
                $
                36
                
                $
                35
                
                $
                36The
                    preceding
                    Notes to Consolidated Financial Statements as they relate to
                    Pennsylvania
                    Electric Company are an integral part ofthese
                    statements.
   142





***Report
      of Independent Registered Public Accounting Firm***





























To
      the Stockholders
      and Board of


Directors
      of
      Pennsylvania Electric Company:





We
      have reviewed
      the accompanying consolidated balance sheet of Pennsylvania Electric Company
      and
      its subsidiaries as of June 30, 2005, and the related consolidated
      statements of income and comprehensive income and cash flows for each of the
      three-month and six-month periods ended June 30, 2005 and 2004. These
      interim financial statements are the responsibility of the Company’s
      management.





We
      conducted our
      review in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). A review of interim financial information
      consists principally of applying analytical procedures and making inquiries
      of
      persons responsible for financial and accounting matters. It is substantially
      less in scope than an audit conducted in accordance with the standards of the
      Public Company Accounting Oversight Board, the objective of which is the
      expression of an opinion regarding the financial statements taken as a whole.
      Accordingly, we do not express such an opinion.





Based
      on our
      review, we are not aware of any material modifications that should be made
      to
      the accompanying consolidated interim financial statements for them to be in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      previously
      audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet as of
      December 31, 2004, and the related consolidated statements of income,
      capitalization, common stockholder’s equity, preferred stock, cash flows and
      taxes for the year then ended, management’s assessment of the effectiveness of
      the Company’s internal control over financial reporting as of December 31,
      2004 and the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2004; and in our report (which contained
      references to the Company’s change in its method of accounting for asset
      retirement obligations as of January 1, 2003 as discussed in Note 2(G)
      to
      those consolidated financial statements and the Company’s change in its method
      of accounting for the consolidation of variable interest entities as of
      December 31, 2003 as discussed in Note 6 to those consolidated financial
      statements) dated March 7, 2005, we expressed unqualified opinions thereon.
      The consolidated financial statements and management’s assessment of the
      effectiveness of internal control over financial reporting referred to above
      are
      not presented herein. In our opinion, the information set forth in the
      accompanying consolidated balance sheet information as of December 31,
      2004, is fairly stated in all material respects in relation to the consolidated
      balance sheet from which it has been derived.














PricewaterhouseCoopers
      LLP


Cleveland,
      Ohio


July
      29,
      2005








143





**PENNSYLVANIA
      ELECTRIC COMPANY**





**MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF**


**RESULTS
      OF
      OPERATIONS AND FINANCIAL CONDITION**








Penelec
      is a wholly
      owned electric utility subsidiary of FirstEnergy. Penelec conducts business
      in
      northern, western and south central Pennsylvania, providing regulated
      transmission and distribution services. Penelec also provides generation
      services to those customers electing to retain Penelec as their power supplier.
      Penelec has unbundled the price for electricity into its component elements
      -
      including generation, transmission, distribution and transition
      charges.





**Results
      of Operations**





Net
      income in the
      second quarter of 2005 increased to $6 million, compared to $3 million in the
      second quarter of 2004. The increase resulted from higher operating revenues
      that were partially offset by higher operating costs - primarily transmission
      expenses. During the first six months of 2005, net income increased to $27
      million compared to $9 million in the first six months of 2004. The increase
      resulted from higher operating revenues and lower purchased power costs,
      partially offset by higher operating costs and income taxes.





Operating
      revenues
      increased by $20 million in the second quarter of 2005 compared to the second
      quarter of 2004, primarily due to higher transmission revenues. T ransmission
      revenues increased $20 million as a result of a change in the power supply
      agreement with FES in the second quarter of 2004. The change also resulted
      in
      higher transmission expenses as discussed further below.





Operating
      revenues
      increased by $57 million in the first six months of 2005 compared to the first
      six months of 2004, primarily due to higher transmission, retail generation
      and
      distribution revenues. T ransmission
      revenues increased $43 million as a result of the power supply agreement change
      with FES.





Total
      retail sales
      increased $11 million due to higher retail generation revenues of $9 million
      and
      distribution revenues of $2 million, respectively. Retail generation revenues
      increased, principally from increased generation KWH sales to all customer
      sectors (residential - $2 million; industrial - $4 million and commercial -
      $3
      million) reflecting increases in KWH sales of 1.9%, 3.7% and 2.7%, respectively,
      combined with higher unit costs. Industrial KWH sales increased despite a small
      increase in customer shopping. Sales by alternative suppliers as a percent
      of
      total industrial sales delivered in Penelec’s franchise area increased by 0.7%,
      while residential and commercial customer shopping remained constant in the
      first six months of 2005 compared to the same period of 2004.





Distribution
      revenues increased by $2 million in the first six months of 2005 compared to
      the
      same period of 2004, primarily due to higher deliveries in all sectors.
      Residential and commercial revenues increased by $1 million each as a result
      of
      higher KWH deliveries, partially offset by lower composite unit prices.





Changes
      in
      kilowatt-hour sales by customer class in the second quarter and first six months
      of 2005 compared to the respective periods in 2004 are summarized in the
      following table:





**Three**
            
            **Six****Changes
                in KWH Sales**
            
            **Months**
            
            **Months****Increase
                (Decrease)**Distribution
                Deliveries:Residential
            
            
            3.8
            %
            
            1.9
            %Commercial
            
            
            (1.4
            )%
            
            2.7
            %Industrial
            
            
            (8.2
            )%
            
            3.7
            %**Total
                Distribution Deliveries**
            
            
            **(2.5**
            **)%**
            
            **2.8**
            **%**








144




*Operating
      Expenses and Taxes*




Total
      operating
      expenses and taxes increased by $17 million or 7.3% in the second quarter and
      $40 million or 8.4% in the first six months of 2005 compared with the same
      periods in 2004. The following table presents changes from the prior year by
      expense category:





**Three**
            
            **Six****Operating
                Expenses and Taxes - Changes**
            
            **Months**
            
            **Months*****(In
                millions)*****Increase
                (Decrease)**Purchased
                power costs
            
            $
            -
            
            $
            (6
            )Other
                operating costs
            
            
            17
            
            
            31Provision
                for
                depreciation
            
            
            1
            
            
            2Amortization
                of regulatory assets
            
            
            (1
            )
            
            (1
            )General
                taxes
            
            
            (1
            )
            
            -Income
                taxes
            
            
            1
            
            
            14**Net
                increase in operating expenses and taxes**
            
            $
            17
            
            $
            40





Other
      operating
      costs increased by $17 million or 36.5% in the second quarter and $31 million
      or
      35.7% in the first six months of 2005 compared to same periods in 2004. The
      increases in both periods were primarily due to increased transmission expenses
      in 2005 as a result of the change in the power supply agreement with FES as
      discussed above. In addition, there were higher costs of $2 million and $4
      million associated with a low-income customer program in the second quarter
      and
      the first six months of 2005, respectively. Purchased power costs decreased
      by
      $6 million in the first half of 2005 compared to the first half of 2004
      primarily due to lower unit costs, partially offset by increased KWH purchased
      to meet increased retail generation sales requirements. Income taxes increased
      due to higher operating income in the second quarter and first six months of
      2005 compared to the same periods of 2004.





**Capital
      Resources and Liquidity**





Penelec’s
      cash
      requirements for operating expenses, construction expenditures and scheduled
      debt maturities are expected to be met by a combination of cash from operations
      and funds from the capital markets.





*Changes
      in Cash
      Position*





As
      of June 30,
      2005, Penelec had $35,000 of cash and cash equivalents compared with $36,000
      as
      of December 31, 2004. The major sources for changes in these balances
      are
      summarized below.





*Cash
      Flows From
      Operating Activities*





Net
      cash provided
      from operating activities in the second quarter and first six months of 2005,
      compared with the corresponding periods in 2004, are summarized as follows:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Operating
                Cash Flows**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Cash
                earnings(*)
            
            $
            17
            
            $
            (14
            )
            $
            45
            
            $
            29Working
                capital and other
            
            
            56
            
            
            88
            
            
            52
            
            
            18Total
                cash
                flows from operating activities
            
            $
            73
            
            $
            74
            
            $
            97
            
            $
            47


(*) Cash earnings is a
      non-GAAP measure (see reconciliation below).








145




Cash
      earnings (in
      the table above) are not a measure of performance calculated in accordance
      with
      GAAP. Penelec believes that cash earnings is a useful financial measure because
      it provides investors and management with an additional means of evaluating
      its
      cash-based operating performance. The following table reconciles cash earnings
      with net income.





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****Reconciliation
                of Cash Earnings**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004*****(In
                millions)***Net
                income
                (GAAP)
            
            $
            6
            
            $
            3
            
            $
            27
            
            $
            9Non-cash
                charges (credits):Provision
                for
                depreciation
            
            
            13
            
            
            11
            
            
            25
            
            
            23Amortization
                of regulatory assets
            
            
            13
            
            
            14
            
            
            26
            
            
            27Deferred
                costs recoverable as regulatory assets
            
            
            (16
            )
            
            (19
            )
            
            (36
            )
            
            (37
            )Deferred
                income taxes and investment tax credits, net
            
            
            -
            
            
            (23
            )
            
            3
            
            
            2Other
                non-cash items
            
            
            1
            
            
            -
            
            
            -
            
            
            5Cash
                earnings
                (Non-GAAP)
            
            $
            17
            
            $
            (14
            )
            $
            45
            
            $
            29





Net
      cash provided
      from cash earnings increased by $31 million in the second quarter and $16
      million in the first six months of 2005 compared to the same periods of 2004.
      These increases in cash earnings are described above and under åResults of
      Operationsæ. The $32 million decrease in working capital primarily resulted from
      changes in receivables, and customer deposits, partially offset by changes
      in
      accounts payable and accrued taxes. Working capital increased by $34 million
      in
      the first six months of 2005 principally due to changes in receivables,
      prepayments and accrued taxes, partially offset by changes accounts payable
      and
      customer deposits.





*Cash
      Flows From
      Financing Activities*




Net
      cash used for
      financing activities was $63 million in the second quarter of 2005 compared
      to
      $61 million in the second quarter of 2004. The net change reflects a $20 million
      increase in common stock dividends to FirstEnergy and a $104 million increase
      in
      repayments of short-term borrowings, offset by a $122 million decrease in debt
      redemptions.





On
      May 1, 2005
      Penelec redeemed all of its outstanding shares of 6.125% Series B Pollution
      Control Revenue Bonds at par, plus accrued interest to date of
      redemption.





Net
      cash used for
      financing activities was $70 million for the first six months of 2005 compared
      to net cash provided from financing activities of $27 million in the first
      six
      months of 2004. The net change of $97 million reflects the absence of a $150
      million long-term debt financing in 2004, a $25 million increase in common
      stock
      dividends to FirstEnergy and a $44 million increase in repayments of short-term
      borrowings, offset by a $122 million decrease in debt redemptions.





Penelec
      had
      approximately $35,000 of cash and temporary investments (which include
      short-term notes receivable from associated companies) and approximately $205
      million of short-term indebtedness as of June 30, 2005. Penelec has
      authorization from the SEC to incur short-term debt of up to $250 million
      (including the utility money pool). Penelec will not issue FMB other than as
      collateral for senior notes, since its senior note indentures prohibit (subject
      to certain exceptions) Penelec from issuing any debt which is senior to the
      senior notes. As of June 30, 2005, Penelec had the capability to issue $3
      million of additional senior notes based upon FMB collateral. Penelec has no
      restrictions on the issuance of preferred stock.





Penelec
      Funding LLC
      (Penelec Funding), a wholly owned subsidiary of Penelec, is a limited liability
      company whose borrowings are secured by customer accounts receivable purchased
      from Penelec. Penelec Funding can borrow up to $75 million under a receivables
      financing arrangement. As a separate legal entity with separate creditors,
      Penelec Funding would have to satisfy its obligations to creditors before any
      of
      its remaining assets could be made available to Penelec. As of June 30,
      2005, the facility was drawn for $64 million. On July 15, 2005, the
      facility was renewed until June 29, 2006. The annual facility fee is
      0.25%
      on the entire finance limit.





On
      June 14,
      2005, FirstEnergy, OE, Penn, CEI, TE, JCP&L, Met-Ed, Penelec, FES and ATSI,
      as Borrowers, entered into a syndicated $2 billion five-year revolving credit
      facility. Borrowings under the facility are available to each Borrower
      separately and will mature on the earlier of 364 days from the date of borrowing
      and the commitment termination date, as the same may be extended. Penelec's
      borrowing limit under the facility is $250 million.





Penelec
      has the
      ability to borrow from its regulated affiliates and FirstEnergy to meet its
      short-term working capital requirements. FESC administers this money pool and
      tracks surplus funds of FirstEnergy and its regulated subsidiaries. Companies
      receiving a loan under the money pool agreements must repay the principal,
      together with accrued interest, within 364 days of borrowing the funds. The
      rate
      of interest is the same for each company receiving a loan from the pool and
      is
      based on the average cost of funds available through the pool. The average
      interest rate for borrowings under these arrangements in the second quarter
      of
      2005 was 2.93%.






146




Penelec’s
      access to
      capital markets and costs of financing are dependent on the ratings of its
      securities and that of FirstEnergy. On May 16, 2005, S&P affirmed its
      'BBB-' corporate credit ratings on FirstEnergy Corp. and its units and revised
      its outlook on the companies to positive from stable. S&P stated that the
      rating affirmation and outlook revision reflects the successful restart of
      the
      three nuclear units from their respective outages that occurred during the
      first
      half of 2005. S&P noted that a subsequent rating upgrade could follow if
      FirstEnergy's financial performance continues to improve as projected and as
      the
      nuclear operations further stabilize.





On
      July 18, 2005,
      Moody’s revised its rating outlook for FirstEnergy and its subsidiaries to
      positive from stable. Moody’s stated that revision to FirstEnergy’s rating
      outlook resulted from steady financial improvement and steps taken by management
      to improve operations, including the stabilization of its nuclear operations.
      Moody’s further stated that the outlook recognized management’s regional
      strategy of focusing on its core utility businesses. FirstEnergy’s credit
      profile has been improving, with a significant debt reduction largely resulting
      from the application of free cash flow. Moody’s notes that a rating upgrade
      could be considered if FirstEnergy continues to achieve planned improvements
      in
      its operations and balance sheet.





*Cash
      Flows From
      Investing Activities*




Cash
      used for
      investing activities was $10 million in the second quarter of 2005 compared
      to
      $13 million in the second quarter of 2004. The increase was primarily due to
      increased loan repayments from associated companies, partially offset by higher
      property additions. Cash used for investing activities was $27 million in the
      first six months of 2005 compared to $74 million in the first six months of
      2005. The decrease was primarily due to the absence in 2005 of a $51 million
      repayment to the NUG trust fund in 2004 and increased loan repayments from
      associated companies, partially offset by increased property additions. Capital
      expenditures for property additions primarily support Penelec’s energy delivery
      operations.





Penelec’s
      capital
      spending for the period 2005-2007 is expected to be about $272 million for
      property additions and improvements, of which about $91 million applies to
      2005.
      During the second half of 2005, capital requirements for property additions
      are
      expected to be about $55 million. Penelec has additional requirements of
      approximately $8 million for maturing long-term debt during the remainder of
      2005. These cash requirements are expected to be satisfied from internal cash
      and short-term credit arrangements.





**Market
      Risk Information**




Penelec
      uses
      various market risk sensitive instruments, including derivative contracts,
      primarily to manage the risk of price and interest rate fluctuations.
      FirstEnergy’s Risk Policy Committee, comprised of members of senior management,
      provides general management oversight to risk management activities throughout
      the Company.





*Commodity
      Price
      Risk*





Penelec
      is exposed
      to market risk primarily due to fluctuations in electricity and natural gas
      prices. To manage the volatility relating to these exposures, it uses a variety
      of non-derivative and derivative instruments, including options and futures
      contracts. The derivatives are used for hedging purposes. Penelec’s non-hedge
      derivative contracts represent non-trading positions that do not qualify for
      hedge treatment under SFAS 133. As of June 30, 2005, Penelec’s commodity
      derivatives contract was an embedded option with a fair value of $14 million.
      A
      decrease of $1 million in the value of this asset was recorded in the first
      six
      months of 2005 as a decrease in regulatory liabilities, and therefore, had
      no
      impact on net income.








147




The
      valuation of
      derivative contracts is based on observable market information to the extent
      that such information is available. In cases where such information is not
      available, Penelec relies on model-based information. The model provides
      estimates of future regional prices for electricity and an estimate of related
      price volatility. Penelec uses these results to develop estimates of fair value
      for financial reporting purposes and for internal management decision making.
      Sources of information for valuation of derivative contracts as of June 30,
      2005 are summarized by year in the following table:





**Sources
                of Information****-****Fair
                Value by Contract Year**
            
            
            
            **2005**(1)
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **Thereafter**
            
            **Total**Prices
                based
                on external sources(2)
            
            
            
            
            $
            3
            
            $
            2
            
            $
            2
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            7Prices
                based
                on models
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            2
            
            
            2
            
            
            3
            
            
            7Total
            
            
            
            
            $
            3
            
            $
            2
            
            $
            2
            
            $
            2
            
            $
            2
            
            $
            3
            
            $
            14(1)For
              the
              last two quarters of 2005.(2)Broker
                quote sheets.





Penelec
      performs
      sensitivity analyses to estimate its exposure to the market risk of its
      commodity positions. A hypothetical 10% adverse shift (an increase or decrease
      depending on the derivative position) in quoted market prices in the near term
      on both its trading and nontrading derivative instruments would not have had
      a
      material effect on its consolidated financial position or cash flows as of
      June 30, 2005.





*Equity
      Price
      Risk*





Included
      in nuclear
      decommissioning trusts are marketable equity securities carried at their current
      fair value of approximately $59 million and $60 million as of June 30,
      2005
      and December 31, 2004, respectively. A hypothetical 10% decrease in
      prices
      quoted by stock exchanges would result in a $6 million reduction in fair value
      as of June 30, 2005.





**Regulatory
      Matters**





Regulatory
      assets
      are costs which have been authorized by the PPUC and the FERC for recovery
      from
      customers in future periods and, without such authorization, would have been
      charged to income when incurred. Penelec's regulatory assets as of June 30,
      2005 and December 31, 2004 were $183 million and $200 million,
      respectively.





In
      accordance with
      PPUC directives, Met-Ed and Penelec have been negotiating with interested
      parties in an attempt to resolve the merger savings issues that are the subject
      of remand from the Commonwealth Court. Met-Ed’s and Penelec’s combined portion
      of total merger savings is estimated to be approximately $31.5 million. On
      April 13, 2005, the Commonwealth Court issued an interim order in the
      remand proceeding that the parties should report the status of the negotiations
      to the PPUC with a copy to the ALJ. The parties exchanged settlement proposals
      in May and June 2005 and continue to have settlement discussions.





Penelec
      purchases a
      portion of its PLR requirements from FES through a wholesale power sales
      agreement. The PLR sale is automatically extended for each successive calendar
      year unless either party elects to cancel the agreement by November 1
      of
      the preceding year. Under the terms of the wholesale agreement, FES retains
      the
      supply obligation and the supply profit and loss risk, for the portion of power
      supply requirements not self-supplied by Penelec under its NUG contracts and
      other power contracts with nonaffiliated third party suppliers. This arrangement
      reduces Penelec's exposure to high wholesale power prices by providing power
      at
      a fixed price for its uncommitted PLR energy costs during the term of the
      agreement with FES. Penelec is authorized to defer differences between NUG
      contract costs and current market prices.





On
      January 12,
      2005, Penelec filed a request with the PPUC to defer transmission-related costs
      beginning January 1, 2005, estimated to be approximately $4 million
      per
      month.





On
      January 31,
      2005, certain PJM transmission owners made three filings pursuant to a
      settlement agreement previously approved by the FERC. Penelec was a party to
      that proceeding and joined in two of the filings. In the first filing, the
      settling transmission owners submitted a filing justifying continuation of
      their
      existing rate design within the PJM RTO. In the second filing, the settling
      transmission owners proposed a revised Schedule 12 to the PJM tariff designed
      to
      harmonize the rate treatment of new and existing transmission facilities.
      Interventions and protests were filed on February 22, 2005. In the third
      filing, Baltimore Gas and Electric Company and Pepco Holdings, Inc. requested
      a
      formula rate for transmission service provided within their respective zones.
      On
      May 31, 2005, the FERC issued an order on these cases. First, it set
      for
      hearing the existing rate design and indicated that it will issue a final order
      within six months. Second, the FERC approved the proposed Schedule 12 rate
      harmonization. Third, the FERC accepted the proposed formula rate, subject
      to
      referral and hearing procedures. On June 30, 2005, the PJM transmission
      owners filed a request for rehearing of the May 31, 2005
      order.






148




See
      Note 14 to the
      consolidated financial statements for further details and a complete discussion
      of regulatory matters in Pennsylvania, including a more detailed discussion
      of
      reliability initiatives, including actions by the PPUC that impact
      Penelec.





**Environmental
      Matters**





Penelec
      accrues
      environmental liabilities when it concludes that it is probable that it has
      an
      obligation for such costs and can reasonably determine the amount of such costs.
      Unasserted claims are reflected in Penelec's determination of environmental
      liabilities and are accrued in the period that they are both probable and
      reasonably estimable.





Penelec
      has been
      named a PRP at waste disposal sites, which may require cleanup under the
      Comprehensive Environmental Response, Compensation and Liability Act of 1980.
      Allegations of disposal of hazardous substances at historical sites and the
      liability involved are often unsubstantiated and subject to dispute; however,
      federal law provides that all PRPs for a particular site are liable on a joint
      and several basis.





FirstEnergy
      plans
      to issue a report that will disclose the Companies’ environmental activities,
      including their plans to respond to environmental requirements. FirstEnergy
      expects to complete the report by December 1, 2005 and will post the
      report
      on its web site, www.firstenergycorp.com .





**Other
      Legal Proceedings**





There
      are various
      lawsuits, claims (including claims for asbestos exposure) and proceedings
      related to Penelec's normal business operations pending against Penelec. The
      most significant are described below.





On
      August 14,
      2003, various states and parts of southern Canada experienced widespread power
      outages. The outages affected approximately 1.4 million customers in
      FirstEnergy's service area. The U.S. - Canada Power System Outage Task Force’s
      final report in April 2004 on the outages concluded, among other things, that
      the problems leading to the outages began in FirstEnergy’s Ohio service area. Specifically,
      the
      final report concludes, among other things, that the initiation of the
      August 14, 2003 power outages resulted from an alleged failure of both
      FirstEnergy and ECAR to assess and understand perceived inadequacies within
      the
      FirstEnergy system; inadequate situational awareness of the developing
      conditions; and a perceived failure to adequately manage tree growth in certain
      transmission rights of way. The Task Force also concluded that there was a
      failure of the interconnected grid's reliability organizations (MISO and PJM)
      to
      provide effective real-time diagnostic support. The final report is publicly
      available through the Department of Energy’s website (www.doe.gov). FirstEnergy
      believes that the final report does not provide a complete and comprehensive
      picture of the conditions that contributed to the August 14, 2003 power
      outages and that it does not adequately address the underlying causes of the
      outages. FirstEnergy remains convinced that the outages cannot be explained
      by
      events on any one utility's system. The final report contained 46
      "recommendations to prevent or minimize the scope of future blackouts."
      Forty-five of those recommendations related to broad industry or policy matters
      while one, including subparts, related to activities the Task Force recommended
      be undertaken by FirstEnergy, MISO, PJM, ECAR, and other parties to correct
      the
      causes of the August 14, 2003 power outages. FirstEnergy implemented
      several initiatives, both prior to and since the August 14, 2003 power
      outages, which were independently verified by NERC as complete in 2004 and
      were
      consistent with these and other recommendations and collectively enhance the
      reliability of its electric system. FirstEnergy’s implementation of these
      recommendations in 2004 included completion of the Task Force recommendations
      that were directed toward FirstEnergy. FirstEnergy also is proceeding with
      the
      implementation of the recommendations regarding enhancements to regional
      reliability that were to be completed subsequent to 2004 and will continue
      to
      periodically assess the FERC-ordered Reliability Study recommendations for
      forecasted 2009 system conditions, recognizing revised load forecasts and other
      changing system conditions which may impact the recommendations. Thus far,
      implementation of the recommendations has not required, nor is expected to
      require, substantial investment in new, or material upgrades, to existing
      equipment, and therefore FirstEnergy has not accrued a liability as of June
      30,
      2005 for any expenditures in excess of those actually incurred through that
      date. FirstEnergy notes, however, that FERC or other applicable government
      agencies and reliability coordinators may take a different view as to
      recommended enhancements or may recommend additional enhancements in the future
      that could require additional, material expenditures. Finally, the PUCO is
      continuing to review FirstEnergy’s filing that addressed upgrades to control
      room computer hardware and software and enhancements to the training of control
      room operators, before determining the next steps, if any, in the
      proceeding.








149




One
      complaint was
      filed on August 25, 2004 against FirstEnergy in the New York State Supreme
      Court. In this case, several plaintiffs in the New York City metropolitan area
      allege that they suffered damages as a result of the August 14, 2003
      power
      outages. None of the plaintiffs are customers of any FirstEnergy affiliate.
      FirstEnergy filed a motion to dismiss with the Court on October 22,
      2004.
      No timetable for a decision on the motion to dismiss has been established by
      the
      Court. No damage estimate has been provided and thus potential liability has
      not
      been determined.





FirstEnergy
      is
      vigorously defending these actions, but cannot predict the outcome of any of
      these proceedings or whether any further regulatory proceedings or legal actions
      may be initiated against the Companies. In particular, if FirstEnergy or its
      subsidiaries were ultimately determined to have legal liability in connection
      with these proceedings, it could have a material adverse effect on FirstEnergy's
      or its subsidiaries' financial condition and results of operations.





**New
      Accounting Standards and Interpretations**





*SFAS
                154
                - "Accounting Changes and Error Corrections - a replacement of APB
                Opinion
                No. 20 and FASB Statement No.
                3"*





In
      May 2005, the
      FASB issued SFAS 154 to change the requirements for accounting and reporting
      a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      when
      that pronouncement does not include specific transition provisions. This
      Statement requires retrospective application to prior periods’ financial
      statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. In those instances, this Statement requires that the new accounting
      principle be applied to the balances of assets and liabilities as of the
      beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement. This Statement also requires that a change in
      depreciation, amortization, or depletion method for long-lived, nonfinancial
      assets be accounted for as a change in accounting estimate effected by a change
      in accounting principle. The provisions of this Statement are effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Penelec will adopt this Statement effective
      January 1, 2006.





*FIN
      47,
      "Accounting for Conditional Asset Retirement Obligations - an interpretation
      of
      FASB Statement No. 143"*





On
      March 30,
      2005, the FASB issued FIN 47 to clarify the scope and timing of liability
      recognition for conditional asset retirement obligations. Under this
      interpretation, companies are required to recognize a liability for the fair
      value of an asset retirement obligation that is conditional on a future event,
      if the fair value of the liability can be reasonably estimated. In instances
      where there is insufficient information to estimate the liability, the
      obligation is to be recognized in the first period in which sufficient
      information becomes available to estimate its fair value. If the fair value
      cannot be reasonably estimated, that fact and the reasons why must be disclosed.
      This Interpretation is effective no later than the end of fiscal years ending
      after December 15, 2005. Therefore, Penelec will adopt this Interpretation
      in the fourth quarter of 2005. Penelec is currently evaluating the effect this
      Interpretation will have on its financial statements.





*EITF
      Issue No.
      03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
      Certain Investments"*





In
      March 2004,
      the EITF reached a consensus on the application guidance for Issue 03-1. EITF
      03-1 provides a model for determining when investments in certain debt and
      equity securities are considered other than temporarily impaired. When an
      impairment is other-than-temporary, the investment must be measured at fair
      value and the impairment loss recognized in earnings. The recognition and
      measurement provisions of EITF 03-1, which were to be effective for periods
      beginning after June 15, 2004, were delayed indefinitely by the issuance
      of
      FSP EITF 03-1-1 in September 2004. During the period of delay, Penelec continues
      to evaluate its investments as required by existing authoritative
      guidance.











150





**ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





See
      "Management’s
      Discussion and Analysis of Results of Operation and Financial Condition - Market
      Risk Information" in Item 2 above.








**ITEM
      4.
      CONTROLS AND PROCEDURES**





**(a)**  **EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**




The
      applicable
      registrant's chief executive officer and chief financial officer have reviewed
      and evaluated the registrant's disclosure controls and procedures, as defined
      in
      the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e), as of the
      end
      of the date covered by the report. Based on that evaluation, those officers
      have
      concluded that the registrant's disclosure controls and procedures are effective
      in timely alerting them to any information relating to the registrants’ and
      their consolidated subsidiaries that is required to be included in the
      registrants’ periodic reports and in ensuring that information required in the
      reports filed under the Exchange Act is recorded, processed summarized and
      reported within the time period specified by the SEC's rules and
      forms.





**(b)**  **CHANGES
      IN
      INTERNAL CONTROLS**





On
      April 1,
      2005, FirstEnergy, the Ohio Companies and Penn implemented or modified certain
      internal controls over financial reporting to accommodate their participation
      in
      the launch of the MISO Day 2 wholesale energy markets for both day-ahead and
      real-time energy transmissions, as well as a financial transmission rights
      market for transmission capacity. MISO also started dispatching generating
      plants and providing real-time energy and balance services. The new or modified
      controls primarily relate to revenue and cost recognition associated with power
      sales and purchases in the MISO Day 2 markets. Management believes these
      controls are important for the accurate reporting of such amounts and, based
      upon management's testing, are adequate for such purposes. There were no other
      changes in the registrants' internal control over financial reporting that
      have
      materially affected, or are reasonably likely to materially affect, the
      registrants' internal control over financial reporting during the quarter ended
      June 30, 2005.











151





***PART
      II. OTHER INFORMATION***





**ITEM
      1.**  **LEGAL
      PROCEEDINGS**




Information
      required for Part II, Item 1 is incorporated by reference to the discussions
      in
      Notes 13 and 14 of the Consolidated Financial Statements in Part I, Item 1
      of
      this Form 10-Q.




**ITEM
      2.**  **CHANGES
      IN
      SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
      SECURITIES**





**(e)**  **FirstEnergy**





The
      table below
      includes information on a monthly basis regarding purchases made by FirstEnergy
      of its common stock.





**Maximum
                Number****(or
                Approximate****Total
                Number of**
            
            **Dollar
                Value) of****Shares
                Purchased**
            
            **Shares
                that May****Total
                Number**
            
            
            
            **As
                Part of Publicly**
            
            **Yet
                Be Purchased****of
                Shares**
            
            **Average
                Price**
            
            **Announced
                Plans**
            
            **Under
                the Plans****Period**
            
            **Purchased
                (a)**
            
            **Paid
                per Share**
            
            **or
                Programs (b)**
            
            **or
                Programs**April
                1-30,
                2005
            
            
            449,813
            
            $
            42.53
            
            
            -
            
            
            -May
                1-31,
                2005
            
            
            940,490
            
            $
            43.75
            
            
            -
            
            
            -June
                1-30,
                2005
            
            
            1,103,335
            
            $
            46.34
            
            
            -
            
            
            -Second
                Quarter 2005
            
            
            2,493,638
            
            $
            44.68
            
            
            -
            
            
            -




(a)
              Share
                  amounts
                  reflect purchases on the open market to satisfy FirstEnergy's obligations
                  to deliver common stock under its Executive and Director Incentive
                  Compensation Plan, Deferred Compensation Plan for Outside Directors,
                  Executive Deferred Compensation Plan, Savings Plan and Stock Investment
                  Plan. In addition, such amounts reflect shares tendered by employees
                  to
                  pay the exercise price or withholding taxes upon exercise of stock
                  options
                  granted under the Executive and Director Incentive Compensation
                  Plan.




(b)
            FirstEnergy
                does not currently have any publicly announced plan or program for
                share
                purchases.





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





(a)
            The
                annual
                meeting of FirstEnergy shareholders was held on May 17, 2005.





(b)
            At
                this
                meeting, the following persons were elected to FirstEnergy's Board
                of
                Directors:





**Number
                of Votes****For**
            
            **Withheld**Anthony
                J.
                Alexander
            
            
            280,505,194
            
            
            5,433,413Russell
                W.
                Maier
            
            
            279,922,948
            
            
            6,015,659Robert
                N.
                Pokelwaldt
            
            
            280,048,373
            
            
            5,890,234Wes
                M.
                Taylor
            
            
            283,540,631
            
            
            2,397,976Jesse
                T.
                Williams, Sr.
            
            
            279,999,208
            
            
            5,939,399





The
      term of office
      for the following Directors continued after the shareholders meeting: Dr. Carol
      A. Cartwright, William T. Cottle, Paul J. Powers, George M. Smart, Dr. Patricia
      K. Woolf, Paul T. Addison, Ernest J. Novak, Jr., Catherine A. Rein and Robert
      C.
      Savage.





(c)
            (i)
            At
                this
                meeting, the appointment of PricewaterhouseCoopers LLP, an independent
                registered public accounting firm, as auditor for the year 2004 was
                ratified:





**Number
                of Votes****For**
            
            **Against**
            
            **Abstentions****281,532,886**
            
            
            **1,685,722**
            
            
            **2,719,999**





(ii)
            At
                this
                meeting, a shareholder proposal requesting that FirstEnergy publish
                semi-annual reports regarding its political contributions was not
                approved
                (approval required a majority of votes
                cast):








152





**Number
                of Votes****Broker****For**
            
            **Against**
            
            **Abstentions**
            
            **Non-Votes****19,941,051**
            
            
            **215,630,919**
            
            
            **19,307,851**
            
            
            **31,058,786**





(iii)
            At
                this
                meeting, a shareholder proposal recommending that the Board of Directors
                take steps for adoption of simple majority voting was approved (approval
                required a majority of votes cast):





**Number
                of Votes****Broker****For**
            
            **Against**
            
            **Abstentions**
            
            **Non-Votes****178,017,001**
            
            
            **71,654,202**
            
            
            **5,208,721**
            
            
            **31,058,683**





Based
      on this
      result, the Board will further review this proposal and consider the appropriate
      steps to take in response.





(iv)
            At
                this
                meeting, a shareholder proposal recommending that any matching awards
                under the Executive Deferred Compensation Plan be in the form of
                performance-based stock options was not approved (approval required
                a
                majority of the votes cast):





**Number
                of Votes****Broker****For**
            
            **Against**
            
            **Abstentions**
            
            **Non-Votes****47,687,400**
            
            
            **202,204,312**
            
            
            **4,988,404**
            
            
            **31,058,491**





**ITEM
      6.**  **EXHIBITS**





**(a)**  **Exhibits**


**Exhibit****Number****JCP&L**12
              Fixed
                  charge
                  ratios31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.3
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.2
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**Met-Ed**12
              Fixed
                  charge
                  ratios31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**Penelec**12
              Fixed
                  charge
                  ratios15
              Letter
                  from
                  independent registered public accounting firm31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**FirstEnergy**15
              Letter
                  from
                  independent registered public accounting firm31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**OE**4.1
              Seventy-ninth
                  Supplemental Indenture dated as of April 1, 2005 between OE and
                  The Bank
                  of New York, as successor Trustee under the Indenture dated as
                  of August
                  1, 1930.









153




4.2
              Eightieth
                  Supplemental Indenture dated as of April 15, 2005 between OE and
                  The Bank
                  of New York, assuccessor
                  Trustee under the Indenture dated as of August 1, 1930.4.3
              Eighty-first
                  Supplemental Indenture dated as of June 1, 2005 between OE and
                  The Bank of
                  New York, assuccessor
                  Trustee under the Indenture dated as of August 1, 1930.4.4
              Eleventh
                  Supplemental Indenture dated as of April 1, 2005 between OE and
                  The Bank
                  of New York, as Trusteeunder
                  the
                  General Mortgage Indenture and Deed of Trust dated as of January
                  1,
                  1998.4.5
              Twelfth
                  Supplemental Indenture dated as of April 15, 2005 between OE and
                  The Bank
                  of New York, as Trusteeunder
                  the
                  General Mortgage Indenture and Deed of Trust dated as of January
                  1,
                  1998.4.6
              Thirteenth
                  Supplemental Indenture dated as of June 1, 2005 between OE and
                  The Bank of
                  New York, asTrustee
                  under
                  the General Mortgage Indenture and Deed of Trust dated as of January
                  1,
                  1998.10.1
              OE
                  Nuclear
                  Capital Contribution Agreement by and between Ohio Edison Company
                  andFirstEnergy
                  Nuclear Generation Corp. (May 20, 2005 Form 8-K, Exhibit
                  10.1).10.2
              OE
                  Fossil
                  Purchase and Sale Agreement by and between Ohio Edison Company
                  (Seller)
                  andFirstEnergy
                  Generation Corp. (Purchaser). (May 20, 2005 Form 8-K, Exhibit
                  10.2).15
              Letter
                  from
                  independent registered public accounting firm31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**Penn**10.1
              PP
                  Nuclear
                  Subscription and Capital Contribution Agreement by and between
                  Pennsylvania PowerCompany
                  and
                  FirstEnergy Nuclear Generation Corp. (May 20, 2005 Form 8-K, Exhibit
                  10.1).10.2
              PP
                  Fossil
                  Purchase and Sale Agreement by and between Pennsylvania Power Company
                  (Seller)and
                  FirstEnergy Generation Corp. (Purchaser). (May 20, 2005 Form 8-K,
                  Exhibit
                  10.2).15
              Letter
                  from
                  independent registered public accounting firm.31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**CEI**4.1
              Eighty-seventh
                  Supplemental Indenture dated as of April 1, 2005 between CEI and
                  JPMorgan
                  Chase Bank,N.A.,
                  as
                  Trustee under the Mortgage and Deed of Trust dated as of July 1,
                  1940.4.2
              Eighty-eighth
                  Supplemental Indenture dated as of July 1, 2005 between CEI and
                  JPMorgan
                  Chase Bank, N.A.,as
                  Trustee
                  under the Mortgage and Deed of Trust dated as of July 1,
                  1940.10.1
              CEI
                  Nuclear
                  Purchase and Sale Agreement by and between The Cleveland Electric
                  IlluminatingExhibit
                  10.1).10.2
              CEI
                  Fossil
                  Purchase and Sale Agreement by and between The Cleveland Electric
                  Illuminating Company(Seller)
                  and
                  FirstEnergy Generation Corp. (Purchaser). (May 20, 2005 Form 8-K,
                  Exhibit
                  10.2).31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.**TE**4.1
              Fifty-fifth
                  Supplemental Indenture dated as of April 1, 2005 between TE and
                  JPMorgan
                  Chase Bank, N.A., asTrustee
                  under
                  the Indenture of Mortgage and Deed of Trust dated as of April 1,
                  1947.10.1
              TE
                  Nuclear
                  Purchase and Sale Agreement by and between The Toledo Edison Company
                  (Seller) andFirstEnergy
                  Nuclear Generation Corp. (Purchaser). (May 20, 2005 Form 8-K, Exhibit
                  10.1).10.2
              TE
                  Fossil
                  Purchase and Sale Agreement by and between The Toledo Edison Company
                  (Seller) and FirstEnergyGeneration
                  Corp. (Purchaser). (May 20, 2005 Form 8-K, Exhibit
                  10.2).31.1
              Certification
                  of chief executive officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).31.2
              Certification
                  of chief financial officer, as adopted pursuant to Rule
                  13a-15(e)/15d-15(e).32.1
              Certification
                  of chief executive officer and chief financial officer, pursuant
                  to 18
                  U.S.C. Section 1350.


Pursuant
      to
      reporting requirements of respective financings, JCP&L, Met-Ed and Penelec
      are required to file fixed charge ratios as an exhibit to this Form 10-Q.
      FirstEnergy, OE, CEI, TE and Penn do not have similar financing reporting
      requirements and have not filed their respective fixed charge
      ratios.





Pursuant
      to
      paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, neither FirstEnergy,
      OE,
      CEI, TE, Penn, JCP&L, Met-Ed nor Penelec have filed as an exhibit to this
      Form 10-Q any instrument with respect to long-term debt if the respective
      total amount of securities authorized thereunder does not exceed 10% of their
      respective total assets of FirstEnergy and its subsidiaries on a consolidated
      basis, or respectively, OE, CEI, TE, Penn, JCP&L, Met-Ed or Penelec, but
      hereby agree to furnish to the Commission on request any such
      documents.








154











**SIGNATURE**











Pursuant
      to the
      requirements of the Securities Exchange Act of 1934, each Registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.











August
      1,
      2005




















**FIRSTENERGY
                CORP.**Registrant**OHIO
                EDISON COMPANY**Registrant**THE
                CLEVELAND ELECTRIC****ILLUMINATING
                COMPANY**Registrant**THE
                TOLEDO EDISON COMPANY**Registrant**PENNSYLVANIA
                POWER COMPANY**Registrant**JERSEY
                CENTRAL POWER & LIGHT COMPANY**Registrant**METROPOLITAN
                EDISON COMPANY**Registrant**PENNSYLVANIA
                ELECTRIC COMPANY**Registrant

















/s/Harvey
                L.
                WagnerHarvey L. WagnerVice President, Controllerand Chief Accounting Officer








155