EXHIBIT 13.7

                          PENNSYLVANIA ELECTRIC COMPANY

                        2001 ANNUAL REPORT TO STOCKHOLDERS



        Pennsylvania  Electric  Company  is  a  wholly  owned  electric  utility
operating  subsidiary of FirstEnergy  Corp. It engages in the  distribution  and
sale of  electric  energy in an area of  approximately  17,600  square  miles in
western  Pennsylvania.  It also engages in the sale, purchase and interchange of
electric  energy  with  other  electric  companies.  The  area it  serves  has a
population of approximately 1.6 million.  The Company, as lessee of the property
of the Waverly Electric Light & Power Company, also serves a population of about
13,400 in Waverly, New York and vicinity.

        In August 2000, FirstEnergy entered into an agreement to merge with GPU,
Inc.,  under which  FirstEnergy  would acquire all of the outstanding  shares of
GPU, Inc.'s common stock for approximately  $4.5 billion in cash and FirstEnergy
common  stock.  The merger  became  effective  on  November 7, 2001 and is being
accounted for by the purchase method. Prior to that time,  Pennsylvania Electric
Company was a wholly owned subsidiary of GPU, Inc.






Contents                                                                Page
--------                                                                ----

Selected Financial Data...........................................       1
Management's Discussion and Analysis..............................      2-8
Consolidated Statements of Income.................................       9
Consolidated Balance Sheets.......................................      10
Consolidated Statements of Capitalization.........................      11
Consolidated Statements of Common Stockholder's Equity............      12
Consolidated Statements of Preferred Stock........................      12
Consolidated Statements of Cash Flows.............................      13
Consolidated Statements of Taxes..................................      14
Notes to Consolidated Financial Statements........................     15-22
Reports of Independent Public Accountants.........................     23-24


<PAGE>
<TABLE>

                                                PENNSYLVANIA ELECTRIC COMPANY

                                                   SELECTED FINANCIAL DATA

<CAPTION>
                                                                                          Years Ended December 31,
                                                  Nov. 7 -      Jan. 1 -     --------------------------------------------------
                                               Dec. 31, 2001  Nov. 6, 2001       2000         1999         1998         1997
-------------------------------------------------------------------------------------------------------------------------------
                                                                        (Dollars in thousands)

<S>                                             <C>            <C>           <C>           <C>          <C>          <C>
Operating Revenues............................. $   140,062 |  $   834,548   $   901,881   $  921,965   $ 1,032,226  $ 1,052,936
                                                =========== |  ===========   ===========   ==========   ===========  ===========
                                                            |
Operating Income............................... $    14,341 |  $    70,049   $    80,336   $  140,925   $   125,623  $   157,950
                                                =========== |  ===========   ===========   ==========   ===========  ===========
                                                            |
Income Before Extraordinary Item............... $    10,795 |  $    23,718   $    39,250   $  152,491   $    58,590  $    95,023
                                                =========== |  ===========   ===========   ==========   ===========  ===========
                                                            |
Net Income..................................... $    10,795 |  $    23,718   $    39,250   $  152,491   $    39,640  $    95,023
                                                =========== |  ===========   ===========   ==========   ===========  ===========
                                                            |
Earnings on Common Stock....................... $    10,795 |  $    23,718   $    39,250   $  151,611   $    38,945  $    94,358
                                                =========== |  ===========   ===========   ==========   ===========  ===========
                                                            |
Total Assets................................... $ 3,300,269 |                $ 2,331,484   $2,463,052   $ 3,565,747  $ 2,499,703
                                                =========== |                ===========   ==========   ===========  ===========
                                                            |
                                                            |
Capitalization:                                             |
Common Stockholder's Equity.................... $ 1,306,576 |                $   469,837   $  461,182   $   767,304  $   791,338
Cumulative Preferred Stock.....................       --    |                      --           --           16,681       16,681
Company-Obligated Mandatorily Redeemable                    |
   Preferred Securities........................       --    |                      --           --          105,000      105,000
Company-Obligated Trust Preferred Securities...      92,000 |                    100,000      100,000         --           --
Long-Term Debt.................................     472,400 |                    519,481      426,795       629,027      679,716
                                                ----------- |                -----------   ----------   -----------  -----------
Total Capitalization........................... $ 1,870,976 |                $ 1,089,318   $  987,977   $ 1,518,012  $ 1,592,735
                                                =========== |                =-=========   ==========   ===========  ===========
                                                            |
                                                            |
Capitalization Ratios:                                      |
Common Stockholder's Equity....................        69.8%|                       43.1%        46.7%         50.5%        49.7%
Cumulative Preferred Stock.....................         --  |                        --           --            1.1          1.0
Company-Obligated Mandatorily Redeemable                    |
   Preferred Securities........................         --  |                        --           --            6.9          6.6
Company-Obligated Trust Preferred Securities...         4.9 |                        9.2         10.1           --            --
Long-Term Debt.................................        25.3 |                       47.7         43.2          41.5         42.7
                                                     ------ |                      -----        -----         -----       ------
Total Capitalization...........................       100.0%|                      100.0%       100.0%        100.0%       100.0%
                                                      ===== |                      =====        =====         =====        =====
                                                            |
                                                            |
Transmission and Distribution                               |
Kilowatt-Hour deliveries (Millions):                        |
Residential....................................         721 |        3,264         3,949        3,864         3,756        3,801
Commercial.....................................         758 |        3,733         4,509        4,319         4,198        4,098
Industrial.....................................         685 |        3,658         4,698        4,865         4,996        4,835
Other..........................................           7 |           34            40           43            42           45
                                                      ----- |      -------      --------       ------        ------       ------
Total Retail...................................       2,171 |       10,689        13,196       13,091        12,992       12,779
Total Wholesale................................         107 |        1,351         2,885        4,219         4,309        3,461
                                                      ----- |      -------      --------       -------       ------       ------
Total..........................................       2,278 |       12,040        16,081       17,310        17,301       16,240
                                                      ===== |       ======      ========       ======        ======       ======
                                                            |
                                                            |
Transmission and Distribution Deliveries                    |
Customers Served::                                          |
Residential....................................     502,901 |                    502,052      500,930       499,484      498,229
Commercial.....................................      76,005 |                     74,282       73,979        73,014       72,271
Industrial.....................................       2,652 |                      2,703        2,844         2,910        2,949
Other..........................................       1,099 |                      1,110        1,110         1,111        1,117
                                                    ------- |                   --------      -------       -------      -------
Total..........................................     582,657 |                    580,147      578,863       576,519      574,566
                                                    ======= |                   ========      =======       =======      =======
</TABLE>

                                       1

<PAGE>

                          PENNSYLVANIA ELECTRIC COMPANY

                     Management's Discussion and Analysis of
                  Results of Operations and Financial Condition


        This discussion includes forward-looking statements based on information
currently  available  to  management  that  is  subject  to  certain  risks  and
uncertainties.  Such 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,  legislative and
regulatory   changes  (including  revised   environmental   requirements),   the
availability and cost of capital,  ability to accomplish or realize  anticipated
benefits from strategic initiatives and other similar factors.


Results of Operations
---------------------

        Earnings on common stock  decreased  12.1% to $34.5 million in 2001 from
$39.2 million in 2000.  In 2001,  earnings  were  negatively  impacted by higher
other  operating  costs,  as well as lower other  income.  Offsetting  this were
higher  revenues and lower net  interest  charges.  In 2000,  earnings on common
stock decreased 74.1% to $39.2 million from $151.6 million in 1999. The decrease
was primarily due to greater  purchased  power costs,  the absence of a net gain
related  to  wholesale  operations  from  the sale of  substantially  all of our
generating  facilities  in 1999,  and, to a lesser  extent,  higher net interest
charges.  Lower  other  operating  costs  and  depreciation  expense  positively
affected earnings on common stock in 2000.

        Operating  revenues increased by $72.7 million in 2001 following a $20.1
million  decrease  in 2000.  The sources of the  changes in  operating  revenues
during  2001 and 2000,  as compared to the prior  year,  are  summarized  in the
following table.

            Sources of Revenue Changes                    2001      2000
     --------------------------------------------------------------------
          Increase (Decrease)                             (In millions)

     Change in kilowatt-hour sales due
       to level of retail customers
       shopping for generation service.................. $134.5   $  9.5
     Change in other retail kilowatt-hour sales.........  (12.2)    10.1
     Decrease in wholesale sales........................  (50.6)   (32.4)
     All other changes..................................    1.0     (7.3)
     --------------------------------------------------------------------

     Net Increase (Decrease) in Operating Revenues...... $ 72.7   $(20.1)
     ====================================================================


Electric Sales

        In 2001, a major  source of the  increase in operating  revenues was the
increase  in retail  generation  kilowatt-hour  sales  due to a large  number of
customers  returning to us in 2001 as full service  customers,  after  receiving
their power from  alternate  suppliers in 2000.  In 2001,  85.3% of total retail
sales were to full service  customers as compared to 62.7% in 2000.  Residential
sales remained  relatively  flat,  while commercial sales were slightly lower in
2001  compared to 2000,  primarily  due to lower  usage.  Industrial  sales also
decreased in 2001 compared to 2000 due almost evenly to a decrease in the number
of customers and lower usage by existing customers. Sales to wholesale customers
decreased in 2001 compared to 2000 due to a reduction in our available capacity.

        The  primary  source of the  decrease  in  operating  revenues  in 2000,
compared to the prior year, was lower sales to the wholesale market, as a result
of us  having  additional  power  available  in  1999  due to the  delay  of the
divestiture of our generating  assets.  Operating revenues also increased due to
higher  residential and commercial  sales,  partially offset by lower industrial
sales.  Changes in  kilowatt-hour  sales by customer  class in 2001 and 2000 are
summarized in the following table:

                                       2
<PAGE>

            Changes in Kilowatt-hour Sales  2001         2000
            --------------------------------------------------
               Increase (Decrease)

            Residential..................   0.9%         2.2%
            Commercial...................  (0.4)%        4.4%
            Industrial...................  (7.6)%       (3.4)%
            --------------------------------------------------

            Total Retail.................  (2.5)%        0.8%
            Wholesale.................... (49.5)%      (31.6)%
            --------------------------------------------------

            Total Sales.................. (11.0)%       (7.1)%
            --------------------------------------------------

Operating Expenses and Taxes

        Total  operating  expenses and taxes increased $68.7 million in 2001 and
$40.5 million in 2000,  compared to the preceding year.  Higher  purchased power
costs accounted for the majority of the increased costs in 2001. Purchased power
costs also increased  significantly  in 2000 but were partially  offset by lower
nuclear costs, other operating costs and depreciation expenses.

        Purchased power costs increased $54.5 million in 2001, compared to 2000.
The higher costs resulted from increased  quantities of power purchased  through
the PJM Power Pool due to a large  number of  customers  returning to us in 2001
after receiving their power from alternate  suppliers in 2000, as well as higher
average prices of power purchased under two-party  agreements.  Also included in
2001 purchased  power costs was a $16 million charge related to the  termination
of a wholesale energy contract with Allegheny Electric  Cooperative.  Offsetting
these increases was the effect of the Pennsylvania  Public Utility  Commission's
(PPUC) June 2001 order that allowed us to defer,  for future rate  recovery from
customers,  energy  costs  in  excess  of our  fixed  generation  tariff  rates,
retroactive  to January 1, 2001, in connection  with our provider of last resort
(PLR) obligation.

        In 2000, fuel and purchased  power costs  increased  $183.2 million over
1999. The majority of the increase was due to the need to purchase substantially
all of our energy requirements following the sales of generating assets in 1999,
and the absence of deferred accounting  treatment for these costs. An offsetting
decrease in fuel costs also resulted from the sales of  generating  assets.  The
sale of Unit 1 of the Three Mile Island  Nuclear  Plant,  completed  in December
1999, eliminated essentially all of our nuclear operating costs in 2000.

        Other operating costs increased $9.9 million in 2001,  compared to 2000,
primarily due the absence in 2001 of a pension  curtailment gain associated with
employees who were terminated at the time of the sale of our generating  assets.
This gain was realized in 2000 as a result of the PPUC's  Phase II Order.  Other
operating  costs  also  increased  due to costs  related to  Voluntary  Enhanced
Retirement Programs offered to certain bargaining unit employees. In 2000, other
operating  costs  decreased  $68.7 million  compared to the previous  year.  The
primary reason for the decline was a reduction in expenses  associated  with the
operation of generating stations due to the sale of all our remaining generating
assets in 1999.  Other  operating costs were also reduced as a result of the net
impact of the PPUC's Phase II Order issued in December 2000, which allowed us to
realize the pension  curtailment gain discussed above, offset by a write-off for
the  disallowance  of a portion of our stranded  costs.  The sale of  generating
assets in 1999 was also the cause for a  decrease  in  depreciation  expense  of
$21.9 million in 2000 from the previous year.

Other Income

        Other income decreased $10.3 million in 2001 from the previous year. The
decrease was  attributed to charges for a sustainable  energy fund and renewable
energy projects in accordance with the Stipulation of Settlement  related to the
merger of FirstEnergy and GPU, Inc. Also  contributing to the decrease was lower
interest income. In 2000, other income decreased $48.9 million from the previous
year.  The  decrease  was due to the  absence  in 2000 of net gains  related  to
wholesale operations as a result of the sale of substantially all our generating
stations and lower interest  income.  Partially  offsetting these reductions was
the reversal of an estimated 1999 tax penalty.

Net Interest Charges

        Net interest charges  decreased by $1.5 million in 2001 after increasing
$3.7 million in 2000 compared to the prior year.  In 2001,  the decrease was due
to the  absence  of prior  year  expense  associated  with a federal  income tax
deficiency,  higher deferred  interest income,  and lower  short-term  borrowing
levels.  These decreases were partially offset by additional interest expense on
$93 million of senior notes issued during 2000.  The issuance of the $93 million
of senior  notes during 2000 was also  responsible  for the increase in interest
expense in 2000 compared to 1999.

                                       3

<PAGE>

Capital Resources and Liquidity
-------------------------------

        We had approximately  $39 million of cash and temporary  investments and
$77.6  million of  short-term  indebtedness  on December 31, 2001. We may borrow
from our  affiliates  on a short-term  basis.  We will not issue first  mortgage
bonds (FMB) other than as  collateral  for senior  notes,  since our senior note
indentures  prohibit  (subject to certain  exceptions)  us from issuing any debt
which is senior  to the  senior  notes.  As of  December  31,  2001,  we had the
capability  to issue $450  million of  additional  senior  notes  based upon FMB
collateral. We have no restrictions on the issuance of preferred stock.

        At the end of 2001, our common equity as a percentage of capitalization,
including debt relating to assets held for sale, stood at 70% compared to 43% at
the end of 2000.  This  increase  resulted  from the  allocation of the purchase
price in the merger between FirstEnergy and GPU.

        Following  approval  of the  merger  of  FirstEnergy  and GPU by the New
Jersey  Board of Public  Utilities on  September  26, 2001,  Standard and Poor's
adjusted  our  corporate  credit  rating from A/A-1 to  BBB/A-2,  and our senior
unsecured debt rating from A to BBB. The lower credit ratings reflect Standard &
Poor's consolidated  rating methodology,  which resulted in essentially the same
corporate  credit rating for all of  FirstEnergy's  electric  utility  operating
companies. The credit rating outlook of Standard & Poor's is stable. On February
22, 2002,  Moody's announced a change in its outlook for our credit ratings from
stable  to  negative  based  upon  a  decision  by  the  Commonwealth  Court  of
Pennsylvania  to  reverse  the  PPUC's  decision  to grant us rate  relief  (see
Regulatory Matters).

        Our cash  requirements  in 2002  for  operating  expenses,  construction
expenditures,  scheduled debt  maturities and preferred  stock  redemptions  are
expected  to be  met  without  increasing  our  net  debt  and  preferred  stock
outstanding.   Major  contractual  obligations  for  future  cash  payments  are
summarized in the following table:

Contractual Obligations         2002   2003   2004  2005  2006 Thereafter Total
-------------------------------------------------------------------------------
                                             (In millions)

Long-term debt..................$ 50   $ --   $125  $  8  $ --   $  336  $  519
Mandatory preferred stock.......                                    100     100
Capital leases .................   1      1     --    --    --       --       2
Unconditional power purchases... 415    261    200   194   197    1,882.  3,149
-------------------------------------------------------------------------------
                                $466   $262   $325  $202  $197   $2,318  $3,770
===============================================================================


        Our capital  spending  for the period  2002-2006 is expected to be about
$375 million, of which approximately $72 million applies to 2002.


Market Risk Information
-----------------------

        We use various market risk sensitive  instruments,  including derivative
contracts, primarily to manage the risk of price and interest rate fluctuations.
Our  Risk  Policy  Committee,   comprised  of  FirstEnergy  executive  officers,
exercises an  independent  risk  oversight  function to ensure  compliance  with
corporate risk management policies and prudent risk management practices.

Commodity Price Risk

        We  are  exposed  to  market  risk  primarily  due  to  fluctuations  in
electricity and natural gas prices.  To manage the volatility  relating to these
exposures,  we use a  variety  of  derivative  instruments,  including  options,
futures contracts and swaps.  These derivatives are used principally for hedging
purposes. The change in the fair value of commodity derivative contracts related
to energy production during 2001 is summarized in the table below:

      Increase (Decrease)in the Fair Value of Commodity Derivative Contracts
      -----------------------------------------------------------------------

                                               Nov. 7-Dec. 31   Jan. 1-Nov. 6
                                                     2001           2001
      -----------------------------------------------------------------------
                                                        (In millions)
      Outstanding as of beginning of period with
        SFAS 133 cumulative adjustment.............. $3.6         $12.8
      Contract value when entered...................  0.3           5.2
      Decrease in value of existing contracts....... (2.5)         (3.5)
      Change in techniques/assumptions..............  --          (10.6)
      Settled contracts............................. (0.1)         (0.3)
      -----------------------------------------------------------------------
      Outstanding as of end of period............... $1.3          $3.6
      =======================================================================

                                       4

<PAGE>

        While the  valuation of  derivative  contracts is always based on active
market prices when they are available, longer-term contracts can require the use
of  model-based  estimates  of  prices  in later  years  due to the  absence  of
published  market prices.  Currently,  substantially  all of our derivatives are
valued based on active market prices.

        We perform  sensitivity  analyses to estimate our exposure to the market
risk of our  commodity  position.  A  hypothetical  10% adverse  shift in quoted
market prices in the near term on our derivative  instruments would not have had
a material  effect on our  consolidated  financial  position or cash flows as of
December 31, 2001.

Interest Rate Risk

        Our exposure to fluctuations in market interest rates is reduced since a
significant  portion of our debt has fixed interest rates, as noted in the table
below. We are subject to the inherent interest rate risks related to refinancing
maturing debt by issuing new debt securities. Changes in the market value of our
nuclear  decommissioning  trust  funds are  recognized  by making  corresponding
changes  to  the  decommissioning  liability,  as  described  in  Note  1 to the
consolidated financial statements.

Comparison of Carrying Value to Fair Value
--------------------------------------------------------------------------------
                                                            There-         Fair
                         2002  2003   2004   2005    2006   after   Total  Value
--------------------------------------------------------------------------------
                                            (Dollars in millions)
Investments other
  than Cash and Cash
  Equivalents:
Fixed Income.............   --   --    --      --     --    $192    $192   $194
  Average interest rate..                                    4.7%    4.7%
--------------------------------------------------------------------------------
________________________________________________________________________________
Liabilities
--------------------------------------------------------------------------------
Long-term Debt:
Fixed rate............... $ 50   --  $125     $ 8     --    $336    $519   $509
  Average interest rate..  6.5%       5.8%    7.5%           6.4%    6.3%
Variable rate............
  Average interest rate..
Short-term Borrowings.... $ 78   --    --      --     --      --    $ 78$    78
  Average interest rate..  4.9%                                      4.9%
--------------------------------------------------------------------------------
Preferred Stock..........   --   --    --      --     --    $100    $100   $ 90
  Average dividend rate..                                    7.4%    7.4%
--------------------------------------------------------------------------------


Interest Rate Swap Agreements

        We use interest rate swap  agreements to manage the risk of increases in
variable  interest rates.  All of the agreements  convert  variable rate debt to
fixed rate debt.  As of December  31, 2001,  interest  rate swaps had a weighted
average  fixed  interest  rate of  7.16%.  The swap  agreements  in effect as of
December 31, 2001 had a notional amount of $50 million,  a maturity date of 2002
and a fair value of ($1.8) million.


Outlook
-------

        Our industry continues to transition to a more competitive  environment.
As of January 1, 1999,  all of our  customers  could select  alternative  energy
suppliers.  We continue  to deliver  power to homes and  businesses  through our
existing  distribution system, which remains regulated.  The PPUC authorized our
rate  restructuring  plan,   establishing  separate  charges  for  transmission,
distribution,  generation and stranded cost recovery, which is recovered through
a competitive  transition charge (CTC).  Customers electing to obtain power from
an  alternative  supplier  have  their  bills  reduced  based  on the  regulated
generation  component,  and the customers  receive a generation  charge from the
alternative  supplier.  We have a continuing  responsibility to provide power to
those  customers  not  choosing  to  receive  power from an  alternative  energy
supplier, subject to certain limits, which is referred to as our PLR obligation.

Regulatory Matters

        In June 2001, we entered into a settlement  agreement with major parties
in the  combined  merger and rate  proceedings  that,  in addition to  resolving
certain issues  concerning the PPUC's  approval of our merger with  FirstEnergy,
also addressed our request for PLR relief. We are permitted to defer, for future
recovery,  the difference between our actual energy costs and those reflected in
our capped  generation  rates.  Those costs will continue to be deferred through
December 31, 2005.  If energy  costs  incurred  during that period are below our
capped  generation rates, the difference would be used to reduce our recoverable
deferred costs.  Our PLR obligation was extended  through December 31, 2010. Our
CTC

                                       5
<PAGE>

revenues will be applied first to PLR costs,  then to stranded  costs other than
for  non-utility  generation  (NUG) and finally to NUG  stranded  costs  through
December 31, 2010. We would be permitted to recover any remaining stranded costs
through a  continuation  of the CTC  after  December  31,  2010;  however,  such
recovery  would  extend to no later than  December  31,  2015.  Any  amounts not
expected to be  recovered  by December 31, 2015 would be written off at the time
such  nonrecovery  becomes  probable.  Several  parties had  appealed  this PPUC
decision to the Commonwealth  Court of  Pennsylvania.  On February 21, 2002, the
Court affirmed the PPUC decision regarding approval of the merger, remanding the
decision to the PPUC only with respect to the issue of merger savings. The Court
reversed  the  PPUC's  decision  regarding  our PLR  obligation,  and denied our
related requests for rate relief. We are considering our response to the Court's
decision,  which could include asking the  Pennsylvania  Supreme Court to review
the decision. We are unable to predict the outcome of these matters.

Supply Plan

        As  part  of  our  Restructuring  Order,  we  are  obligated  to  supply
electricity  to  customers  who do not choose an alternate  supplier.  The total
forecasted  peak of this obligation in 2002 is 2,300 megawatts (MW). Our current
supply portfolio contains approximately 400 MW of long-term purchases from NUGs,
and our  remaining  obligation is expected to be met through a mix of multi-year
forward  purchases,  short-term  forward (less than one year) purchases and spot
market purchases.

Environmental Matters

        Various   environmental   liabilities   have  been   recognized  on  the
Consolidated  Balance  Sheet as of December 31, 2001,  based on estimates of the
total costs of cleanup, our proportionate  responsibility for such costs and the
financial ability of other  nonaffiliated  entities to pay. The Company has been
named as a "potentially  responsible  party" (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.  Federal law provides that all PRPs for a particular site be
held  liable on a joint and several  basis.  We have total  accrued  liabilities
aggregating  approximately $1 million as of December 31, 2001. We do not believe
environmental  remediation  costs  will have a  material  adverse  effect on our
financial condition, cash flows or results of operations.

Legal Matters

        Various lawsuits,  claims and proceedings related to our normal business
operations  are pending  against us, the most  significant of which is described
below.

        We have a 25%  ownership  interest  in Unit 2 of the Three  Mile  Island
Nuclear Plant (TMI-2),  which was damaged during a 1979 accident. As a result of
the accident,  claims for alleged  personal injury were filed against us, Jersey
Central Power & Light Company,  Metropolitan  Edison Company and GPU in the U.S.
District Court for the Middle  District of  Pennsylvania.  In 1996, the District
Court  granted  a  motion  for  summary  judgment  filed by the  defendants  and
dismissed  the ten initial  "test cases" which had been selected for a test case
trial, as well as all of the remaining  2,100 pending claims.  In November 1999,
the U.S.  Court of Appeals for the Third Circuit  affirmed the District  Court's
dismissal of the ten test cases,  but set aside the dismissal of the  additional
pending  claims,  remanding them to the District Court for further  proceedings.
Following  the  resolution  of  judicial  proceedings  dealing  with  admissible
evidence, we have again requested summary judgment of the remaining 2,100 claims
in the District  Court.  On January 15, 2002,  the  District  Court  granted our
motion.  On February 14, 2002, the  plaintiffs  filed a notice of appeal of this
decision (see Note 6 - Other Legal Proceedings).  Although unable to predict the
outcome of this  litigation,  we believe that any liability to which we might be
subject by reason of the TMI-2 accident will not exceed our financial protection
under the Price-Anderson Act.


Significant Accounting Policies
-------------------------------

        We prepare our  consolidated  financial  statements in  accordance  with
accounting  principles  generally accepted in the United States.  Application of
these  principles  often  requires  a high  degree of  judgment,  estimates  and
assumptions that affect our financial results.  All of our assets are subject to
their own specific  risks and  uncertainties  and are  continually  reviewed for
impairment.  Assets related to the  application of the policies  discussed below
are  similarly  reviewed  with their risks and  uncertainties  reflecting  these
specific factors. Our more significant accounting policies are described below:

Purchase Accounting

        On  November  7, 2001,  the merger  between  FirstEnergy  and GPU became
effective,  and we became a wholly owned  subsidiary of FirstEnergy.  The merger
was accounted for by the purchase method of accounting,  which requires judgment
regarding the  allocation of the purchase  price based on the fair values of the
assets acquired (including


                                       6
<PAGE>

intangible assets) and the liabilities assumed. The fair values of the acquired
assets and assumed liabilities were based primarily on estimates. The
adjustments reflected in our records, which are subject to adjustment in 2002
when finalized, primarily consist of: (1) revaluation of certain property, plant
and equipment; (2) adjusting preferred stock subject to mandatory redemption and
long-term debt to estimated fair value; (3) recognizing additional obligations
related to retirement benefits; and (4) recognizing estimated severance and
other compensation liabilities. The excess of the purchase price over the
estimated fair values of the assets acquired and liabilities assumed was
recognized as goodwill, which will be reviewed for impairment at least annually.
As of December 31, 2001, we had recorded goodwill of approximately $797.4
million related to the merger.

Regulatory Accounting

        We are  subject  to  regulation  that  sets the  prices  (rates)  we are
permitted to charge our customers  based on costs that the  regulatory  agencies
determine we are permitted to recover.  At times,  regulators  permit the future
recovery through rates of costs that would be currently charged to expense by an
unregulated  company.  This  rate-making  process  results in the  recording  of
regulatory assets based on anticipated  future cash inflows.  As a result of the
changing  regulatory   framework  in  Pennsylvania,   a  significant  amount  of
regulatory assets have been recorded. As of December 31, 2001, we had regulatory
assets of $769.8  million.  We  continually  review these assets to assess their
ultimate  recoverability within the approved regulatory  guidelines.  Impairment
risk  associated with these assets relates to potentially  adverse  legislation,
judicial or regulatory actions in the future.

Derivative Accounting

        Determination  of appropriate  accounting  for  derivative  transactions
requires the involvement of management representing operations, finance and risk
assessment.  In order to determine the  appropriate  accounting  for  derivative
transactions,  the  provisions of the contract need to be carefully  assessed in
accordance  with  the  authoritative   accounting  literature  and  management's
intended use of the derivative.  New authoritative  guidance  continues to shape
the  application  of  derivative  accounting.   Management's   expectations  and
intentions  are key factors in  determining  the  appropriate  accounting  for a
derivative  transaction and, as a result,  such expectations and intentions must
be documented. Derivative contracts that are determined to fall within the scope
of Statement of Financial Accounting Standards (SFAS) No. 133, as amended,  must
be recorded at their fair value.  Active market prices are not always  available
to  determine  the fair value of the later years of a contract,  requiring  that
various  assumptions  and estimates be used in their  valuation.  We continually
monitor our derivative  contracts to determine if our activities,  expectations,
intentions,  assumptions  and  estimates  remain  valid.  As part of our  normal
operations we enter into  commodities  contracts,  which  increase the impact of
derivative accounting judgments.

Revenue Recognition

        We follow the accrual  method of accounting  for  revenues,  recognizing
revenue for  kilowatt-hours  that have been delivered but not yet billed through
the end of the year. The determination of unbilled revenues requires  management
to make various estimates including:

     -    Net energy purchased or generated for retail load
     -    Losses of energy over distribution lines
     -    Mix of kilowatt-hour  usage by residential,  commercial and industrial
          customers
     -    Kilowatt-hour   usage  of   customers   receiving   electricity   from
          alternative suppliers


Recently Issued Accounting Standards
------------------------------------

          The Financial Accounting Standards Board (FASB) approved SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets,"
on June 29, 2001. SFAS 141 requires that all business combinations initiated
after June 30, 2001 be accounted for using purchase accounting. The provisions
of the new standard relating to the determination of goodwill and other
intangible assets have been applied to our 2001 merger, which was accounted for
as a purchase transaction. Under SFAS 142, amortization of existing goodwill
will cease January 1, 2002. Instead, goodwill will be tested for impairment at
least on an annual basis, and no impairment of goodwill is anticipated as a
result of a preliminary analysis. We did not have any goodwill prior to our 2001
merger, and we did not amortize goodwill associated with the merger under the
provisions of the new standard.

        In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations."  The new statement  provides  accounting  standards for retirement
obligations  associated with tangible  long-lived assets, with adoption required
by January 1, 2003.  SFAS 143 requires that the fair value of a liability for an
asset  retirement  obligation be recorded in the period in which it is incurred.
The associated  asset  retirement  costs are capitalized as part of the carrying
amount of the long-lived  asset. Over time the capitalized costs are depreciated
and the present value of the asset retirement liability increases,  resulting in
a period expense.  Upon retirement,  a gain or loss will be recorded if the cost
to settle the retirement  obligation  differs from the carrying  amount.  We are
currently  assessing the new standard and have not yet  determined the impact on
our financial statements.

                                       7
<PAGE>


        In  September  2001,  the FASB  issued  SFAS  144,  "Accounting  for the
Impairment or Disposal of  Long-Lived  Assets."  SFAS 144  supersedes  SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Statement  also  supersedes  the  accounting  and reporting
provisions of APB 30. Our adoption of this Statement, effective January 1, 2002,
will  result in our  accounting  for any  future  impairments  or  disposals  of
long-lived  assets  under the  provisions  of SFAS 144,  but will not change the
accounting   principles  used  in  previous  asset   impairments  or  disposals.
Application of SFAS 144 is not  anticipated to have a major impact on accounting
for impairments or disposal  transactions  compared to the prior  application of
SFAS 121 or APB 30.

                                       8

<PAGE>
<TABLE>

                                                 PENNSYLVANIA ELECTRIC COMPANY

                                               CONSOLIDATED STATEMENTS OF INCOME

<CAPTION>

                                                                 Nov 7 -         Jan. 1 -   For the Years Ended Dec.31,
                                                              Dec. 31, 2001   Nov. 6, 2001      2000         1999
----------------------------------------------------------------------------------------------------------------------
                                                                                  (In thousands)

<S>                                                              <C>            <C>             <C>          <C>
OPERATING REVENUES........................................       $140,062  |    $834,548        $901,881     $921,965
                                                                 --------  |    --------        --------     --------
                                                                           |
OPERATING EXPENSES AND TAXES:                                              |
   Fuel and purchased power...............................         79,815  |     519,838         545,117      361,901
   Nuclear operating costs................................          --     |       --              --          30,626
   Other operating costs..................................         20,015  |     138,543         148,698      217,408
                                                                 --------  |    --------        --------     --------
     Total operation and maintenance expenses.............         99,830  |     658,381         693,815      609,935
   Provision for depreciation and amortization............          8,613  |      49,191          56,505       78,384
   General taxes..........................................          6,281  |      39,532          45,890       42,046
   Income taxes...........................................         10,997  |      17,395          25,335       50,675
                                                                 --------  |    --------        --------    ---------
     Total operating expenses and taxes...................        125,721  |     764,499         821,545      781,040
                                                                 --------  |    --------        --------     --------
                                                                           |
OPERATING INCOME..........................................         14,341  |      70,049          80,336      140,925
                                                                           |
OTHER INCOME (EXPENSE)....................................          3,049  |      (6,610)          6,716       55,641
                                                                 --------  |    --------        --------     --------
                                                                           |
INCOME BEFORE NET INTEREST CHARGES........................         17,390  |      63,439          87,052      196,566
                                                                 --------  |    --------        --------     --------
                                                                           |
NET INTEREST CHARGES:                                                      |
   Subsidiaries preferred dividends.......................          1,101  |       6,239           7,034        8,953
   Interest on long-term debt.............................          3,972  |      28,751          29,964       31,837
   Allowance for borrowed funds used during                                |
     construction.........................................             47  |        (494)           (742)      (1,074)
   Deferred interest income...............................           (504) |        (783)          --           --
   Other interest expense ................................          1,979  |       6,008          11,546        4,359
                                                                 --------  |    --------        --------     --------
   Net interest charges...................................          6,595  |      39,721          47,802       44,075
                                                                 --------  |    --------        --------     --------
                                                                           |
NET INCOME................................................         10,795  |      23,718          39,250      152,491
                                                                           |
PREFERRED STOCK DIVIDEND                                                   |
   REQUIREMENTS...........................................          --     |       --              --             154
                                                                 --------  |    --------        --------     --------
                                                                           |
LOSS ON PREFERRED STOCK REACQUISITION.....................          --     |       --              --             726
                                                                 --------  |    --------        --------     --------
                                                                           |
EARNINGS ON COMMON STOCK..................................       $ 10,795  |    $ 23,718        $ 39,250     $151,611
                                                                 ========  |    ========        ========     ========


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

</TABLE>
                                       9
<PAGE>

<TABLE>

                                         PENNSYLVANIA ELECTRIC COMPANY

                                         CONSOLIDATED BALANCE SHEETS
<CAPTION>
As of December 31,                                                                        2001             2000
------------------------------------------------------------------------------------------------------------------
                                                                                              (In thousands)
                                         ASSETS
UTILITY PLANT:
<S>                                                                                    <C>              <C>
   In service.....................................................................     $1,845,187   |   $1,794,259
   Less-Accumulated provision for depreciation....................................        630,957   |      588,377
                                                                                       ----------   |   ----------
                                                                                        1,214,230   |    1,205,882
                                                                                       ----------   -   ----------
   Construction work in progress-                                                                   |
     Electric plant...............................................................         12,857   |       25,895
                                                                                       ----------   |   ----------
                                                                                        1,227,087   |    1,231,777
                                                                                       ----------   |   ----------
OTHER PROPERTY AND INVESTMENTS:                                                                     |
   Nonutility generation trusts...................................................        154,067   |      190,710
   Nuclear plant decommissioning trusts...........................................         96,610   |       98,426
   Long-term notes receivable from associated companies...........................         15,515   |       15,515
   Other..........................................................................          2,265   |          833
                                                                                       ----------   |   ----------
                                                                                          268,457   |      305,484
                                                                                       ----------   |   ----------
CURRENT ASSETS:                                                                                     |
   Cash and cash equivalents......................................................         39,033   |          581
   Receivables-                                                                                     |
     Customers (less accumulated provisions of $14,719,000 and $14,851,000                          |
        respectively, for uncollectible accounts).................................        107,170   |      117,515
     Associated companies.........................................................         40,203   |        9,558
     Other........................................................................         14,842   |       21,205
   Prepayments ...................................................................          8,605   |       11,868
                                                                                       ----------   |   ----------
                                                                                          209,853   |      160,727
                                                                                       ----------   |   ----------
DEFERRED CHARGES:                                                                                   |
   Regulatory assets..............................................................        769,807   |      614,182
   Goodwill.......................................................................        797,362   |        --
   Other..........................................................................         27,703   |       19,314
                                                                                       ----------   |   ----------
                                                                                        1,594,872   |      633,496
                                                                                       ----------   |   ----------
                                                                                       $3,300,269   |   $2,331,484
                                                                                       ----------   |   ----------
                           CAPITALIZATION AND LIABILITIES                                           |
                                                                                                    |
CAPITALIZATION (See Consolidated Statements of Capitalization):                                     |
   Common stockholder's equity....................................................     $1,306,576   |   $  469,837
   Company-obligated trust preferred securities...................................         92,000   |      100,000
   Long-term debt.................................................................        472,400   |      519,481
                                                                                       ----------   |   ----------
                                                                                        1,870,976   |    1,089,318
                                                                                       ----------   |   ----------
CURRENT LIABILITIES:                                                                                |
   Currently payable long-term debt and preferred stock...........................         50,756   |          499
   Short-term borrowings (Note 5)-                                                                  |
     Associated companies.........................................................         77,623   |        --
     Other........................................................................          --      |       55,800
   Accounts payable-                                                                                |
     Associated companies.........................................................        126,390   |       29,788
     Other........................................................................         38,720   |       49,452
   Accrued taxes..................................................................         29,255   |       23,895
   Accrued interest...............................................................         12,284   |       11,582
   Other..........................................................................         10,993   |        7,970
                                                                                       ----------   |   ----------
                                                                                          346,021   |      178,986
                                                                                       ----------   |   ----------
DEFERRED CREDITS:                                                                                   |
   Accumulated deferred income taxes..............................................         21,682   |       25,013
   Accumulated deferred investment tax credits....................................         11,956   |       13,098
   Nuclear plant decommissioning costs............................................        135,483   |      132,717
   Nuclear fuel disposal costs....................................................         18,453   |       17,728
   Power purchase contract loss liability.........................................        867,046   |      846,992
   Other..........................................................................         28,652   |       27,632
                                                                                       ----------   |   ----------
                                                                                        1,083,272   |    1,063,180
                                                                                       ----------   |   ----------
COMMITMENTS AND CONTINGENCIES                                                                       |
   (Notes 3 and 6)                                                                     ----------   |   ----------
                                                                                       $3,300,269   |   $2,331,484
                                                                                       ==========   |   ==========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.

</TABLE>
                                       10
<PAGE>

<TABLE>

                                      PENNSYLVANIA ELECTRIC COMPANY

                                CONSOLIDATED STATEMENTS OF CAPITALIZATION

<CAPTION>
As of December 31,                                                                            2001        2000
-------------------------------------------------------------------------------------------------------------------
                              (Dollars in thousands, except per share amounts)
COMMON STOCKHOLDER'S EQUITY:
<S>                                                                                       <C>            <C>
   Common stock, par value $20 per share, authorized 5,400,000 shares
     5,290,596 shares outstanding...................................................      $  105,812  |  $  105,812
   Other paid-in capital............................................................       1,188,190  |     320,487
   Accumulated other comprehensive income (Note 4E).................................           1,779  |          23
   Retained earnings (Note 4A)......................................................          10,795  |      43,515
                                                                                          ----------  |  ----------
     Total common stockholder's equity..............................................       1,306,576  |     469,837
                                                                                          ----------  |  ----------
                                                                                                      |
   COMPANY OBLIGATED TRUST                                                                            |
   PREFERRED SECURITIES                                                                               |
   OF SUBSIDIARY TRUST                                                                                |
   (NOTE 4C):                                                                                         |
     7.34% due 2039.................................................................          92,000  |     100,000
                                                                                                      |
LONG-TERM DEBT (Note 4D):                                                                             |
   First mortgage bonds:                                                                              |
     6.125% due 2007................................................................           4,110  |       4,110
     5.35% due 2010.................................................................          12,310  |      12,310
     5.35% due 2010.................................................................          12,000  |      12,000
     5.80% due 2020.................................................................          20,000  |      20,000
     6.05% due 2025.................................................................          25,000  |      25,000
                                                                                          ----------  |  ----------
       Total first mortgage bonds...................................................          73,420  |      73,420
                                                                                          ----------  |  ----------
                                                                                                      |
   Unsecured notes:                                                                                   |
     6.42% due 2002.................................................................          25,000  |      25,000
     6.47% due 2002.................................................................          25,000  |      25,000
     5.75% due 2004.................................................................         125,000  |     125,000
     7.50% due 2005.................................................................           8,000  |       8,000
     6.125% due 2009................................................................         100,000  |     100,000
     7.77% due 2010.................................................................          35,000  |      35,000
     6.625% due 2019................................................................         125,000  |     125,000
     7.69% due 2039.................................................................           2,998  |       3,012
                                                                                          ----------  |  ----------
       Total senior notes...........................................................         445,998  |     446,012
                                                                                          ----------  |  ----------
                                                                                                      |
   Capital lease obligations (Note 3)...............................................           1,670  |       2,153
                                                                                          ----------  |  ----------
   Net unamortized premium (discount) on debt.......................................           2,068  |      (1,605)
                                                                                          ----------  |  ----------
   Long-term debt due within one year...............................................         (50,756) |        (499)
                                                                                          ----------  |  ----------
   Total long-term debt.............................................................         472,400  |     519,481
                                                                                          ----------  |  ----------
TOTAL CAPITALIZATION................................................................      $1,870,976  |  $1,089,318
                                                                                          ==========  |  ==========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

</TABLE>
                                       11
<PAGE>

<TABLE>

                                         PENNSYLVANIA ELECTRIC COMPANY

                                CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

<CAPTION>

                                                                         Common Stock                 Accumulated
                                                                         ------------        Other       Other
                                                        Comprehensive    Number     Par      Paid-In  Comprehensive  Retained
                                                           Income     of Shares   Value     Capital  Income (Loss)  Earnings
                                                       -------------  ---------   -----     -------  -------------  --------
                                                                       (Dollars in thousands)

<S>                                                      <C>          <C>       <C>         <C>          <C>       <C>
Balance, January 1, 1999.......................                       5,290,596 $105,812    $  285,487   $8,353    $  367,653
   Net income..................................          $152,491                                                     152,491
   Net unrealized gain (loss) on investments...             2,101                                         2,101
   Minimum pension liability...................               165                                           165
                                                         --------
   Comprehensive income........................           154,757
                                                         --------
   Loss on preferred stock reacquisition.......                                                                          (725)
   Cash dividends on preferred stock...........                                                                          (154)
   Cash dividends on common stock..............                                                                      (460,000)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999.....................                       5,290,596  105,812       285,487   10,619        59,265
   Net income..................................            39,250                                                      39,250
   Net unrealized gain (loss) on investments...           (10,596)                                      (10,596)
                                                         --------
   Comprehensive income........................            28,654
                                                         --------
   Contributions from parent company...........                                                 35,000
   Cash dividends on common stock..............                                                                       (55,000)
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000.....................                       5,290,596  105,812       320,487       23        43,515
   Net income..................................            23,718                                                      23,718
   Net unrealized gain on investments..........                12                                            12
   Net unrealized gain (loss) on derivative
     instruments...............................            (1,064)                                       (1,064)
                                                         --------
   Comprehensive income........................            22,666
                                                         --------
   Contributions from parent company...........                                                 50,000
-----------------------------------------------------------------------------------------------------------------------------
Balance, November 6, 2001......................                       5,290,596  105,812       370,487   (1,029)       67,233
   Purchase accounting fair value adjustment...                                                817,703    1,029       (67,233)
_____________________________________________________________________________________________________________________________
Balance, November 7, 2001......................                       5,290,596  105,812     1,188,190    --            --
   Net income..................................            10,795                                                      10,795
   Net unrealized gain (loss) on investments...                (2)                                           (2)
   Net unrealized gain (loss) on
     derivative instruments....................             1,781                                         1,781
                                                         --------
   Comprehensive Income........................          $ 12,574
                                                         --------
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001.....................                       5,290,596 $105,812    $1,188,190   $1,779    $   10,795
=============================================================================================================================



                                 CONSOLIDATED STATEMENTS OF PREFERRED STOCK
<CAPTION>
                                                          Not Subject to              Subject to
                                                      Mandatory Redemption       Mandatory Redemption
                                                      --------------------       --------------------
                                                       Number     Carrying       Number      Carrying
                                                      of Shares     Value        of Shares      Value
                                                      ---------     -----        ---------      -----
                                                                   (Dollars in thousands)

<S>                                                    <C>        <C>         <C>           <C>
             Balance, January 1, 1999............      165,485    $16,681       4,200,000    $105,000
               Redemptions-
                   4.40% Series B................      (29,678)    (3,026)
                   3.70% Series C................      (49,568)    (4,983)
                   4.05% Series D................      (28,219)    (2,852)
                   4.70% Series E................      (14,103)    (1,411)
                   4.50% Series F................      (17,081)    (1,714)
                   4.60% Series G................      (26,836)    (2,695)
                   8.75% Series..................                              (4,200,000)   (105,000)
               Issuances-
                 7.34% Series....................                               4,000,000     100,000
             ----------------------------------------------------------------------------------------
             Balance, December 31, 1999..........        --          --         4,000,000     100,000
             ========================================================================================
             Balance, December 31, 2000..........        --          --         4,000,000     100,000
             ========================================================================================
               Purchase accounting fair
                  value adjustment...............                                              (8,000)
             ----------------------------------------------------------------------------------------
             Balance, December 31, 2001..........        --       $  --         4,000,000    $ 92,000
             ========================================================================================


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

</TABLE>
                                       12
<PAGE>

<TABLE>

                                             PENNSYLVANIA ELECTRIC COMPANY

                                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                      Nov. 7 -     Jan. 1 -  For the Years  Ended Dec. 31,
                                                                  Dec. 31, 2001  Nov. 6, 2001     2000          1999
-------------------------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>          <C>          <C>         <C>
Net Income...........................................................$ 10,795  |  $   23,718   $  39,250    $  152,491
Adjustments to reconcile net income to net                                     |
   cash from operating activities:                                             |
     Provision for depreciation and amortization.....................   8,613  |      49,191      56,505        78,384
     Nuclear fuel and lease amortization.............................   --     |       --          --            6,036
     Other amortization..............................................     309  |       1,672         347         --
     Impact of PPUC rate order, net..................................   --     |       --        (21,550)        --
     Deferred costs, net.............................................  (7,467) |    (143,462)    (76,957)      (57,474)
     Deferred income taxes, net...................................... (23,127) |      60,170      15,946      (394,872)
     Investment tax credits, net.....................................    (171) |        (970)     (1,142)      (22,687)
     Receivables..................................................... (26,592) |      16,566     (19,089)      (11,216)
     Materials and supplies..........................................   --     |       --          --           56,559
     Accounts payable................................................ (19,382) |      29,462     (20,608)        6,110
     Other...........................................................  41,590  |     (36,884)    (89,125)      (81,187)
                                                                     --------- |  ----------   ---------    ----------
       Net cash used for operating activities........................ (15,432) |        (537)   (116,423)     (267,856)
                                                                     --------- |  ----------   ---------    ----------
                                                                               |
CASH FLOWS FROM FINANCING ACTIVITIES:                                          |
New Financing-                                                                 |
     Long-term debt..................................................   --     |       --        118,000       348,218
     Short-term borrowings, net......................................   2,623  |      19,200       2,200         --
     Company-obligated trust preferred securities....................   --     |       --          --           96,535
     Contributions from parent.......................................   --     |      50,000      35,000         --
Redemptions and Repayments-                                                    |
     Preferred stock.................................................   --     |       --          --           17,406
     Long-term debt..................................................   --     |       --         25,000       600,011
     Short-term borrowings, net......................................   --     |       --          --           32,423
     Company-obligated mandatorily redeemable                                  |
        preferred securities.........................................   --     |       --          --          105,383
     Capital lease principal payments................................   --     |       --          --            7,907
Dividend Payments-                                                             |
     Common stock....................................................   --     |       --         55,000       460,000
     Preferred stock.................................................   --     |       --          --              154
                                                                     --------  |  ----------   ---------    ----------
       Net cash used for (provided from) financing activities........  (2,623) |     (69,200)    (75,200)      778,531
                                                                     --------  |  ----------   ---------    ----------
                                                                               |
CASH FLOWS FROM INVESTING ACTIVITIES:                                          |
Property additions...................................................   9,687  |      50,543      73,247        78,331
Contributions to (proceeds from) nonutility generation trusts........ (29,944) |     (18,339)    (75,991)      266,701
Contributions to decommissioning trusts..............................   --     |          15          40        75,926
Sale of investments..................................................   --     |       --          --       (1,493,444)
Other................................................................     246  |       5,194      (6,617)       (1,002)
                                                                     --------  |  ----------   ---------    ----------
       Net cash used for (provided from) investing activities........ (20,011) |      37,413      (9,321)   (1,073,488)
                                                                     --------  |  ----------   ---------    ----------
Net increase (decrease) in cash and cash equivalents.................   7,202  |      31,250     (31,902)       27,101
Cash and cash equivalents at beginning of period.....................  31,831  |         581      32,483         5,382
                                                                     --------  |  ----------   ---------    ----------
Cash and cash equivalents at end of period...........................$ 39,033  |  $   31,831   $     581    $   32,483
                                                                     ========  |  ==========   =========    ==========
                                                                               |
SUPPLEMENTAL CASH FLOWS INFORMATION:                                           |
Cash Paid During the Year-                                                     |
     Interest (net of amounts capitalized)...........................$  2,018  |  $   35,134   $  33,409    $   46,826
                                                                     ========  |  ==========   =========    ==========
     Income taxes (refund)...........................................$(12,176) |  $  (14,542)  $ 110,395    $  413,810
                                                                     ========  |  ==========   =========    ==========

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

</TABLE>
                                       13
<PAGE>

<TABLE>

                                            PENNSYLVANIA ELECTRIC COMPANY

                                          CONSOLIDATED STATEMENTS OF TAXES

<CAPTION>
                                                                      Nov. 7 -     Jan. 1 -  For the Years  Ended Dec. 31,
                                                                  Dec. 31, 2001  Nov. 6, 2001     2000          1999
--------------------------------------------------------------------------------------------------------------------------
                                                                                     (In thousands)
GENERAL TAXES:
<S>                                                                  <C>          <C>          <C>          <C>
Real and personal property.........................................  $   (146) |  $    1,622   $   1,139    $    5,998
State gross receipts...............................................     5,560  |      30,932      37,222        27,498
Other..............................................................       867  |       6,978       7,529         8,550
                                                                     --------  |  ----------   ---------    ----------
       Total general taxes.........................................  $  6,281  |  $   39,532   $  45,890    $   42,046
                                                                     ========  |  ==========   =========    ==========
                                                                               |
PROVISION FOR INCOME TAXES:                                                    |
Currently payable-                                                             |
   Federal.........................................................  $ 23,861  |  $  (36,615)  $  11,593    $  358,267
   State...........................................................     7,667  |      (3,183)      3,357       113,675
                                                                     --------  |  ----------   ---------    ----------
                                                                       31,528  |     (39,798)     14,950       471,942
                                                                     --------  |  ----------   ---------    ----------
Deferred, net-                                                                 |
   Federal.........................................................   (17,511) |      46,346      11,732      (298,890)
   State...........................................................    (5,616) |      13,824       4,214       (95,982)
                                                                     --------  |  ----------   ---------    ----------
                                                                      (23,127) |      60,170      15,946      (394,872)
                                                                     --------  |  ----------   ---------    ----------
Investment tax credit amortization.................................      (171) |        (970)     (1,142)      (22,687)
                                                                     --------  |  ----------   ---------    ----------
       Total provision for income taxes............................  $  8,230  |  $   19,402   $  29,754    $   54,383
                                                                     ========  |  ==========   =========    ==========
                                                                               |
INCOME STATEMENT CLASSIFICATION                                                |
OF PROVISION FOR INCOME TAXES:                                                 |
Operating income...................................................  $ 10,997  |  $   17,395   $  25,335    $   50,675
Other income.......................................................    (2,767) |       2,007       4,419         3,708
                                                                     --------  |  ----------   ---------    ----------
       Total provision for income taxes............................  $  8,230  |  $   19,402   $  29,754    $   54,383
                                                                     ========  |  ==========   =========    ==========
                                                                               |
RECONCILIATION OF FEDERAL INCOME TAX                                           |
EXPENSE AT STATUTORY RATE TO TOTAL                                             |
PROVISION FOR INCOME TAXES:                                                    |
Book income before provision for income taxes                        $ 19,025  |  $   43,120   $  69,003    $  206,875
                                                                     ========  |  ==========   =========    ==========
Federal income tax expense at statutory rate.......................  $  6,659  |  $   15,092   $  24,151    $   72,406
Increases (reductions) in taxes resulting from-                                |
   Amortization of investment tax credits..........................      (171) |        (969)     (1,140)      (22,686)
   Depreciation....................................................       555  |       1,407       1,183           109
   State income tax, net of federal tax............................     1,404  |       7,156       3,590        14,951
   Allocated share of consolidated tax savings.....................     --     |      (2,912)      --             (880)
   Other, net......................................................      (217) |        (372)      1,970        (9,517)
                                                                     --------  |  ----------   ---------    ----------
       Total provision for income taxes............................  $  8,230  |  $   19,402   $  29,754    $   54,383
                                                                     ========  |  ==========   =========    ==========
                                                                               |
ACCUMULATED DEFERRED INCOME TAXES AT                                           |
DECEMBER 31:                                                                   |
Property basis differences.........................................  $256,951  |               $ 250,410    $  257,820
Nuclear decommissioning............................................   (42,138) |                 (35,495)        2,693
Non-utility generation costs.......................................  (214,492) |                (112,291)     (103,621)
Purchase accounting basis difference...............................   (38,407) |                   --            --
Sale of generation assets..........................................     5,302  |                   5,302      (245,097)
Regulatory transition charge.......................................    (9,329) |                  (9,329)       22,904
Customer receivables for future income taxes.......................    61,493  |                  65,506        68,816
Other..............................................................     2,302  |                (139,090)       14,250
                                                                     --------  |               ---------    ----------
       Net deferred income tax liability...........................  $ 21,682  |               $  25,013    $   17,765
                                                                     ========  |               =========    ==========


The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.

</TABLE>

                                       14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          The consolidated financial statements include Pennsylvania Electric
Company (Company) and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated. The Company is a wholly owned
subsidiary of FirstEnergy Corp. FirstEnergy also holds directly all of the
issued and outstanding common shares of Ohio Edison Company (OE), The Cleveland
Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American
Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L)
and Metropolitan Edison Company (Met-Ed). The Company, JCP&L and Met-Ed were
formerly wholly owned subsidiaries of GPU, Inc., which merged with FirstEnergy
on November 7, 2001. Pre-merger period and post-merger period financial results
are separated by a heavy black line.

        The Company follows the accounting policies and practices  prescribed by
the  Pennsylvania  Public  Utility  Commission  (PPUC)  and the  Federal  Energy
Regulatory  Commission  (FERC).  The  preparation  of  financial  statements  in
conformity with accounting  principles  generally  accepted in the United States
(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.  Certain  prior year  amounts have been  reclassified  to
conform with the current year presentation.


     REVENUES-

        The  Company's  principal  business  is  providing  electric  service to
customers in Pennsylvania. The Company's retail customers are metered on a cycle
basis.  Revenue is recognized for unbilled  electric  service through the end of
the year.

        Receivables from customers include sales to residential,  commercial and
industrial  customers  and sales to wholesale  customers.  There was no material
concentration  of receivables  as of December 31, 2001 or 2000,  with respect to
any particular segment of the Company's customers.


     REGULATORY PLAN-

        Pennsylvania  enacted its electric utility  competition law in 1996 with
the phase-in of customer choice for generation suppliers completed as of January
1, 2001. The PPUC authorized a rate  restructuring  plan for the Company in 1998
which  essentially  resulted in the  deregulation  of the  Company's  generation
business. The Company has a continuing  responsibility to provide power to those
customers not choosing to receive  power from an  alternative  energy  supplier,
subject to certain  limits,  which is referred to as the  Company's  provider of
last resort (PLR) obligation.

        In 2000,  the PPUC  disallowed  a portion  of the  requested  additional
stranded  costs  above  those  amounts   granted  in  the  Company's  1998  rate
restructuring  plan order.  The PPUC  required the Company to seek an IRS ruling
regarding the return of certain  unamortized  investment  tax credits and excess
deferred  income  tax  benefits  to  ratepayers.  If the IRS  ruling  ultimately
supports  returning  these tax benefits to  ratepayers,  the Company  would then
reduce  stranded  costs by $25 million plus interest and record a  corresponding
charge to income.

        As a result of its generating  asset  divestitures,  the Company obtains
its  supply of  electricity  to meet its PLR  obligation  almost  entirely  from
contracted and open market purchases. During 2000, the Company's purchased power
costs  substantially  exceeded  the  amounts it could  recover  under its capped
generation rates, which are in effect for varying periods,  pursuant to its 1998
rate restructuring plan. In November 2000, the Company filed a petition with the
PPUC seeking  permission to defer for future recovery its energy costs in excess
of amounts  reflected in its capped  generation rates. In January 2001, the PPUC
consolidated  this petition with the merger proceeding (see Note 2 - Merger) for
consideration  and resolution in accordance  with the FirstEnergy and GPU merger
procedural schedule.

In June 2001, the Company entered into a Settlement  Stipulation with all of the
major  parties in the  combined  merger and rate relief  proceedings,  that,  in
addition to  resolving  certain  issues  concerning  the PPUC's  approval of the
merger,  also addressed the Company's  request for PLR relief. On June 20, 2001,
the PPUC entered orders approving the Settlement Stipulation, which approved the
merger and  provided  PLR relief.  The Company is  permitted to defer for future
recovery the difference  between its actual energy costs and those  reflected in
its capped generation rates, retroactive to January 1, 2001. Deferral accounting
will continue for such cost  differences  through  December 31, 2005 and, should
energy  costs  incurred  by the  Company  during that period be below its capped
generation  rates,  the  difference  would  be used to  reduce  its  recoverable
deferred costs.  The Company's PLR obligation has been extended through December
31, 2010.  The Company's  competitive  transition  charge (CTC) revenues will be
applied first to PLR costs,  then to stranded  costs other than for  non-utility
generation  (NUG) and finally to NUG stranded  costs through  December 31, 2010.
The Company would be permitted to recover any remaining stranded costs through a
continuation  of the CTC after December 31, 2010;  however,  such recovery would
extend to no later than  December  31,  2015.  Any  amounts  not  expected to be
recovered by December 31, 2015 would be written off at the time such nonrecovery
becomes probable.

                                       15
<PAGE>

        Several  parties had filed  Petitions  for Review with the  Commonwealth
Court of  Pennsylvania  regarding the PPUC's  orders.  On February 21, 2002, the
Court affirmed the PPUC decision regarding approval of the merger, remanding the
decision to the PPUC only with respect to the issue of merger savings. The Court
reversed the PPUC's decision regarding the Company's PLR obligation,  and denied
the Company's  related requests for rate relief.  The Company is considering its
response to the Court's  decision,  which could include asking the  Pennsylvania
Supreme  Court to review the  decision.  The  Company  is unable to predict  the
outcome of these matters.

        The application of Statement of Financial  Accounting  Standards  (SFAS)
No.  71,  "Accounting  for the  Effects  of Certain  Types of  Regulation,"  was
discontinued in 1998 with respect to the Company's  generation  operations.  The
Company  subsequently  divested  substantially all of its generating assets. The
Securities and Exchange Commission issued interpretive  guidance regarding asset
impairment  measurement,  concluding that any supplemental  regulated cash flows
such as a CTC should be  excluded  from the cash flows of assets in a portion of
the business not subject to regulatory accounting practices. If those assets are
impaired,  a regulatory asset should be established if the costs are recoverable
through  regulatory  cash  flows.  All of the  Company's  regulatory  assets are
expected  to  continue  to  be  recovered  under  provisions  of  the  Company's
regulatory orders.


     PROPERTY, PLANT AND EQUIPMENT-

          As a result of the merger, certain of the Company's property, plant
and equipment have been adjusted to reflect fair value. The majority of the
Company's property, plant and equipment is reflected at original cost since such
assets remain subject to rate regulation on a historical cost basis.

        The  Company  provides  for  depreciation  on a  straight-line  basis at
various rates over the estimated lives of property included in plant in service.
The annualized  composite rate was approximately  2.9% in 2001, 2.7% in 2000 and
2.8% in 1999.

        Annual depreciation expense in 2001 included  approximately $1.5 million
for future decommissioning costs applicable to the Company's ownership in Unit 2
of the Three Mile Island Nuclear Plant (TMI-2), a demonstration  nuclear reactor
owned by a wholly owned subsidiary of the Company (in conjunction with JCP&L and
Met-Ed) and  decommissioning  liabilities  for its previously  divested  nuclear
generating  units. The Company's share of the future  obligation to decommission
these units is approximately $128.1 million in current dollars and (using a 4.0%
escalation rate) approximately  $211.8 million in future dollars.  The estimated
obligation  and the  escalation  rate  were  developed  based  on site  specific
studies.  Decommissioning of the demonstration nuclear reactor is expected to be
completed in 2003;  payments for  decommissioning of TMI-2 are expected to begin
in 2014, when actual  decommissioning work is expected to begin. The Company has
recovered  approximately  $50 million for  decommissioning  through its electric
rates from customers  through December 31, 2001. The Company has also recognized
an estimated  liability of approximately $2.3 million related to decontamination
and  decommissioning  of nuclear  enrichment  facilities  operated by the United
States Department of Energy, as required by the Energy Policy Act of 1992.

        In July 2001,  the Financial  Accounting  Standards  Board (FASB) issued
SFAS 143,  "Accounting  for Asset  Retirement  Obligations."  The new  statement
provides  accounting  treatment  for  retirement   obligations  associated  with
tangible  long-lived  assets with adoption  required as of January 1, 2003. SFAS
143  requires  that  the  fair  value of a  liability  for an  asset  retirement
obligation  be recorded in the period in which it is  incurred.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
long-lived  asset.  Over  time the  capitalized  costs are  depreciated  and the
present value of the asset retirement liability increases, resulting in a period
expense. Upon retirement, a gain or loss will be recorded if the costs to settle
the  retirement  obligation  differs  from the  carrying  amount.  Under the new
standard,  additional  assets and  liabilities  relating  principally to nuclear
decommissioning obligations will be recorded, the pattern of expense recognition
will change and income from the external decommissioning trusts will be recorded
as investment  income.  The Company is currently  assessing the new standard and
has not yet quantified the impact on its financial statements.


     INCOME TAXES-

        Details  of the  total  provision  for  income  taxes  are  shown on the
Consolidated  Statements  of Taxes.  Deferred  income  taxes  result from timing
differences  in the  recognition of revenues and expenses for tax and accounting
purposes.  Investment tax credits,  which were deferred when utilized, are being
amortized over the recovery period of the related property. The liability method
is used to account for deferred  income taxes.  Deferred  income tax liabilities
related to tax and accounting basis  differences are recognized at the statutory
income tax rates in effect when the liabilities are expected to be paid. Results
for the period  January 1, 2001  through  November  6, 2001 are  included in the
final consolidated  federal income tax return of GPU, and results for the period
November 7, 2001 through  December 31, 2001 are included in  FirstEnergy's  2001
consolidated  federal income tax return.  In both cases,  the  consolidated  tax
liability  is  allocated  on a  "stand-alone"  company  basis,  with the Company
recognizing  the tax benefit for any tax losses or credits it contributed to the
consolidated return.

                                       16

<PAGE>

     RETIREMENT BENEFITS-

          Effective December 31, 2001, the Company's defined benefit pension
plan was merged into FirstEnergy's defined benefit pension plan. FirstEnergy's
trusteed, noncontributory defined benefit pension plan covers almost all of the
Company's full-time employees. Upon retirement, employees receive a monthly
pension based on length of service and compensation. On December 31, 2001, the
GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the
projected unit credit method for funding purposes. The assets of the pension
plan consist primarily of common stocks, United States government bonds and
corporate bonds. The FirstEnergy and GPU postretirement benefit plans are
currently separately maintained; the information shown below is aggregated as of
December 31, 2001. Costs for the year 2001 include the former GPU companies'
pension and other postretirement benefit costs for the period November 7, 2001
through December 31, 2001.

        The Company provides a minimum amount of noncontributory  life insurance
to retired employees in addition to optional contributory insurance. Health care
benefits,  which include certain employee  deductibles and copayments,  are also
available  to  retired   employees,   their   dependents   and,   under  certain
circumstances,  their survivors.  The Company pays insurance premiums to cover a
portion of these benefits in excess of set limits;  all amounts up to the limits
are paid by the Company.  The Company  recognizes the expected cost of providing
other  postretirement  benefits to employees and their beneficiaries and covered
dependents  from the time  employees  are hired  until they  become  eligible to
receive those benefits.

        The  following  sets  forth the funded  status of the plans and  amounts
recognized on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001:

                                                                  Other
                                       Pension Benefits  Postretirement Benefits
                                       ----------------  -----------------------
                                                     (In millions)
     Change in benefit obligation:
     Benefit obligation as of January 1..   $1,506.1         $  752.0
     Service cost........................       34.9             18.3
     Interest cost.......................      133.3             64.4
     Plan amendments.....................        3.6              --
     Actuarial loss......................      123.1             73.3
     Voluntary early retirement program..        --               2.3
     GPU acquisition.....................    1,878.3            716.9
     Benefits paid.......................     (131.4)           (45.6)
     ---------------------------------------------------------------------------
     Benefit obligation as of December 31    3,547.9          1,581.6
     ---------------------------------------------------------------------------

     Change in plan assets:
     Fair value of plan assets
       as of January 1...................    1,706.0             23.0
     Actual return on plan assets........        8.1             12.7
     Company contribution................       --               43.3
     GPU acquisition.....................    1,901.0            462.0
     Benefits paid.......................     (131.4)            (6.0)
     ---------------------------------------------------------------------------
     Fair value of plan assets as
        of December 31...................    3,483.7            535.0
     ---------------------------------------------------------------------------

     Funded status of plan...............      (64.2)        (1,046.6)
     Unrecognized actuarial loss (gain)..      222.8            212.8
     Unrecognized prior service cost.....       87.9             17.7
     Unrecognized net transition
       obligation (asset)................        --             101.6
     ---------------------------------------------------------------------------
     Prepaid (accrued) benefit cost         $  246.5         $ (714.5)
     ===========================================================================

     Assumptions used as of
       December 31, 2001:
     Discount rate.......................       7.25%            7.25%
     Expected long-term return
       on plan assets....................      10.25%           10.25%
     Rate of compensation increase.......       4.00%            4.00%


        FirstEnergy's net pension and other postretirement benefit costs for the
year ended December 31, 2001 were computed as follows:

                                                                Other
                                       Pension Benefits Postretirement Benefits
                                       ---------------- -----------------------
                                                    (In millions)
     Service cost.........................  $   34.9            $18.3
     Interest cost........................     133.3             64.4
     Expected return on plan assets           (204.8)            (9.9)
     Amortization of transition
       obligation (asset).................      (2.1)             9.2
     Amortization of prior service cost...       8.8              3.2
     Recognized net actuarial loss (gain).      --                4.9
     Voluntary early retirement program...       6.1              2.3
     --------------------------------------------------------------------------
     Net benefit cost.....................  $  (23.8)           $92.4
     ==========================================================================

        The composite health care trend rate assumption is approximately  10% in
2002,  9% in 2003 and 8% in 2004,  trending  to  4%-6% in later  years.  Assumed
health  care cost  trend rates have a significant effect on the amounts reported

                                       17
<PAGE>

for the health care plan.  An increase in the health care trend rate  assumption
by one percentage point would increase  FirstEnergy's total service and interest
cost components by $14.6 million and the  postretirement  benefit  obligation by
$151.2 million.  A decrease in the same assumption by one percentage point would
decrease the total service and interest cost components by $12.7 million and the
postretirement benefit obligation by $131.3 million.

Pre-Merger

        As of December 31, 2000,  the Company had on its balance  sheet  accrued
benefit costs of $1.0 million related to pension  obligations.  In addition,  in
each of the years ended  December 31, 2000 and 1999,  the Company  recognized in
income net benefit costs/(credits) of $0.1 million for pension benefits.


     TRANSACTIONS WITH AFFILIATED COMPANIES-

        During the three years ended  December 31, 2001,  GPU Service,  Inc., an
affiliated company, provided legal, accounting,  financial and other services to
the Company. In addition,  prior to the sales of the Company's generating assets
in 1999,  affiliated  companies  GPU  Nuclear,  Inc.  and GPU  Generation,  Inc.
conducted  generation  operations  for the  company.  The total cost of services
rendered by affiliates  was $156 million,  $139 million and $337 million for the
years 2001, 2000 and 1999,  respectively.  Of these amounts,  $110 million, $109
million and $259  million  were  charged to income for the years 2001,  2000 and
1999, respectively.


     SUPPLEMENTAL CASH FLOWS INFORMATION-

        All temporary cash  investments  purchased  with an initial  maturity of
three  months  or less are  reported  as cash  equivalents  on the  Consolidated
Balance Sheets at cost, which approximates their fair market value.

        All borrowings with initial maturities of less than one year are defined
as financial instruments under GAAP and are reported on the Consolidated Balance
Sheets at cost, which  approximates  their fair market value. The following sets
forth the  approximate  fair  value and  related  carrying  amounts of all other
long-term debt,  preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:

                                            2001                  2000
        ----------------------------------------------------------------------
                                      Carrying  Fair        Carrying  Fair
                                       Value   Value         Value    Value
         ---------------------------------------------------------------------
                                                   (In millions)
         Long-term debt............... $519    $509            $518   $497
         Preferred stock.............. $ 92    $ 90            $100   $ 97
         Investments other than cash
           and cash equivalents....... $251    $251            $289   $289
         ---------------------------------------------------------------------
                                       $862    $850            $907   $883
         =====================================================================

        The fair  values of  long-term  debt and  preferred  stock  reflect  the
present value of the cash  outflows  relating to those  securities  based on the
current  call  price,  the yield to  maturity  or the  yield to call,  as deemed
appropriate at the end of each respective year. The yields assumed were based on
securities  with similar  characteristics  offered by  corporations  with credit
ratings  similar to the Company's  ratings.  Long-term debt and preferred  stock
subject to mandatory redemption were recognized at fair value in connection with
the merger.

        The fair  value of  investments  other  than  cash and cash  equivalents
represent cost (which  approximates fair value) or the present value of the cash
inflows  based on the  yield to  maturity.  The  yields  assumed  were  based on
financial instruments with similar characteristics and terms.  Investments other
than  cash and  cash  equivalents  include  decommissioning  trust  investments.
Unrealized gains and losses applicable to the  decommissioning  trusts have been
recognized  in  the  trust  investment  with  a  corresponding   change  to  the
decommissioning  liability.  The  Company  has no  securities  held for  trading
purposes.

        On  January 1, 2001,  the  Company  adopted  SFAS 133,  "Accounting  for
Derivative  Instruments  and  Hedging  Activities,"  as  amended  by  SFAS  138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities --
an  amendment  of  FASB  Statement  No.  133."  The  adoption  resulted  in  the
recognition of derivative assets on the Consolidated Balance Sheet as of January
1, 2001 in the amount of $26.0 million,  with an offsetting  amount, net of tax,
recorded  in  Regulatory  Assets of $25.9  million.  As of January 1, 2001,  the
Company also recorded derivative  liabilities in the amount of $1.0 million as a
result of adopting SFAS 133, with a substantially  offsetting amount recorded in
Accumulated Other Comprehensive  Income, of $0.5 million. As of January 1, 2001,
a cumulative  effect of accounting  change was recognized as an expense in Other
Income (Deductions),  Net on the Consolidated  Statement of Income in the amount
of $0.8 million.

        The Company is exposed to financial risks resulting from the fluctuation
of interest rates and commodity prices,  including  electricity and natural gas.
To manage the volatility relating to these exposures, the Company uses a

                                       18
<PAGE>

variety Of derivative  instruments,  including  options,  futures  contracts and
swaps. These derivatives are used principally for hedging purposes.  FirstEnergy
has a Risk Policy Committee comprised of executive officers,  which exercises an
independent  risk oversight  function to ensure  compliance  with corporate risk
management policies and prudent risk management practices.

          The Company uses derivatives to hedge the risk of price and interest
rate fluctuations. The Company's primary ongoing hedging activity involves cash
flow hedges of electricity and natural gas purchases. The majority of the
Company's forward commodity contracts are considered "normal purchases and
sales," as defined by SFAS 133, and are therefore excluded from the scope of
SFAS 138. The options and futures contracts determined to be within the scope of
SFAS 133 are accounted for as cash flow hedges and expire on various dates
through 2002. Gains and losses from hedges of commodity price risks are included
in net income when the underlying hedged commodities are delivered. The Company
also uses interest rate swap agreements to manage the risk of increases in
variable interest rates. The interest rate swap agreements, which were entered
into to convert variable rate debt to fixed rate debt, are accounted for as cash
flow hedges under SFAS 133, and expire on various dates through 2002. There is
currently a net deferred gain of $1.8 million included in Accumulated Other
Comprehensive Income as of December 31, 2001 related to derivative hedging
activity, which will be reclassified to earnings during the next twelve months
as hedged transactions occur.

     REGULATORY ASSETS-

        The Companies recognize,  as regulatory assets, costs which the FERC and
PPUC have authorized for recovery from customers in future periods. Without such
authorization,  the costs  would have been  charged to income as  incurred.  All
regulatory  assets are expected to continue to be recovered from customers under
the  Company's  regulatory  plan.  The  Company  continues  to bill and  collect
cost-based rates for its transmission  and distribution  services,  which remain
regulated;  accordingly,  it is  appropriate  that  the  Company  continues  the
application of SFAS 71 to those operations.

        Net regulatory  assets on the Consolidated  Balance Sheets are comprised
of the following:

                                                2001         2000
        ------------------------------------------------------------
                                                  (In millions)

        Regulatory transition charge......      $515.9       $439.4
        Customer receivables for
          future income taxes.............       140.2        149.4
        Provider of last resort deferrals.        83.5          --
        Nuclear decommissioning costs.....        24.0         18.5
        Loss on reacquired debt...........         5.8          6.6
        Other.............................         0.4          0.3
        ------------------------------------------------------------
            Total.........................      $769.8       $614.2
        ============================================================


2.   MERGER:

        On November 7, 2001, the merger of FirstEnergy and GPU became  effective
pursuant to the Agreement and Plan of Merger,  dated August 8, 2000. As a result
of the merger,  GPU's former wholly owned  subsidiaries,  including the Company,
became wholly owned subsidiaries of FirstEnergy.

          The merger was accounted for by the purchase method of accounting. The
assets acquired and liabilities assumed were recorded at estimated fair values
as determined by FirstEnergy's management based on information currently
available and on current assumptions as to future operations. Merger purchase
accounting adjustments recorded in the records of the Company primarily consist
of: (1) revaluation of certain property, plant and equipment; (2) adjusting
preferred stock subject to mandatory redemption and long-term debt to estimated
fair value; (3) recognizing additional obligations related to retirement
benefits; and (4) recognizing estimated severance and other compensation
liabilities. Other assets and liabilities were not adjusted since they remain
subject to rate regulation on a historical cost basis. The excess of the
purchase price over the estimated fair values of the assets acquired and
liabilities assumed was recognized as goodwill, which will not be amortized but
will be reviewed for impairment at least annually. As of December 31, 2001, we
had recorded goodwill of approximately $797.4 million related to the merger.

3.   LEASES:

        Consistent with regulatory treatment, the rentals for capital leases are
charged to operating  expenses on the  Consolidated  Statements  of Income.  The
Company has a capital lease for an operations  building,  which expires in 2004.
In both 2001 and 2000,  total  rentals  related to this capital  lease were $0.7
million,  comprised  of an interest  element of $0.2  million and other costs of
$0.5 million.

                                       19

<PAGE>


         As of December  31,  2001,  the future  minimum  lease  payments on the
Company's capital lease discussed above are: $0.7 million, $0.7 million and $0.6
million for the years 2002 through  2004.  The present  value of the net minimum
lease payments is $1.7 million and the total interest portion is $0.3 million.


4.   CAPITALIZATION:

     (A)  RETAINED EARNINGS-

        The  merger  purchase  accounting  adjustments  included  resetting  the
retained earnings balance to zero at the November 7, 2001 merger date.

        In general,  the Company's first mortgage bond (FMB) indentures restrict
the payment of dividends or  distributions  on or with respect to the  Company's
common stock to amounts credited to earned surplus since  approximately the date
of its  indenture.  At such date,  the Company had a balance of $10.1 million in
its earned surplus account,  which would not be available for dividends or other
distributions.  As of December  31,  2001,  the Company  had  retained  earnings
available  to pay  common  stock  dividends  of  $0.7  million,  net of  amounts
restricted under the Company's FMB indentures.


     (B)  PREFERRED AND PREFERENCE STOCK-

        The Company's preferred stock  authorization  consists of 11.435 million
shares without par value. No preferred shares are currently outstanding.


     (C)  COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
          SUBSIDIARY TRUST HOLDING SOLELY PARTNERSHIP PREFERRED SECURITIES-

        The Company  has formed a  statutory  business  trust,  Penelec  Capital
Trust, which is owned through a wholly-owned limited partnership of the Company,
Penelec  Capital II, L.P., of which a wholly-owned  subsidiary of the Company is
the sole general partner.  In this  transaction,  Penelec Capital Trust invested
the gross proceeds from the sale of $100.0 million of its 7.34% trust  preferred
securities in the preferred  securities  of Penelec  Capital II, L.P.,  which in
turn invested those proceeds in $103.1 million of 7.34% subordinated  debentures
of the  Company.  The sole  assets of Penelec  Capital  Trust are the  preferred
securities  of Penelec  Capital II,  L.P.,  whose sole assets are the  Company's
subordinated  debentures  with the same rate and maturity  date as the preferred
securities.  The  Company  has  effectively  provided  a full and  unconditional
guarantee of its obligations under its trust's preferred  securities.  The trust
preferred  securities,  which  mature  in 2039 and have a  liquidation  value of
$25.00 per security,  are  redeemable at the option of the Company  beginning in
September  2004  at  100%  of  their  principal  amount.  The  interest  on  the
subordinated  debentures  (and  therefore  the  distributions  on the  preferred
securities)  may be  deferred  for up to 60 months,  but the Company may not pay
dividends on, or redeem or acquire,  any of its  cumulative  preferred or common
stock until deferred payments on its subordinated debentures are paid in full.


     (D)  LONG-TERM DEBT-

        The first mortgage indentures and their supplements, which secure all of
the Company's FMBs,  serve as direct first mortgage liens on  substantially  all
property and franchises, other than specifically excepted property, owned by the
Company.

        Based  on the  amount  of bonds  authenticated  by the  Trustee  through
December  31,  2001,  the  Company's   annual  sinking  and   improvement   fund
requirements  for all bonds issued under the mortgage  amount to $12.7  million.
The Company  expects to fulfill its sinking and  improvement  fund obligation by
providing bondable property additions to the Trustee.

        Sinking  fund   requirements  for  FMBs  and  maturing   long-term  debt
(excluding capital leases) for the next five years are:

                               (In millions)
                      ---------------------
                      2002........  $ 50.2
                      2003........     0.2
                      2004........   125.2
                      2005........     8.2
                      2006........     0.2
                     ----------------------

                                       20
<PAGE>

        The Company's  obligations to repay certain  pollution  control  revenue
bonds are secured by several series of FMBs.  Certain  pollution control revenue
bonds are  entitled to the benefit of  noncancelable  municipal  bond  insurance
policies of $69.3  million to pay  principal  of, or interest on, the  pollution
control revenue bonds.


   (E)      COMPREHENSIVE INCOME-

        Comprehensive income includes net income as reported on the Consolidated
Statements of Income and all other changes in common stockholder's equity except
those resulting from  transactions with the Company's parent. As of December 31,
2001,  accumulated other comprehensive  income consisted primarily of unrealized
gains on derivative instrument hedges of $1.8 million.


5.   SHORT-TERM BORROWINGS:

        The Company may borrow from its affiliates on a short-term  basis. As of
December 31, 2001, the Company had total short-term  borrowings of $77.6 million
from its affiliates with a weighted average interest rate of approximately 4.9%.


6.   COMMITMENTS, GUARANTEES AND CONTINGENCIES:

     CAPITAL EXPENDITURES-

        The Company's  current forecast  reflects  expenditures of approximately
$375 million for property  additions and improvements  from 2002-2006,  of which
approximately $72 million is applicable to 2002.


     NUCLEAR INSURANCE-

        The  Price-Anderson Act limits the public liability relative to a single
incident at a nuclear  power plant to $9.5  billion.  The amount is covered by a
combination  of private  insurance  and an industry  retrospective  rating plan.
Based on its present ownership interest in TMI-2, the Company is exempt from any
potential assessment under the industry retrospective rating plan.

        The Company is also  insured as to its  interest in TMI-2 under a policy
issued to the operating company for the plant.  Under this policy,  $150 million
is provided for property damage and decontamination  and decommissioning  costs.
Under this policy,  the Company can be assessed a maximum of approximately  $0.2
million for incidents at any covered nuclear facility  occurring during a policy
year which are in excess of  accumulated  funds  available  to the  insurer  for
paying losses.

        The  Company  intends to maintain  insurance  against  nuclear  risks as
described above as long as it is available.  To the extent that property damage,
decontamination,  decommissioning,  repair and replacement  costs and other such
costs  arising from a nuclear  incident at TMI-2 exceed the policy limits of the
insurance in effect with respect to that plant, to the extent a nuclear incident
is determined not to be covered by the Company's insurance  policies,  or to the
extent such  insurance  becomes  unavailable  in the future,  the Company  would
remain at risk for such costs.


     ENVIRONMENTAL MATTERS-

        Various   environmental   liabilities   have  been   recognized  on  the
Consolidated  Balance  Sheet as of December 31, 2001,  based on estimates of the
total costs of cleanup,  the  Company's  proportionate  responsibility  for such
costs and the  financial  ability of other  nonaffiliated  entities to pay.  The
Company  has been  named as a  "potentially  responsible  party"  (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. Federal law provides that all PRPs for a
particular  site be held  liable on a joint and several  basis.  The Company has
total accrued  liabilities  aggregating  approximately $1 million as of December
31, 2001. The Company does not believe environmental remediation costs will have
a material adverse effect on its financial  condition,  cash flows or results of
operations.


     OTHER LEGAL PROCEEDINGS-

        Various lawsuits, claims and proceedings related to the Company's normal
business  operations are pending  against the Company,  the most  significant of
which is described below.

                                       21
<PAGE>

        TMI-2, which was damaged during a 1979 accident, is jointly owned by the
Company,  JCP&L and Met-Ed, with the Company having a 25% ownership  percentage.
Claims for alleged  personal injury against the Company,  JCP&L,  Met-Ed and GPU
(the defendants)  were filed in the U.S.  District Court for the Middle District
of  Pennsylvania.  In 1996,  the  District  Court  granted a motion for  summary
judgment  filed by the  defendants  and  dismissed  the ten initial "test cases"
which had been  selected for a test case trial,  as well as all of the remaining
2,100 pending claims.  In November 1999, the U.S. Court of Appeals for the Third
Circuit affirmed the District Court's dismissal of the ten "test cases," but set
aside the dismissal of the  additional  pending  claims,  remanding  them to the
District Court for further proceedings.  In September 2000, the defendants filed
for a summary judgment in the District Court. Meanwhile, the plaintiffs appealed
to the Third  Circuit  for a review of the  District  Court's  decision  placing
limitations on the remaining  plaintiffs' suit. In April 2001, the Third Circuit
affirmed the District  Court's  decision.  In July 2001, the defendants  renewed
their  motion  for a  summary  judgment  on the  remaining  2,100  claims in the
District  Court. On January 15, 2002, the District Court granted the defendants'
amended motion for summary  judgment.  On February 14, 2002,  plaintiffs filed a
notice of appeal to the United States Court of Appeals for the Third Circuit. In
addition to the  approximately  2,100 claims for which summary judgment has been
granted,  there is other pending  litigation  arising out of the TMI-2 accident.
This litigation consists of the following: eight personal injury cases that were
not consolidated with the above-referenced approximately 2,100 claims; two class
actions brought on behalf of plaintiffs  alleging  additional injuries diagnosed
after the filing of the complaints in the above-referenced case; a case alleging
exposure  during the  post-accident  cleanup of the TMI-2  plant;  and claims by
individual  businesses  for economic  loss  resulting  from the TMI-2  accident.
Although unable to predict the outcome of this litigation,  the Company believes
that any liability to which it might be subject by reason of the TMI-2  accident
will not exceed its financial protection under the Price-Anderson Act.


7.   SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):

        The  following  summarizes  certain  consolidated  operating  results by
quarter for 2001 and 2000.
<TABLE>
<CAPTION>

                                    Three Months Ended
                               -------------------------------
                               March 31, June 30, September 30, Oct. 1-Nov. 6, Nov. 7-Dec. 31,
                                 2001      2001       2001          2001           2001
----------------------------------------------------------------------------------------------
                                                    (In millions)

<S>                             <C>       <C>        <C>           <C>           <C>
Operating Revenues............  $243.8    $230.6     $265.6        $94.5    |    $140.1
Operating Expenses and Taxes..   235.0     212.2      238.8         78.5    |     125.7
----------------------------------------------------------------------------|-----------------
Operating Income..............     8.8      18.4       26.8         16.0    |      14.4
Other Income (Expense)........     0.6       1.4       (1.2)        (7.4)   |       3.0
Net Interest Charges..........    11.5      12.6       11.2          4.4    |       6.6
----------------------------------------------------------------------------|-----------------
Net Income (Loss).............  $ (2.1)   $  7.2     $ 14.4        $ 4.2    |    $ 10.8
============================================================================|=================
</TABLE>


                                               Three Months Ended
                                 ---------------------------------------------
                                 March 31,  June 30, September 30,December 31,
                                   2000      2000       2000        2000
------------------------------------------------------------------------------
                                                (In millions)

Operating Revenues............   $220.1     $206.8    $236.7      $238.3
Operating Expenses and Taxes..    184.4      193.2     237.8       206.2
------------------------------------------------------------------------------
Operating Income (Loss).......     35.7       13.6      (1.1)       32.1
Other Income (Expense)........      0.3        2.0      (0.8)        5.2
Net Interest Charges..........      9.1       11.1      12.1        15.5
------------------------------------------------------------------------------
Net Income (Loss).............   $ 26.9     $  4.5    $(14.0)     $ 21.8
==============================================================================

                                       22

<PAGE>

Report of Independent Public Accountants


To the Stockholders and Board of Directors of
Pennsylvania Electric Company:

We have audited the  accompanying  consolidated  balance sheet and  consolidated
statement of  capitalization  of Pennsylvania  Electric  Company (a Pennsylvania
corporation and wholly owned  subsidiary of FirstEnergy  Corp.) and subsidiaries
as of December 31, 2001 (post-merger),  and the related consolidated  statements
of income,  common stockholder's  equity,  preferred stock, cash flows and taxes
for the period from  January 1, 2001 to November  6, 2001  (pre-merger)  and the
period from November 7, 2001 to December 31, 2001 (post-merger). These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.  The  financial  statements  of  Pennsylvania  Electric  Company  and
subsidiaries as of December 31, 2000 and for each of the two years in the period
ended  December  31, 2000  (pre-merger),  were audited by other  auditors  whose
report  dated  January  31,  2001,  expressed  an  unqualified  opinion on those
statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the 2001 financial statements referred to above present fairly,
in all  material  respects,  the  financial  position of  Pennsylvania  Electric
Company and subsidiaries as of December 31, 2001 (post-merger),  and the results
of their  operations and their cash flows for the period from January 1, 2001 to
November 6, 2001  (pre-merger)  and the period from November 7, 2001 to December
31, 2001  (post-merger),  in conformity  with  accounting  principles  generally
accepted in the United States.


Arthur Andersen LLP

Cleveland, Ohio,
  March 18, 2002.

                                       23
<PAGE>


                      Report of Independent Accountants


To the Board of Directors and Stockholder of
Pennsylvania Electric Company:

In our opinion,  the consolidated  balance sheet as of December 31, 2000 and the
related  consolidated  statements of income,  and cash flows for each of the two
years in the period ended December 31, 2000 (appearing on the accompanying index
of  the  Pennsylvania  Electric  Company  2001  Annual  Report  to  Stockholders
incorporated  by reference in this Form 10-K)  present  fairly,  in all material
respects,  the  financial  position,  results  of  operations  and cash flows of
Pennsylvania  Electric Company and Subsidiary Companies at December 31, 2000 and
for each of the two years in the period ended  December 31, 2000,  in conformity
with accounting  principles  generally accepted in the United States of America.
These financial  statements are the responsibility of the Company's  management;
our responsibility is to express an opinion on these financial  statements based
on our audits.  We conducted our audits of these  statements in accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.



PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
January 31, 2001

                                       24