EXHIBIT 13.7


                          PENNSYLVANIA ELECTRIC COMPANY

                       2002 ANNUAL REPORT TO STOCKHOLDERS



        Pennsylvania  Electric  Company  (Penelec)  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..............................      2-11
Consolidated Statements of Income.................................      12
Consolidated Balance Sheets.......................................      13
Consolidated Statements of Capitalization.........................      14
Consolidated Statements of Common Stockholder's Equity............      15
Consolidated Statements of Preferred Stock........................      15
Consolidated Statements of Cash Flows.............................      16
Consolidated Statements of Taxes..................................      17
Notes to Consolidated Financial Statements........................     18-30
Reports of Independent Accountants................................     31-32


<PAGE>


<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                                 SELECTED FINANCIAL DATA

<CAPTION>
                                                       Nov. 7 -       Jan. 1 -
                                            2002     Dec. 31, 2001  Nov. 6, 2001     2000         1999         1998
------------------------------------------------------------------------------------------------------------------------
                                                                        (Dollars in thousands)

<S>                                      <C>          <C>          <C>           <C>          <C>          <C>
Operating Revenues.....................  $ 1,027,102  $   140,062  $   834,548 | $   901,881  $  921,965   $ 1,032,226
                                         ===========  ===========   ===========| ===========  ==========   ===========
                                                                               |
Operating Income.......................  $    88,190  $    14,341  $    70,049 | $    80,336  $  140,925   $   125,623
                                         ===========   ==========  =========== | ===========  ==========   ===========
                                                                               |
Income Before Extraordinary Item.......  $    50,910  $    10,795  $    23,718 | $    39,250  $  152,491   $    58,590
                                         ===========  ==========   =========== | ===========  ==========   ===========
                                                                               |
Net Income.............................  $    50,910  $    10,795  $    23,718 | $    39,250  $ 152, 91$   $    39,640
                                         ===========  ===========  =========== | ===========  ===========  ===========
                                                                               |
Earnings on Common Stock...............  $    50,910  $    10,795  $    23,718 | $    39,250  $  151,611   $    38,945
                                         ===========  ===========  =========== | ===========  ==========   ===========
                                                                               |
Total Assets...........................  $ 3,163,254  $ 3,300,269              | $ 2,331,484  $2,463,052   $ 3,565,747
                                         ===========  ===========              | ===========  ==========   ===========
                                                                               |
                                                                               |
Capitalization:                                                                |
   Common Stockholder's Equity.........   $1,353,704   $1,306,576              | $   469,837   $ 461,182   $   767,304
   Cumulative Preferred Stock..........           --           --              |          --          --        16,681
   Company-Obligated Mandatorily                                               |
     Redeemable Preferred Securities...           --           --              |          --          --       105,000
   Company-Obligated Trust Preferred                                           |
     Securities........................       92,214       92,000              |     100,000     100,000            --
   Long-Term Debt......................      470,274      472,400              |     519,481     426,795       629,027
                                          ----------   ----------              |  ----------   ---------    ----------
     Total Capitalization..............   $1,916,192   $1,870,976              |  $1,089,318   $ 987,977    $1,518,012
                                          ==========   ==========              |  ==========   =========    ==========
                                                                               |
                                                                               |
Capitalization Ratios:                                                         |
   Common Stockholder's Equity.........         70.7%        69.8%             |        43.1%       46.7%         50.5%
    Cumulative Preferred Stock.........           --           --              |          --          --           1.1
   Company-Obligated Mandatorily                                               |
     Redeemable Preferred Securities...           --           --              |          --          --           6.9
   Company-Obligated Trust Preferred                                           |
     Securities........................          4.8          4.9              |         9.2        10.1            --
   Long-Term Debt......................         24.5         25.3              |        47.7        43.2          41.5
                                              ------        ------             |      ------      ------        ------
     Total Capitalization..............        100.0%       100.0%             |       100.0%      100.0%        100.0%
                                               =====        =====              |       =====       =====         =====
                                                                               |
                                                                               |
Transmission and Distribution                                                  |
Kilowatt-Hour Deliveries (Millions):                                           |
   Residential.........................        4,196          721        3,264 |       3,949       3,864         3,756
   Commercial..........................        4,753          758        3,733 |       4,509       4,319         4,198
   Industrial..........................        4,336          685        3,658 |       4,698       4,865         4,996
   Other...............................           42            7           34 |          40          43            42
                                              ------        -----        ----- |      ------      ------        ------
   Total Retail........................       13,327        2,171       10,689 |      13,196      13,091        12,992
   Total Wholesale.....................          516          107        1,351 |       2,885       4,219         4,309
                                              ------        -----       ------ |      ------      ------        ------
   Total...............................       13,843        2,278       12,040 |      16,081      17,310        17,301
                                              ======        =====       ====== |      ======      ======        ======
                                                                               |
                                                                               |
Transmission and Distribution Deliveries                                       |
Customers Served:                                                              |
   Residential.........................      503,007      502,901              |     502,052     500,930       499,484
   Commercial..........................       77,125       76,005              |      74,282      73,979        73,014
   Industrial..........................        2,605        2,652              |       2,703       2,844         2,910
   Other...............................        1,081        1,099              |       1,110       1,110         1,111
                                             -------      -------              |     -------      ------       ------
   Total...............................      583,818      582,657              |     580,147     578,863       576,519
                                             =======      =======              |     =======     =======       =======

                                                           1
</TABLE>

<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 market  prices,  legislative  and regulatory
changes (including revised environmental requirements), and the availability and
cost of capital.


Results of Operations

        Net income  increased  by 47.5% to $50.9  million in 2002,  compared  to
$34.5 million in 2001, as a result of higher operating  revenues and lower other
operating costs. Partially offsetting these favorable results was the absence of
deferral accounting for energy costs in 2002 (see Regulatory  Matters),  as well
as higher general taxes.  Net income decreased by 12.1% to $34.5 million in 2001
from $39.2 million in 2000. In 2001, earnings were negatively impacted by higher
purchased  power and other  operating  costs,  as well as lower other  income --
partially offset by increased operating revenues.

        Operating  revenues  increased $52.5 million in 2002,  following a $72.7
million  increase  in 2001.  The sources of the  changes in  operating  revenues
during  2002 and 2001,  as compared to the prior  year,  are  summarized  in the
following table.

            Sources of Revenue Changes                2002        2001
            -------------------------------------------------------------
                 Increase (Decrease)                   (In millions)

            Increase in kilowatt-hour sales
              due to level of retail customers
              shopping for generation service......  $ 55.1      $134.5
            Change in other retail kilowatt-
              hour sales...........................    43.8       (12.2)
            Decrease in wholesale sales............   (40.8)      (50.6)
            All other changes......................    (5.6)        1.0
            -------------------------------------------------------------

            Net Increase in Operating Revenues.....  $ 52.5     $  72.7
            =============================================================


Electric Sales

        In 2002, further reductions in the number of residential, commercial and
industrial  customers who received  their power from  alternate  suppliers,  and
therefore  returned  to us as full  service  customers,  resulted  in  increased
operating  revenues.  During 2002, only 6.2% of total  kilowatt-hours  delivered
were to shopping customers,  whereas that percentage was 14.1% in 2001 and 37.3%
in 2000. In addition to the higher revenues from returning  shopping  customers,
warmer summer weather in 2002 contributed to an increase in retail sales, as did
slight increases in the number of residential and commercial customers. A slight
decrease  in  kilowatt-hour  sales  to  industrial  customers  during  2002  was
attributed  to  a  decline  in  economic  conditions.   Due  to  a  decrease  in
kilowatt-hours  available  for sale to other  parties,  as well as lower average
prices for energy in 2002,  revenues from wholesale sales were lower in 2002, as
compared to 2001.  Residential  kilowatt-hour  sales remained  relatively  flat,
while  commercial  sales were slightly lower compared to 2000,  primarily due to
reduced customer usage. Industrial sales also decreased in 2001 compared to 2000
as a result of a decrease in the number of customers and lower usage by existing
customers.  Sales to wholesale customers also decreased in 2001 compared to 2000
due to a reduction in our available capacity.  Changes in kilowatt-hour sales by
customer class in 2002 and 2001 are summarized in the following table:


            Changes in Kilowatt-hour Sales  2002         2001
            --------------------------------------------------
               Increase (Decrease)

            Residential..................   4.4%         0.9%
            Commercial...................   3.5%        (0.4)%
            Industrial...................  (1.8)%       (7.6)%
            --------------------------------------------------

            Total Retail.................   2.0%        (2.5)%
            Wholesale....................  (64.7)%     (49.5)%
            --------------------------------------------------

            Total Sales..................  (4.8)%      (11.0)%
            --------------------------------------------------

                                       2

<PAGE>


Operating Expenses and Taxes

        Total  operating  expenses and taxes increased $48.7 million in 2002 and
$68.7 million in 2001,  compared to the preceding  year.  Increases in purchased
power costs and general taxes,  offset in part by a decrease in other  operating
costs, accounted for the majority of the increase in 2002. In 2001, the increase
was due primarily to increases in purchased power and other operating costs.

        Purchased power costs  increased $50.1 million in 2002,  compared to the
prior year.  The  increase was due  primarily  to energy costs of $32.8  million
incurred in 2002 that otherwise  would have been deferred  absent a Pennsylvania
Commonwealth  Court  decision  (see  Regulatory  Matters).   That  increase  was
partially  offset by a reduction in power  purchased  during 2002, as well as by
the  absence  of  a  one-time  $16.0  million  pre-tax  charge  related  to  the
termination of a wholesale energy contract with Allegheny  Electric  Cooperative
in 2001.

        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
the purchased  power costs in 2001 was a $16.0 million pre-tax charge related to
the termination of a wholesale energy contract discussed above. 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 (see Regulatory Matters).

        Other operating  costs decreased $25.6 million in 2002,  compared to the
previous year. The decrease was primarily due to reduced uncollectible accounts,
personnel  reductions  and the absence of employee  severance  costs  accrued in
2001.  Other operating  costs increased $9.9 million in 2001,  compared to 2000,
primarily  due to the  absence of a pension  curtailment  gain  associated  with
employees who were terminated when we sold 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 in 2001 to certain bargaining unit employees.

        General taxes  increased  $19.5  million in 2002,  compared to the prior
year, due primarily to an increase in Pennsylvania gross receipts taxes.

Other Income

        Other income increased $5.3 million in 2002, compared to the prior year.
The increase was  primarily due to the absence of 2001 charges for a sustainable
energy  fund  and  renewable  energy  projects,   which  were  required  by  the
Stipulation of Settlement related to the FirstEnergy/GPU merger, and the absence
of 2001 net losses on futures contracts and options.  The increase was partially
offset by a decrease in interest  income.  In 2001, other income decreased $10.3
million,  compared to 2000,  primarily due to charges for the sustainable energy
fund and renewable  energy projects  discussed  above, as well as lower interest
income.

Net Interest Charges

        Net interest  charges  decreased  $7.3 million in 2002,  compared to the
previous year, due to reduced  short-term  borrowing  levels and amortization of
purchase  accounting fair market value  adjustments  recorded in connection with
the merger. Net interest charges decreased $1.5 million in 2001, compared to the
prior year.  The decrease was due to the absence of prior year expenses  related
to  federal  income  taxes,  higher  deferred  PLR  interest  costs,  and  lower
short-term  borrowing levels.  These decreases were partially offset by interest
expense on $93 million of senior notes issued during 2000.

Capital Resources and Liquidity

     Changes in Cash Position

        As of  December  31,  2002,  we had  $10.3  million  of  cash  and  cash
equivalents  compared  with $39.0  million as of December  31,  2001.  The major
sources for changes in these balances are summarized below.

     Cash Flows From Operating Activities

        Cash flows provided from operating  activities  totaled $39.3 million in
2002,  and cash flows used for  operating  activities  totaled  $16.0 million in
2001. The sources of these changes are as follows:

                                       3

<PAGE>


            Operating Cash Flows       2002     2001
            ------------------------------------------
                                       (In millions)
            Cash earnings (1).....    $ 97     $(21)
            Working capital.......     (58)       5
            ------------------------------------------

            Total.................    $ 39     $(16)
            ==========================================

        (1) Includes net income,  depreciation and amortization,  deferred costs
            recoverable as regulatory assets,  deferred income taxes, investment
            tax credits and major noncash charges.


     Cash Flows From Financing Activities

        In  2002,  net cash  used  for  financing  activities  of $66.2  million
reflects  redemptions  of debt and  $29.0  million  in  common  stock  dividends
payments to  FirstEnergy.  The following  table provides  details  regarding new
issues and redemptions during 2002:


               Securities Issued or Redeemed in 2002
               --------------------------------------------------
                                                  (In millions)
               Redemptions
                  Unsecured notes........................... $50
               --------------------------------------------------

               Short-term Borrowings, net source of cash....  13


        In 2001,  net cash  provided  from  financing  activities  totaled $71.8
million, primarily due to a $50 million contribution from its former parent, GPU
Inc.

        We had $90.4  million of short-term  indebtedness  on December 31, 2002,
compared  to  $77.6  million  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, 2002,  we had the  capability to
issue $7 million of additional  senior notes based upon FMB collateral.  We have
no restrictions on the issuance of preferred stock.

        At the end of 2002, our common equity as a percentage of  capitalization
stood at 71% compared to 70% and 43% at the end of 2001 and 2000,  respectively.
In  2001  we  experienced  a  significant  increase  in  this  ratio  due to the
allocation of the purchase price in the merger between FirstEnergy and GPU.

     Cash Flows From Investing Activities

        Cash used for investing activities totaled $1.9 million in 2002 and cash
used for  investing  activities  totaled $17.4 million in 2001. In both periods,
cash outflows for property  additions to support the distribution of electricity
were offset by proceeds from non-utility generation trusts.

        Our cash  requirements  in 2003  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.  Over the next  three  years,  we  expect  to meet our  contractual
obligations  with cash flows  from  operations.  Thereafter,  we expect to use a
combination of cash flows from operations and funds from the capital markets.


                                   Less than    1-3         3-5     More than
Contractual Obligations   Total     1 Year      Years      Years     5 Years
------------------------------------------------------------------------------
                                           (In millions)
Long-term debt......... $  469      $ --       $134        $  3      $  332
Short-term borrowings..     90        90         --          --          --
Preferred stock (1)....     92        --         --          --          92
Capital lease (2)......      1         1         --          --          --
Purchases (3)..........  2,761       308        396         399       1,658
-----------------------------------------------------------------------------
   Total............... $3,413      $399       $530        $402      $2,082
-----------------------------------------------------------------------------

(1) Subject to mandatory redemption
(2) See note 3
(3) Fuel  and power  purchases under  contracts with fixed or minimum quantities
    and approximate timing

                                       4

<PAGE>


        Our capital  spending  for the period  2003-2007 is expected to be about
$328 million, of which approximately $54 million applies to 2003.

        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
secured  debt rating from A+ to BBB+.  The credit  rating  outlook of Standard &
Poor's is stable.  On February  22,  2002,  Moody's  changed  its credit  rating
outlook from stable to negative based upon a decision by the Commonwealth  Court
of  Pennsylvania  to  remand  to the  PPUC  for  reconsideration  its  decisions
regarding rate relief, accounting deferrals and the mechanism for sharing merger
savings rendered in connection with its approval of the  FirstEnergy/GPU  merger
(see Regulatory Matters).

          On February 22, 2002, Moody's Investor Service changed its credit
rating outlook for FirstEnergy from stable to negative. The change was based
upon a decision by the Commonwealth Court of Pennsylvania to remand to the
Pennsylvania Public Utility Commission (PPUC) for reconsideration its decision
on the mechanism for sharing merger savings and reversed the PPUC decisions
regarding rate relief and accounting deferrals rendered in connection with its
approval of the GPU merger. On April 4, 2002, Standard & Poor's (S&P) changed
its outlook for FirstEnergy's credit ratings from stable to negative citing
recent developments including: damage to the Davis-Besse reactor vessel head,
the Pennsylvania Commonwealth Court decision, and deteriorating market
conditions for some sales of FirstEnergy's remaining non-core assets. On July
31, 2002, Fitch revised its rating outlook for FirstEnergy to negative from
stable. The revised outlook reflected the adverse impact of the unplanned
Davis-Besse outage, Fitch's judgment about NRG's financial ability to consummate
the purchase of four power plants from FirstEnergy and Fitch's expectation of
subsequent delays in debt reduction. On August 1, 2002, S&P concluded that while
NRG's liquidity position added uncertainty to FirstEnergy's sale of power plants
to NRG, its ratings would not be affected. S&P found FirstEnergy's cash flows
sufficiently stable to support a continued (although delayed) program of debt
and preferred stock redemption. S&P noted that it would continue to closely
monitor FirstEnergy's progress on various initiatives. On January 21, 2003, S&P
indicated its concern about FirstEnergy's disclosure of non-cash charges related
to deferred costs in Pennsylvania, pension and other post-retirement benefits,
and Emdersa (FirstEnergy's Argentina operations), which were higher than
anticipated in the third quarter of 2002. S&P identified the restart of the
Davis-Besse nuclear plant "...without significant delay beyond April 2003..." as
key to maintaining its current debt ratings. S&P also identified other issues it
would continue to monitor including: FirstEnergy's deleveraging efforts, free
cash generated during 2003, the JCP&L rate case, successful hedging of its short
power position, and continued capture of projected merger savings. While
FirstEnergy anticipates being prepared to restart the Davis-Besse plant in the
spring of 2003 the Nuclear Regulatory Commission (NRC) must authorize the unit's
restart following a formal inspection process prior to its returning the unit to
service. Significant delays in the planned date of Davis-Besse's return to
service or other factors (identified above) affecting the speed with which
FirstEnergy reduces debt could put additional pressure on Penelec's credit
ratings.

Market Risk Information

        We use various market risk sensitive  instruments,  including derivative
contracts,  primarily to manage the risk of price 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  non-derivative  and  derivative  instruments,
including  options and futures  contracts.  The derivatives are used for hedging
purposes.  Most of our  non-hedge  derivative  contracts  represent  non-trading
positions that do not qualify for hedge  treatment  under Statement of Financial
Accounting  Standards  (SFAS)  133.  The change in the fair  value of  commodity
derivative  contracts  related to energy production during 2002 is summarized in
the following table:

                                        5

<PAGE>


<TABLE>

Increase (Decrease) in the Fair Value
of Commodity Derivative Contracts
<CAPTION>
                                                                Non-Hedge     Hedge      Total
                                                                ---------     -----      -----
                                                                          (In millions)
Change in the Fair Value of Commodity Derivative Contracts
<S>                                                                 <C>        <C>       <C>
Outstanding net asset as of January 1, 2002.................        $1.1       $  0.2     $ 1.3
New contract value when entered.............................          --           --        --
Additions/Increase in value of existing contracts...........         7.6          1.5       9.1
Settled contracts...........................................          --         (1.6)     (1.6)
                                                                --------------------------------
Net Assets - Derivatives Contracts as of
  December 31, 2002 (1).....................................        $8.7       $  0.1     $ 8.8
                                                                ================================

Impact of Changes in Commodity Derivative Contracts (2)
Income Statement Effects (Pre-Tax)..........................        $0.4       $  --      $ 0.4
Balance Sheet Effects:
   Other Comprehensive Income (Pre-Tax).....................        $ --       $(0.1)     $(0.1)
   Regulatory Liability.....................................        $7.2       $  --      $ 7.2
</TABLE>


Derivatives included on the Consolidated Balance Sheet as of December 31, 2002:

                                                Non-Hedge    Hedge    Total
                                                ---------    -----    -----
                                                         (In millions)
      Current-
            Other Assets...................        $ --      $0.1     $0.1

      Non-Current-
            Other Deferred Credits.........         8.7        --      8.7
                                                   ----      ----     ----

              Net assets...................        $8.7      $0.1     $8.8
                                                   ====      ====     ====

(1)  Includes $8.6 million in non-hedge commodity derivative contracts which are
     offset by a regulatory liability.
(2)  Represents  the  increase  in  value  of  existing  contracts  and  settled
     contracts.

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


Source of Information - Fair Value by Contract Year
---------------------------------------------------

                             2003   2004    2005   2006    Thereafter   Total
                             ----   ----    ----   ----    ----------   -----
                                            (In millions)

Prices based on external
  sources(1)..............   $0.3   $0.3    $0.8   $ --       $  -       $1.4
Prices based on models....     --     --      --    1.1        6.3        7.4
                            -------------------------------------------------

   Total(2)...............   $0.3   $0.3    $0.8   $1.1       $6.3       $8.8
                            =================================================

(1) Broker quote sheets.
(2) Includes $8.6 million from an embedded option that is offset by a regulatory
    liability and does not affect earnings.

        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 derivative  instruments  would not have had a
material  effect on our  consolidated  financial  position  or cash  flows as of
December 31, 2002.

     Interest Rate Risk

        Our exposure to  fluctuations  in market interest rates is reduced since
our debt has fixed interest rates, as noted in the following table.

                                        6
<PAGE>
<TABLE>

<CAPTION>

Comparison of Carrying Value to Fair Value
------------------------------------------------------------------------------------------------------------------------
                                                                                             There-               Fair
                                      2003       2004       2005       2006        2007      after      Total     Value
------------------------------------------------------------------------------------------------------------------------
                                                                (Dollars in millions)
Assets
Investments other than Cash and Cash

<S>                                     <C>       <C>         <C>        <C>         <C>      <C>        <C>       <C>
   Equivalents-Fixed Income..           --          --        --         --          --       $157       $157      $157
   Average interest rate.....                                                                  4.5%       4.5%
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Liabilities
------------------------------------------------------------------------------------------------------------------------
Long-term Debt:
Fixed rate...................           --        $126        $8         --          $3        $332       $469     $475
   Average interest rate ....                      5.8%      7.5%                   6.1%        6.4%       6.3%
------------------------------------------------------------------------------------------------------------------------
Preferred Stock..............           --          --        --         --          --        $ 92       $ 92     $100
   Average dividend rate ....                                                                   7.3%       7.3%
------------------------------------------------------------------------------------------------------------------------
</TABLE>

        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.

     Equity Price Risk

        Included in nuclear  decommissioning  trusts, as required by the Nuclear
Regulatory Commission,  are marketable equity securities carried at their market
value of  approximately  $42 million  and $54  million at December  31, 2002 and
2001,  respectively.  A  hypothetical  10%  decrease  in prices  quoted by stock
exchanges  would result in a $4 million  reduction in fair value at December 31,
2002. (See Note 1 - "Supplemental Cash Flows Information.")

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  assets are costs which  regulatory  agencies have authorized
for recovery from customers in future periods and,  without such  authorization,
would have been charged to income when incurred.  All of our  regulatory  assets
are expected to continue to be recovered  under the provisions of the regulatory
plans as discussed  below.  Our regulatory  assets totaled $600 million and $770
million as of December 31, 2002 and 2001, respectively.

     Regulatory Matters

        Effective  September  1, 2002,  we assigned  our provider of last resort
(PLR) responsibility obligation to our unregulated supply affiliate, FirstEnergy
Solutions Corp. (FES), through a wholesale power sale agreement which expires in
December 2003 and may be extended for each successive  calendar year.  Under the
terms of the wholesale  agreement,  FES assumed the supply  obligation,  and the
energy supply profit and loss risk, for the portion of power supply requirements
that we do not self-supply under our non-utility  generation (NUG) contracts and
other existing power contracts with  nonaffiliated  third party suppliers.  This
arrangement  reduces our  exposure to high  wholesale  power prices by providing
power at or below the  shopping  credit for our  uncommitted  PLR  energy  costs
during the term of the  agreement  to FES. We will  continue to defer those cost
differences  between NUG  contract  rates and the rates  reflected in our capped
generation rates.

        In its February 21, 2002 decision on Petitions for Review  regarding the
June 2001 PPUC orders which approved the FirstEnergy/GPU  merger and provided us
deferral  accounting  treatment  for energy  costs,  the  Commonwealth  Court of
Pennsylvania  affirmed the PPUC merger  decision,  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 obligations,  and denied us authority to defer
for future  recovery the  difference  between our wholesale  power costs and the
amount we collect from retail  customers.  We and the PPUC each filed a Petition
for  Allowance  of Appeal  with the  Pennsylvania  Supreme  Court in March 2002,
asking it to review the  Commonwealth  Court  decision.  In the first quarter of
2002, we established a $111.1 million  reserve  against our PLR deferred  energy
costs incurred prior to our  acquisition by FirstEnergy.  The reserve  reflected
the potential  adverse impact of a pending  Pennsylvania  Supreme Court decision
whether to review the Commonwealth  Court ruling. The reserve increased goodwill
by an aggregate  net of tax amount of

                                       7

<PAGE>

$65.0  million.  On January 17,  2003,  the  Pennsylvania  Supreme  Court denied
further appeals of the Commonwealth Court's decision, which effectively affirmed
the PPUC's order approving the merger between FirstEnergy and GPU, let stand the
Commonwealth  Court's denial of our request for PLR rate relief and remanded the
merger savings issue back to the PPUC.

     FERC Regulatory Matters

        On December 19, 2002 the Federal  Energy  Regulatory  Commission  (FERC)
granted  unconditional   Regional   Transmission   Organization  status  to  PJM
Interconnection, LLC (PJM). We are a transmission owner in PJM.

     Environmental Matters

        We have 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;  however,  federal law provides that all
PRPs  for a  particular  site  be held  liable  on a joint  and  several  basis.
Therefore,  potential  environmental  liabilities  have been  recognized  on the
Consolidated  Balance  Sheet as of December 31, 2002,  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. We have total accrued
liabilities  aggregating  approximately $0.3 million as of December 31, 2002. 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 are 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  against us, Jersey  Central
Power & Light Company,  Metropolitan Edison Company and GPU (the defendants) had
been 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.  In January 2002,  the District  Court granted our motion
for summary  judgment on the remaining 2,100 pending  claims.  In February 2002,
the  plaintiffs  filed a notice of appeal of this  decision  (see Note 6 - Other
Legal Proceedings). In December 2002, the Court of Appeals for the Third Circuit
refused to hear the appeal,  which  effectively  ended  further legal action for
those claims.

Significant Accounting Policies

        We prepare our  consolidated  financial  statements in  accordance  with
accounting  principles  that  are  generally  accepted  in  the  United  States.
Application  of these  principles  often  requires  a high  degree of  judgment,
estimates and assumptions that affect financial  results.  All of our assets are
subject to their own specific risks and uncertainties and are regularly 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  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 were finalized in
the fourth  quarter of 2002,  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.  Based on the guidance provided
by SFAS 142,  "Goodwill and Other  Intangible  Assets," we evaluate our goodwill
for  impairment  at least  annually  and  would  make  such an  evaluation  more
frequently if indicators of impairment  should arise.  The forecasts used in our
evaluations of goodwill reflect operations  consistent with our general business
assumptions. Unanticipated changes in those assumptions could have a significant
effect on our future  evaluations  of goodwill.  As of December 31, 2002, we had
recorded goodwill of approximately $898.1 million related to the merger.

                                       8

<PAGE>

     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 - $599.7  million as of December 31, 2002.
We regularly review these assets to assess their ultimate  recoverability within
the approved regulatory guidelines. Impairment risk associated with these assets
relates to potentially  adverse  legislative,  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 are
documented. Derivative contracts that are determined to fall within the scope of
SFAS 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 commodity 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  accounting  period.  The  determination  of  unbilled  revenues
requires management to make various estimates including:

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

     Pension and Other Postretirement Benefits Accounting

        Our  reported  costs  of  providing   non-contributory  defined  pension
benefits and  postemployment  benefits other than pensions  (OPEB) are dependent
upon  numerous  factors  resulting  from  actual  plan  experience  and  certain
assumptions.

        Pension and OPEB costs are affected by employee demographics  (including
age, compensation levels, and employment periods), the level of contributions we
make to the plans, and earnings on plan assets.  Pension and OPEB costs may also
be affected by changes to key assumptions, including anticipated rates of return
on plan  assets,  the  discount  rates  and  health  care  trend  rates  used in
determining the projected benefit obligations and pension and OPEB costs.

         In accordance  with SFAS 87,  "Employers'  Accounting for Pensions" and
SFAS  106,  "Employers'  Accounting  for  Postretirement   Benefits  Other  Than
Pensions," changes in pension and OPEB obligations associated with these factors
may  not be  immediately  recognized  as  costs  on the  income  statement,  but
generally  are  recognized in future years over the  remaining  average  service
period of plan  participants.  SFAS 87 and SFAS 106 delay recognition of changes
due to the  long-term  nature of pension  and OPEB  obligations  and the varying
market  conditions  likely  to  occur  over  long  periods  of  time.  As  such,
significant  portions of pension  and OPEB costs  recorded in any period may not
reflect the actual level of cash benefits  provided to plan participants and are
significantly  influenced by assumptions about future market conditions and plan
participants' experience.

         In selecting an assumed discount rate, we consider currently  available
rates  of  return  on  high-quality  fixed  income  investments  expected  to be
available during the period to maturity of the pension and other  postretirement
benefit obligations. Due to the significant decline in corporate bond yields and
interest rates in general  during 2002, we reduced the assumed  discount rate as
of December 31, 2002 to 6.75% from 7.25% used in 2001 and 7.75% used in 2000.

                                       9

<PAGE>

         Our assumed rate of return on pension plan assets considers  historical
market returns and economic  forecasts for the types of investments  held by our
pension  trusts.  The market values of our pension  assets have been affected by
sharp  declines in the equity markets since  mid-2000.  In 2002 plan assets have
earned (11.3)%.  Our pension costs in 2002 were computed  assuming a 10.25% rate
of return on plan  assets.  As of December  31, 2002 the assumed  return on plan
assets was  reduced to 9.00%  based upon our  projection  of future  returns and
pension trust investment allocation of approximately 60% large cap equities, 10%
small cap equities and 30% bonds.

         Based on pension assumptions and pension plan assets as of December 31,
2002, we will not be required to fund our pension plans in 2003. While OPEB plan
assets have also been  affected  by sharp  declines  in the equity  market,  the
impact  is not as  significant  due to the  relative  size of the  plan  assets.
However,  health care cost trends have  significantly  increased and will affect
future OPEB costs.  The 2003  composite  health  care trend rate  assumption  is
approximately 10%-12% gradually decreasing to 5% in later years, compared to our
2002 assumption of approximately 10% in 2002,  gradually  decreasing to 4%-6% in
later years. In determining our trend rate assumptions, we included the specific
provisions of our health care plans, the  demographics and utilization  rates of
plan participants,  actual cost increases  experienced in our health care plans,
and projections of future medical trend rates. Our non-cash, pre-tax pension and
OPEB  expense  under SFAS 87 and SFAS 106 is expected to increase by $15 million
and $5  million,  respectively  - a total of $20  million in 2003 as compared to
2002.


  Increase in Costs from Adverse Changes in Key Assumptions
------------------------------------------------------------------------------
  Assumption                      Adverse Change     Pension    OPEB     Total
                                                             (In millions)
  Discount rate................   Decrease by 0.25%    $1.7      $1.1     $2.8
  Long-term return on assets...   Decrease by 0.25%     1.2       0.4      1.6
  Health care trend rate.......   Increase by 1%       na         3.1      3.1


     Long-Lived Assets

         In accordance with SFAS 144, "Accounting for the Impairment or Disposal
of  Long-Lived  Assets,"  we  periodically  evaluate  our  long-lived  assets to
determine  whether  conditions exist that would indicate that the carrying value
of an asset may not be fully recoverable.  The accounting standard requires that
if the sum of future cash flows (undiscounted) expected to result from an asset,
is less  than the  carrying  value of the  asset,  an asset  impairment  must be
recognized in the financial statements. If impairment, other than of a temporary
nature, has occurred, we recognize a loss - calculated as the difference between
the carrying value and the estimated fair value of the asset (discounted  future
net cash flows).

Recently Issued Accounting Standards Not Yet Implemented
--------------------------------------------------------

     SFAS 143, "Accounting for Asset Retirement Obligations"

         In  June  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.  However,  rate-regulated  entities may recognize
regulatory  assets or  liabilities  if the criteria for such  treatment are met.
Upon  retirement,  a gain or loss  would be  recorded  if the cost to settle the
retirement obligation differs from the carrying amount.

         We have identified  applicable  legal  obligations as defined under the
new standard, principally for nuclear power plant decommissioning. Upon adoption
of SFAS 143, asset  retirement  costs of $93 million will be recorded as part of
the  carrying  amount of the related  long-lived  asset,  offset by  accumulated
depreciation of $93 million.

         The asset  retirement  liability  at the date of  adoption  will be $99
million. As of December 31, 2002, we had recorded decommissioning liabilities of
$130 million.  The change in the estimated  liabilities resulted from changes in
methodology and various  assumptions,  including  changes in the projected dates
for decommissioning.

         Management    expects   that   substantially   all   of   our   nuclear
decommissioning costs will be recoverable through regulated rates. Therefore, we
recognized a regulatory  liability of $29 million upon  adoption of SFAS 143 for
the transition amounts related to establishing the asset retirement  obligations
for nuclear  decommissioning.  The  remaining  cumulative  effect  adjustment to
recognize  the  undepreciated  asset  retirement  cost and the asset  retirement
liability  offset by the

                                       10

<PAGE>

reversal of  the  previously  recorded  decommissioning  liabilities  was a $1.9
million increase to income, or $1.1 million net of tax.

         SFAS 146,  "Accounting  for  costs  Associated  with  Exit or  Disposal
         Activities"

         This statement, which was issued by the FASB in July 2002, requires the
recognition  of costs  associated  with exit or disposal  activities at the time
they are  incurred  rather  than when  management  commits  to a plan of exit or
disposal.  It also  requires the use of fair value for the  measurement  of such
liabilities.  The new standard  supersedes  guidance provided by Emerging Issues
Task  Force  Issue  No.  94-3,  "Liability   Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs  Incurred in a  Restructuring)."  This new standard was effective for exit
and disposal  activities  initiated after December 31, 2002. Since it is applied
prospectively,  there will be no impact upon adoption.  However,  SFAS 146 could
change the timing and amount of costs  recognized in connection with future exit
or disposal activities.

         FASB  Interpretation   (FIN)  No.  45,   "Guarantor's   Accounting  and
         Disclosure  Requirements for Guarantees,  Including Indirect Guarantees
         of Indebtedness of Others - an interpretation of FASB Statements No. 5,
         57, and 107 and rescission of FASB Interpretation No. 34"

         The FASB issued FIN 45 in January 2003. This interpretation  identifies
minimum guarantee  disclosures required for annual periods ending after December
15, 2002. It also clarifies  that  providers of guarantees  must record the fair
value of those  guarantees  at their  inception.  This  accounting  guidance  is
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December  31,  2002.  We do not believe  that  implementation  of FIN 45 will be
material but we will continue to evaluate anticipated guarantees.

         FIN  46,   "Consolidation   of   Variable   Interest   Entities   -  an
         interpretation of ARB 51"

         In January  2003,  the FASB issued this  interpretation  of ARB No. 51,
"Consolidated Financial Statements". The new interpretation provides guidance on
consolidation of variable interest entities (VIEs), generally defined as certain
entities  in  which  equity  investors  do not  have  the  characteristics  of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support  from other  parties.  This  Interpretation  requires an  enterprise  to
disclose  the  nature  of its  involvement  with a VIE if the  enterprise  has a
significant  variable  interest  in  the  VIE  and to  consolidate  a VIE if the
enterprise is the primary  beneficiary.  VIEs created after January 31, 2003 are
immediately subject to the provisions of FIN 46. VIEs created before February 1,
2003 are  subject to this  interpretation's  provisions  beginning  in the first
interim or annual  reporting  period  beginning  after June 15,  2003 (our third
quarter of 2003). The FASB also identified  transitional  disclosure  provisions
for all financial statements issued after January 31, 2003.

         We currently have involvement with entities in connection with the sale
of preferred securities, which may fall within the scope of this interpretation,
and  which  are  reasonably  possible  of  meeting  the  definition  of a VIE in
accordance with FIN 46. We currently  consolidate  these entities and believe we
will continue to consolidate following the adoption of FIN 46.

                                       11

<PAGE>
<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                            CONSOLIDATED STATEMENTS OF INCOME

<CAPTION>

                                                                                 Nov 7 -        Jan. 1 -
                                                                  2002       Dec. 31, 2001    Nov. 6, 2001    2000
----------------------------------------------------------------------------------------------------------------------
                                                                                  (In thousands)

<S>                                                            <C>              <C>             <C>          <C>
OPERATING REVENUES........................................     $1,027,102       $140,062    |   $834,548     $901,881
                                                               ----------       --------    |   --------     --------
                                                                                            |
OPERATING EXPENSES AND TAXES:                                                               |
   Fuel and purchased power...............................        649,725         79,815    |    519,838      545,117
   Other operating costs..................................        132,996         20,015    |    138,543      148,698
                                                               ----------       --------    |   --------     --------
     Total operation and maintenance expenses.............        782,721         99,830    |    658,381      693,815
   Provision for depreciation and amortization............         61,476          8,613    |     49,191       56,505
   General taxes..........................................         65,301          6,281    |     39,532       45,890
   Income taxes...........................................         29,414         10,997    |     17,395       25,335
                                                               ----------       --------    |   --------     --------
     Total operating expenses and taxes...................        938,912        125,721    |    764,499      821,545
                                                               ----------       --------    |   --------     --------
                                                                                            |
OPERATING INCOME..........................................         88,190         14,341    |     70,049       80,336
                                                                                            |
OTHER INCOME (EXPENSE)....................................          1,742          3,049    |     (6,610)       6,716
                                                               ----------       --------    |   --------     --------
                                                                                            |
INCOME BEFORE NET INTEREST CHARGES........................         89,932         17,390    |     63,439       87,052
                                                               ----------       --------    |   --------     --------
                                                                                            |
NET INTEREST CHARGES:                                                                       |
   Interest on long-term debt.............................         31,758          3,972    |     28,751       29,964
   Allowance for borrowed funds used during                                                 |
     construction.........................................            (52)            47    |       (494)        (742)
   Deferred interest .....................................         (3,299)          (504)   |       (783)          --
   Other interest expense ................................          3,061          1,979    |      6,008       11,546
   Subsidiary's preferred stock dividend requirements.....          7,554          1,101    |      6,239        7,034
                                                               ----------       --------    |   --------     --------
     Net interest charges.................................         39,022          6,595    |     39,721       47,802
                                                               ----------       --------    |   --------     --------
                                                                                            |
NET INCOME................................................     $   50,910       $ 10,795    |   $ 23,718     $ 39,250
                                                               ==========       ========    |   ========     ========


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

                                                           12
</TABLE>

<PAGE>

<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                               CONSOLIDATED BALANCE SHEETS
<CAPTION>

As of December 31,                                                                        2002             2001
------------------------------------------------------------------------------------------------------------------
                                                                                              (In thousands)
                                         ASSETS
UTILITY PLANT:
<S>                                                                                    <C>              <C>
   In service.....................................................................     $1,844,999       $1,845,187
   Less-Accumulated provision for depreciation....................................        647,581          630,957
                                                                                       ----------       ----------
                                                                                        1,197,418        1,214,230
   Construction work in progress-
     Electric plant...............................................................         19,200           12,857
                                                                                       -----------      ----------
                                                                                        1,216,618        1,227,087
OTHER PROPERTY AND INVESTMENTS:
   Non-utility generation trusts..................................................        109,881          154,067
   Nuclear plant decommissioning trusts...........................................         88,818           96,610
   Long-term notes receivable from associated companies...........................         15,515           15,515
   Other..........................................................................          9,425            2,265
                                                                                       ----------       ----------
                                                                                          223,639          268,457
                                                                                       ----------       ----------
CURRENT ASSETS:
   Cash and cash equivalents......................................................         10,310           39,033
   Receivables-
     Customers (less accumulated provisions of $6,216,000 and $14,719,000
       respectively, for uncollectible accounts)..................................        128,303          107,170
     Associated companies.........................................................         45,236           40,203
     Other........................................................................         16,184           14,842
   Prepayments and other..........................................................          2,551            8,605
                                                                                       ----------       ----------
                                                                                          202,584          209,853
                                                                                       ----------       ----------
DEFERRED CHARGES:
   Regulatory assets..............................................................        599,663          769,807
   Goodwill.......................................................................        898,086          797,362
   Accumulated deferred income taxes..............................................          1,517               --
   Other..........................................................................         21,147           27,703
                                                                                       -----------      ----------
                                                                                        1,520,413        1,594,872
                                                                                       ----------       ----------
                                                                                       $3,163,254       $3,300,269
                                                                                       ==========       ==========
                           CAPITALIZATION AND LIABILITIES

CAPITALIZATION (See Consolidated Statements of Capitalization):
   Common stockholder's equity....................................................     $1,353,704       $1,306,576
   Company-obligated trust preferred securities...................................         92,214           92,000
   Long-term debt.................................................................        470,274          472,400
                                                                                       ----------       ----------
                                                                                        1,916,192        1,870,976
CURRENT LIABILITIES:
   Currently payable long-term debt ..............................................            813           50,756
   Short-term borrowings (Note 5)-
     Associated companies.........................................................         90,427           77,623
   Accounts payable-
     Associated companies.........................................................        129,906          126,390
     Other........................................................................         29,690           38,720
   Accrued  taxes.................................................................         21,271           29,255
   Accrued interest...............................................................         12,695           12,284
   Other..........................................................................          8,409           10,993
                                                                                       ----------       ----------
                                                                                          293,211          346,021
                                                                                       ----------       ----------
DEFERRED CREDITS:
   Accumulated deferred income taxes..............................................             --           21,682
   Accumulated deferred investment tax credits....................................         10,924           11,956
   Nuclear plant decommissioning costs............................................        135,450          135,483
   Nuclear fuel disposal costs....................................................         18,771           18,453
   Power purchase contract loss liability.........................................        765,063          867,046
   Other..........................................................................         23,643           28,652
                                                                                       -----------      ----------
                                                                                          953,851        1,083,272
COMMITMENTS AND CONTINGENCIES
   (Notes 3 and 6)................................................................     ----------       ----------
                                                                                       $3,163,254       $3,300,269
                                                                                       ==========       ==========


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

                                                         13

</TABLE>

<PAGE>

<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                        CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>

As of December 31,                                                                            2002         2001
-------------------------------------------------------------------------------------------------------------------
                                    (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..............................................................     1,215,256      1,188,190
   Accumulated other comprehensive income/(loss) (Note 4E)............................           (69)         1,779
   Retained earnings (Note 4A)........................................................        32,705         10,795
                                                                                         -----------    -----------
     Total common stockholder's equity................................................     1,353,704      1,306,576
                                                                                         -----------    -----------

   Company obligated TRUST
   Preferred securities
   of subsidiary trust
   (NOTE 4C):
     7.34% due 2039...................................................................        92,214         92,000
                                                                                         -----------    -----------

LONG-TERM DEBT (Note 4D):
   First mortgage bonds:
     6.125% due 2007..................................................................         3,905          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.....................................................        73,215         73,420
                                                                                         -----------    -----------

   Unsecured notes:
     6.42% due 2002...................................................................            --         25,000
     6.47% due 2002...................................................................            --         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...................................................................         2,984          2,998
                                                                                         -----------    -----------
       Total unsecured notes..........................................................       395,984        445,998
                                                                                         -----------    -----------

   Capital lease obligations (Note 3).................................................         1,132          1,670

   Net unamortized premium on debt....................................................           756          2,068

   Long-term debt due within one year.................................................          (813)       (50,756)
                                                                                         -----------    -----------
     Total long-term debt.............................................................       470,274        472,400
                                                                                         -----------    -----------
TOTAL CAPITALIZATION..................................................................   $ 1,916,192    $ 1,870,976
                                                                                         ===========    ===========


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

                                                           14
</TABLE>

<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, 2000.......................               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
   Net income..................................       50,910                                                  50,910
   Net unrealized gain (loss) on investments...            5                                            5
   Net unrealized gain (loss) on derivative
     instruments...............................       (1,853)                                      (1,853)
                                                    --------
   Comprehensive income........................      $49,062
                                                     =======
   Cash dividends on common stock..............                                                              (29,000)
   Purchase accounting fair value adjustment...                                       27,066
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002.....................               5,290,596  $105,812 $1,215,256    $     (69)  $ 32,705
=====================================================================================================================

</TABLE>


                       CONSOLIDATED STATEMENTS OF PREFERRED STOCK

                                                           Subject to
                                                      Mandatory Redemption
                                                   -------------------------
                                                    Number          Carrying
                                                   of Shares          Value
                                                   ---------        --------
                                                     (Dollars in thousands)


             Balance, January 1, 2000..........    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
             ===============================================================
               Amortization of fair market
                 value adjustment..............                          214
             ---------------------------------------------------------------
             Balance, December 31, 2002........    4,000,000       $  92,214
             ===============================================================


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

                                                           15

<PAGE>

<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                                   Nov. 7 -      Jan. 1 -
                                                                       2002     Dec. 31, 2001  Nov. 6, 2001   2000
----------------------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                 <C>           <C>          <C>         <C>
Net Income........................................................  $  50,910     $ 10,795  |  $  23,718   $  39,250
   Adjustments to reconcile net income to net                                               |
   cash from operating activities:                                                          |
     Provision for depreciation and amortization..................     61,476        8,613  |     49,191      56,505
     Other amortization...........................................         94          309  |      1,672         347
     Impact of PPUC rate order, net...............................         --           --  |         --     (21,550)
     Deferred costs recoverable as regulatory assets..............    (58,953)      (7,467) |   (143,462)    (76,957)
     Deferred income taxes, net...................................     11,893      (23,127) |     60,170      15,946
     Investment tax credits, net..................................     (1,032)        (171) |       (970)     (1,142)
     Receivables..................................................    (27,509)     (26,592) |     16,566     (19,089)
     Accounts payable.............................................     (5,514)     (19,382) |     29,462     (20,608)
     Other (Note 7)...............................................      7,947       41,590  |    (36,884)    (89,125)
                                                                    ---------     --------  |  ---------   ---------
       Net cash provided from (used for) operating activities.....     39,312      (15,432) |       (537)   (116,423)
                                                                    ---------     --------  |  ---------   ---------
                                                                                            |
CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |
   New Financing-                                                                           |
     Long-term debt...............................................         --           --  |         --     118,000
     Short-term borrowings, net...................................     12,804        2,623  |     19,200       2,200
     Contributions from parent....................................         --           --  |     50,000      35,000
   Redemptions and Repayments-                                                              |
     Long-term debt...............................................    (49,973)          --  |         --     (25,000)
   Dividend Payments-                                                                       |
     Common stock.................................................    (29,000)          --  |         --     (55,000)
                                                                    ---------     --------  |  ---------   ---------
       Net cash provided from (used for) financing activities.....    (66,169)       2,623  |     69,200      75,200
                                                                    ---------     --------  |  ---------   ---------
                                                                                            |
CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |
   Property additions.............................................    (50,671)      (9,687) |    (50,543)    (73,247)
   Proceeds from non-utility generation trusts....................     49,044       29,944  |     18,339      75,991
   Contributions to decommissioning trusts........................         --           --  |        (15)        (40)
   Other..........................................................       (239)        (246) |     (5,194)      6,617
                                                                    ---------     --------  |  ---------   ---------
       Net cash provided from (used for) investing activities.....     (1,866)      20,011  |    (37,413)      9,321
                                                                    ---------     --------  |  ---------   ---------
                                                                                            |
                                                                                            |
Net increase (decrease) in cash and cash equivalents..............    (28,723)       7,202  |     31,250     (31,902)
Cash and cash equivalents at beginning of period..................     39,033       31,831  |        581      32,483
                                                                    ---------     --------  |  ---------   ----------
Cash and cash equivalents at end of period........................  $  10,310     $ 39,033  |  $  31,831   $     581
                                                                    =========     ========  |  =========   =========
                                                                                            |
SUPPLEMENTAL CASH FLOWS INFORMATION:                                                        |
Cash Paid During the Year-                                                                  |
     Interest (net of amounts capitalized)........................  $  32,695    $   2,018  |  $  35,134   $  33,409
                                                                    =========    =========  |  =========   =========
     Income taxes (refund)........................................  $  43,613     $(12,176) |  $ (14,542)  $ 110,395
                                                                    =========     ========  |  =========   =========


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

                                                           16
</TABLE>

<PAGE>
<TABLE>

                                              PENNSYLVANIA ELECTRIC COMPANY

                                            CONSOLIDATED STATEMENTS OF TAXES


<CAPTION>
                                                                                  Nov. 7 -       Jan. 1 -
                                                                      2002     Dec. 31, 2001   Nov. 6, 2001   2000
---------------------------------------------------------------------------------------------------------------------
                                                                                      (In thousands)
GENERAL TAXES:
<S>                                                               <C>           <C>            <C>         <C>
Real and personal property......................................  $     1,583   $       (146)| $   1,622   $   1,139
State gross receipts*...........................................       55,505          5,560 |    30,932      37,222
Other...........................................................        8,213            867 |     6,978       7,529
                                                                  -----------   ------------ | ---------   ---------
       Total general taxes......................................  $    65,301   $      6,281 | $  39,532   $  45,890
                                                                  ===========   ============ |  =========   =========
                                                                                             |
PROVISION FOR INCOME TAXES:                                                                  |
Currently payable-                                                                           |
   Federal......................................................  $    17,554   $     23,861 | $ (36,615)  $  11,593
   State........................................................        5,833          7,667 |    (3,183)      3,357
                                                                  ------------  ------------ | ---------   ---------
                                                                       23,387         31,528 |   (39,798)     14,950
                                                                  -----------   ------------ | ---------   ---------
Deferred, net-                                                                               |
   Federal......................................................       10,600        (17,511)|    46,346      11,732
   State........................................................        1,293         (5,616)|    13,824       4,214
                                                                  -----------   ------------ | ---------   ---------
                                                                       11,893        (23,127)|    60,170      15,946
                                                                  -----------   ------------ | ---------   ---------
Investment tax credit amortization..............................       (1,032)          (171)|      (970)     (1,142)
                                                                  -----------   ------------ | ---------   ---------
       Total provision for income taxes.........................  $    34,248   $      8,230 | $  19,402   $  29,754
                                                                  ===========   ============ | =========   =========
                                                                                             |
INCOME STATEMENT CLASSIFICATION                                                              |
OF PROVISION FOR INCOME TAXES:                                                               |
Operating income................................................  $    29,414   $     10,997 | $  17,395   $  25,335
Other income....................................................        4,834         (2,767)|     2,007       4,419
                                                                  -----------   ------------ | ---------   ---------
       Total provision for income taxes.........................  $    34,248   $      8,230 | $  19,402   $  29,754
                                                                  ===========   ============ | =========   =========
                                                                                             |
RECONCILIATION OF FEDERAL INCOME TAX                                                         |
EXPENSE AT STATUTORY RATE TO TOTAL                                                           |
PROVISION FOR INCOME TAXES:                                                                  |
Book income before provision for income taxes                     $    85,158   $     19,025 | $  43,120   $  69,004
                                                                  ===========   ============ | =========   =========
Federal income tax expense at statutory rate....................  $    29,805   $      6,659 | $  15,092   $  24,151
Increases (reductions) in taxes resulting from-                                              |
   Amortization of investment tax credits.......................       (1,032)          (171)|      (969)     (1,140)
   Depreciation.................................................        1,591            555 |     1,407       1,183
   State income tax, net of federal tax.........................        4,702          1,404 |     7,156       3,590
   Allocated share of consolidated tax savings..................           --             -- |    (2,912)         --
   Other, net...................................................         (818)          (217)|      (372)      1,970
                                                                  -----------   ------------ | ---------   ---------
       Total provision for income taxes.........................  $    34,248   $      8,230 | $  19,402   $  29,754
                                                                  ===========   ============ | =========   =========
                                                                                             |
ACCUMULATED DEFERRED INCOME TAXES AT                                                         |
DECEMBER 31:                                                                                 |
Property basis differences......................................  $   242,192   $    256,951 |             $ 250,410
Nuclear decommissioning.........................................      (41,665)       (42,138)|               (35,495)
Non-utility generation costs....................................     (223,644)      (214,492)|              (112,291)
Purchase accounting basis difference............................         (762)       (38,407)|                    --
Sale of generation assets.......................................        7,495          7,495 |                 5,302
Regulatory transition charge....................................           --          9,329 |                (9,329)
Customer receivables for future income taxes....................       52,793         61,493 |                65,506
Other...........................................................      (37,926)       (18,549)|              (139,090)
                                                                  ------------  ------------ |           ---------
       Net deferred income tax liability (asset)................  $    (1,517)  $     21,682 |             $  25,013
                                                                  ============  ============ |             =========


* Collected from customers through regulated rates and included in revenue on the Consolidated Statements of Income.

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

                                                           17
</TABLE>


<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 and post-merger  period  financial  results are
separated by a heavy black line.

         The Company follows the accounting policies and practices prescribed by
the Securities and Exchange  Commission  (SEC), 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 the 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.

   (A)   CONSOLIDATION-

         The  Company  consolidates  all  majority-owned   subsidiaries,   after
eliminating  the  effects  of  intercompany  transactions.   Non-majority  owned
investments,  including investments in limited liability companies, partnerships
and joint  ventures,  are accounted for under the equity method when the Company
is able to  influence  their  financial or operating  policies.  Investments  in
corporations  resulting  in voting  control  of 20% or more are  presumed  to be
equity method investments. Limited partnerships are evaluated in accordance with
SEC Staff D-46,  "Accounting for Limited  Partnership  Investments" and American
Institute of Certified Public  Accountants  (AICPA)  Statement of Position (SOP)
78-9, "Accounting for Investments in Real Estate Ventures," which specify a 3 to
5  percent  threshold  for the  presumption  of  influence.  For  all  remaining
investments  (excluding  those  within  the  scope  of  Statement  of  Financial
Accounting Standards (SFAS) 115, the Company applies the cost method.

   (B)   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 provided through the
end of the year. See Note 7 - Other  Information  for discussion of reporting of
independent system operator transactions.

         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, 2002 or 2001,  with respect to
any particular segment of the Company's customers.

   (C)   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. In 1998, the PPUC authorized a rate  restructuring plan for the Company
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
Internal   Revenue  Service  (IRS)  ruling   regarding  the  return  of  certain
unamortized  investment tax credits and excess  deferred  income tax benefits to
customers. If the IRS ruling ultimately supports returning these tax benefits to
customers,  there  would be no  effect to the  Company's  net  income  since the
contingency existed prior to the merger.

         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. In 2000, the Company filed a petition with
the PPUC  seeking  permission  to defer,  for future  recovery,  energy costs in
excess  of  amounts   reflected  in  its  capped   generation  rates;  the  PPUC
subsequently consolidated this petition in January 2001 with the FirstEnergy/GPU
merger proceeding (see Note 2 - Merger).

         In  June  2001,  the  PPUC  entered  orders  approving  the  Settlement
Stipulation with all of the major parties in the combined merger and rate relief
proceedings  which approved the merger and provided the Company PLR rate relief.

                                       18

<PAGE>

The PPUC  permitted the Company 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. Correspondingly, in the event that energy
costs  incurred  by the Company  were below its capped  generation  rates,  that
difference  would have  reduced  costs that had been  deferred  for  recovery in
future periods. However, this PLR deferral accounting procedure was subsequently
denied in a court  decision,  as discussed  below.  The Company's PLR obligation
extends  through  December  31,  2010.  Had the PLR  accounting  procedure  been
allowed, competitive transition charge (CTC) revenues would have been applied to
the Company's PLR stranded costs during that period. The Company would have been
permitted to recover any remaining  stranded costs through a continuation of the
CTC after December 31, 2010 through no later than December 31, 2015. Any amounts
not expected to be recovered by December 31, 2015 would have been written off at
the time such nonrecovery became probable.

         Several  parties had filed  Petitions  for Review in June and July 2001
with the Commonwealth Court of Pennsylvania regarding the June 2001 PPUC orders.
On February  21,  2002,  the Court  affirmed  the PPUC  decision  regarding  the
FirstEnergy/GPU 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 rejected those parts of the settlement  that
permitted the Company to defer for accounting  purposes the  difference  between
its wholesale power costs and the amount that it collects from retail customers.
The Company and the PPUC each filed a Petition for  Allowance of Appeal with the
Pennsylvania  Supreme  Court  on  March  25,  2002,  asking  it  to  review  the
Commonwealth  Court  decision.  Also on March 25, 2002,  Citizens  Power filed a
motion  seeking an appeal of the  Commonwealth  Court's  decision  to affirm the
FirstEnergy/GPU merger with the Pennsylvania Supreme Court. In the first quarter
of 2002, the Company  established a $111.1 million  reserve for its PLR deferred
energy costs  incurred  prior to its  acquisition  by  FirstEnergy.  The reserve
reflected the potential adverse impact of a pending  Pennsylvania  Supreme Court
decision whether to review the Commonwealth  Court ruling. The reserve increased
goodwill by an aggregate net of tax amount of $65.0 million.

         On January 17, 2003,  the  Pennsylvania  Supreme  Court denied  further
appeals of the February 21, 2002 Pennsylvania Commonwealth Court decision, which
effectively  affirmed the PPUC's order approving the merger between  FirstEnergy
and GPU, let stand the  Commonwealth  Court's  denial of PLR rate relief for the
Company and remanded the merger savings issue back to the PPUC.

         Effective   September   1,  2002,   the   Company   assigned   its  PLR
responsibility  to FES through a wholesale power sale  agreement.  The PLR sale,
which initially ran through the end of 2002, was extended  through December 2003
and will be automatically  extended for each successive calendar year unless any
party elects to cancel the agreement by November 1 of the preceding year.  Under
the terms of the wholesale agreement,  FES assumes the supply obligation and the
energy supply profit and loss risk for the portion of power supply  requirements
not  self-supplied  by  the  Company  under  its  non-utility  generation  (NUG)
contracts and other existing  power  contracts  with  nonaffiliated  third party
suppliers.  This  arrangement  reduces the Company's  exposure to high wholesale
power  prices  by  providing  power  at or below  the  shopping  credit  for its
uncommitted  PLR energy  costs  during the term of the  agreement  with FES. The
Company is authorized  to continue  deferring  differences  between NUG contract
costs and amounts recovered through its capped generation rates.

         The  application  of SFAS 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 SEC 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.

   (D)   PROPERTY, PLANT AND EQUIPMENT-

         As a result of the merger, a portion of the Company's  property,  plant
and equipment was adjusted to reflect fair value.  The majority of the Company's
property,  plant and equipment  continues to be reflected at original cost since
such assets remain subject to rate  regulation on a historical  cost basis.  The
Company's  accounting  policy  for  planned  major  maintenance  projects  is to
recognize liabilities as they are incurred.

         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  3.0% in 2002, 2.9% in 2001 and
2.7% in 2000.

         Annual depreciation expense in 2002 included approximately $0.3 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
(Saxton Nuclear Experimental Facility) 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 $131.2 million in
current dollars and (using a

                                       19

<PAGE>

4.0%  escalation  rate)  approximately  $209.3  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 the nuclear
generating units are expected to begin in 2014, when actual decommissioning work
is expected to begin. The Company has recovered  approximately $50.2 million for
future  decommissioning  through  its  electric  rates  from  customers  through
December 31, 2002.  The Company has also  recognized  an estimated  liability of
approximately  $1.9 million related to  decontamination  and  decommissioning of
nuclear enrichment facilities operated by the United States Department of Energy
(DOE), as required by the Energy Policy Act of 1992.

         In  June  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. However,  rate-regulated entities may recognize a
regulatory  asset or liability  instead,  if the criteria for such treatment are
met. Upon retirement, a gain or loss would be recorded if the cost to settle the
retirement obligation differs from the carrying amount.

         The Company has  identified  applicable  legal  obligations  as defined
under the new standard,  principally  for nuclear  power plant  decommissioning.
Upon  adoption  of SFAS  143,  asset  retirement  costs of $93  million  will be
recorded as part of the carrying amount of the related long-lived asset,  offset
by  accumulated  depreciation  of $93  million.

         The asset  retirement  liability  at the date of  adoption  will be $99
million.  As of December  31,  2002,  the Company had  recorded  decommissioning
liabilities of $130 million.  The change in the estimated  liabilities  resulted
from changes in methodology and various  assumptions,  including  changes in the
projected dates for decommissioning.

         Management expects that the Company's ultimate nuclear  decommissioning
costs will be tracked and recovered  through  regulated  rates.  Therefore,  the
Company  recognized a regulatory  liability of $29 million upon adoption of SFAS
143 for the transition  amounts  related to  establishing  the asset  retirement
obligations  for  nuclear  decommissioning.   The  remaining  cumulative  effect
adjustment to recognize the  undepreciated  asset  retirement cost and the asset
retirement   liability  offset  by  the  reversal  of  the  previously  recorded
decommissioning  liabilities  was a $1.9  million  increase  to income,  or $1.1
million net of tax.

        The FASB approved SFAS 141, "Business Combinations" and SFAS 142,
"Goodwill and Other Intangible Assets," on June 29, 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001, to 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 the
FirstEnergy/GPU merger, which was accounted for as a purchase transaction, and
have not materially affected the accounting for this transaction. Under SFAS
142, amortization of existing goodwill ceased January 1, 2002. Instead, goodwill
is tested for impairment at least on an annual basis - based on the results of
the transition analysis and the 2002 annual analysis, no impairment of the
Company's goodwill is required.

    (E)   STOCK-BASED COMPENSATION-

         FirstEnergy  applies the  recognition  and  measurement  principles  of
Accounting  Principles  Board  Opinion  No. 25 (APB 25),  "Accounting  for Stock
Issued  to  Employees"  and  related   Interpretations  in  accounting  for  its
stock-based  compensation plans (see Note 4B). No material  stock-based employee
compensation  expense is  reflected in net income as all options  granted  under
those plans had an exercise  price equal to the market  value of the  underlying
common stock on the grant date, resulting in substantially no intrinsic value.

         If FirstEnergy  had accounted for employee stock options under the fair
value method,  a higher value would have been  assigned to the options  granted.
The weighted average assumptions used in valuing the options and their resulting
estimated fair values would be as follows:

                                       20

<PAGE>


                                               2002       2001      2000
-------------------------------------------------------------------------
         Valuation assumptions:
           Expected option term (years).....    8.1        8.3       7.6
           Expected volatility                23.31%     23.45%    21.77%
           Expected dividend yield..........   4.36%      5.00%     6.68%
           Risk-free interest rate..........   4.60%      4.67%     5.28%
         Fair value per option..............  $6.45      $4.97     $2.86
         ----------------------------------------------------------------

        The effects of applying fair value accounting to the FirstEnergy's stock
options would not materially effect the Company's net income.

   (F)   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 were  included in the
final consolidated  federal income tax return of GPU, and results for the period
November 7, 2001 through December 31, 2001 were included in  FirstEnergy's  2001
consolidated  federal  income tax return.  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.

   (G)   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.  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.  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  contributions,   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:

                                       21

<PAGE>

<TABLE>
<CAPTION>
                                                                                                 Other
                                                                 Pension Benefits        Postretirement Benefits
                                                                 ----------------        -----------------------
                                                                 2002        2001           2002         2001
              --------------------------------------------------------------------------------------------------
                                                                               (In millions)
              <S>                                              <C>         <C>          <C>          <C>
              Change in benefit obligation:
              Benefit obligation as of January 1..........     $3,547.9    $1,506.1     $ 1,581.6    $   752.0
              Service cost................................         58.8        34.9          28.5         18.3
              Interest cost...............................        249.3       133.3         113.6         64.4
              Plan amendments.............................         --           3.6        (121.1)          --
              Actuarial loss..............................        268.0       123.1         440.4         73.3
              Voluntary early retirement program..........           --          --            --          2.3
              GPU acquisition.............................        (11.8)    1,878.3         110.0        716.9
              Benefits paid...............................       (245.8)     (131.4)        (83.0)       (45.6)
              --------------------------------------------------------------------------------------------------
              Benefit obligation as of December 31........      3,866.4     3,547.9       2,070.0      1,581.6
              --------------------------------------------------------------------------------------------------

              Change in fair value of plan assets:
              Fair value of plan assets as of January 1...      3,483.7     1,706.0         535.0         23.0
              Actual return on plan assets................       (348.9)        8.1         (57.1)        12.7
              Company contribution........................           --          --          37.9         43.3
              GPU acquisition.............................           --     1,901.0            --        462.0
              Benefits paid...............................       (245.8)     (131.4)        (42.5)        (6.0)
              -------------------------------------------------------------------------------------------------
              Fair value of plan assets as of December 31.      2,889.0     3,483.7         473.3        535.0
              -------------------------------------------------------------------------------------------------

              Funded status of plan.......................       (977.4)      (64.2)     (1,596.7)    (1,046.6)
              Unrecognized actuarial loss.................      1,185.8       222.8         751.6        212.8
              Unrecognized prior service cost.............         78.5        87.9        (106.8)        17.7
              Unrecognized net transition obligation......           --          --          92.4        101.6
              -------------------------------------------------------------------------------------------------
              Net amount recognized.......................     $  286.9    $  246.5     $  (859.5)   $  (714.5)
              ========================================================================================------===

              Consolidated Balance Sheets classifications:
              Prepaid (accrued) benefit cost..............     $ (548.6)   $  246.5     $  (859.5)   $  (714.5)
              Intangible asset............................         78.5          --            --           --
              Accumulated other comprehensive loss........        757.0          --            --           --
              --------------------------------------------------------------------------------------------------
              Net amount recognized.......................     $  286.9    $  246.5     $  (859.5)   $  (714.5)
              =======================================================================------=====================

              Assumptions used as of December 31:
              Discount rate...............................         6.75%       7.25%         6.75%        7.25%
              Expected long-term return on plan assets....         9.00%      10.25%         9.00%       10.25%
              Rate of compensation increase...............         3.50%       4.00%         3.50%        4.00%


         Net pension and other  postretirement  benefit costs for the two years ended December 31, 2002 were computed as
follows:


<CAPTION>
                                                                                        Other
                                                     Pension Benefits           Postretirement Benefits
                                                 ----------------------         -----------------------
                                                 2002        2001                 2002        2001
     --------------------------------------------------------------------------------------------------
                                                                     (In millions)

<S>                                           <C>         <C>                   <C>           <C>
     Service cost...........................  $   58.8    $   34.9               $ 28.5       $18.3
     Interest cost..........................     249.3       133.3                113.6        64.4
     Expected return on plan assets.........    (346.1)     (204.8)               (51.7)       (9.9)
     Amortization of transition obligation
       (asset)                                      --        (2.1)                 9.2         9.2
     Amortization of prior service cost.....       9.3         8.8                  3.2         3.2
     Recognized net actuarial loss (gain)...        --          --                 11.2         4.9
     Voluntary early retirement program.....        --         6.1                   --         2.3
     --------------------------------------------------------------------------------------------------
     Net periodic benefit cost (income).....  $  (28.7)   $  (23.8)              $114.0       $92.4
     ==================================================================================================

</TABLE>



         The composite  health care cost trend rate assumption is  approximately
10%-12% in 2003,  9% in 2004 and 8% in 2005,  decreasing  to 5% in later  years.
Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for the health  care plan.  An  increase in the health care cost trend
rate  assumption by one  percentage  point would  increase the total service and
interest  cost  components  by  $20.7  million  and the  postretirement  benefit
obligation  by  $232.2  million.  A  decrease  in  the  same  assumption  by one
percentage  point would decrease the total service and interest cost  components
by $16.7 million and the postretirement benefit obligation by $204.3 million.

         A significant  portion of the services provided to the Company are from
affiliates, GPU Service, Inc. (GPUS) and FirstEnergy Service Company (FECO) (see
Note 1H).  Therefore,  substantially  all of the  employees  are with GPUS which
bills the Company for services rendered. See Note 7D for the Company's amount of
net pension and other postretirement benefit costs reflected in its Consolidated
Statements of Income.

                                       22


<PAGE>


   (H)   TRANSACTIONS WITH AFFILIATED COMPANIES-

         Operating  revenues,   operating  expenses  and  other  income  include
transactions with affiliated companies, primarily GPUS and FES. During the three
years ended December 31, 2002,  GPUS provided legal,  accounting,  financial and
other  services to the Company.  The Company also entered into sale and purchase
transactions  with  affiliates  (JCP&L and Met-Ed) during the period.  Effective
September 1, 2002, the Company assigned its PLR  responsibility to FES through a
wholesale power sale agreement.

         FirstEnergy  does not bill directly or allocate any of its costs to any
subsidiary company. Costs are allocated to the Company from its affiliates, GPUS
and FECO,  both  subsidiaries  of  FirstEnergy  Corp.  and both "mutual  service
companies" as defined in Rule 93 of the 1935 Public Utility  Holding Company Act
("PUHCA"). The vast majority of costs are directly billed or assigned at no more
than cost as determined  by PUHCA Rule 91. The remaining  costs are for services
that are  provided on behalf of more than one  company,  or costs that cannot be
precisely  identified  and are allocated  using formulas that are filed annually
with the SEC on Form U-13-60. The current allocation or assignment formulas used
and their bases include  multiple factor  formulas;  the ratio of each company's
amount of the  FirstEnergy's  aggregate  total  for  direct  payroll,  number of
employees, asset balances,  revenues, number of customers and other factors; and
specific  departmental  charge ratios. It is management's belief that allocation
methods utilized are reasonable.

   (I)   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:


                                       2002                2001
----------------------------------------------------------------------
                                  Carrying  Fair        Carrying Fair
                                    Value   Value         Value  Value
                                  --------  -----       -------- -----
                                              (In millions)
    Long-term debt................  $469    $475         $519    $509
    Preferred stock...............  $ 92    $100         $ 92    $ 90
    Investments other than cash
      and cash equivalents........  $199    $199         $251    $251

         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.  The
Company has no securities held for trading purposes.

         The  investment  policy for the  nuclear  decommissioning  trust  funds
restricts  or limits  the  ability  to hold  certain  types of assets  including
private or direct placements,  warrants, securities of FirstEnergy,  investments
in companies  owning  nuclear power  plants,  financial  derivatives,  preferred
stocks,  securities  convertible  into common stock and  securities of the trust
fund's custodian or managers and their parents or subsidiaries.  The investments
that are held in the decommissioning trusts (included as "Investments other than
cash and cash  equivalents"  in the table above)  consist of equity  securities,
government bonds and corporate bonds.  Unrealized gains and losses applicable to
the  decommissioning  trusts have been recognized in the trust investment with a
corresponding change to the decommissioning  liability.  Realized gains (losses)
are recognized as additions  (reductions) to trust asset balances.  For the year
2002,  net  realized  gains were  approximately  $0.2  million and  interest and
dividend income totaled approximately $2.7 million.

         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

                                       23

<PAGE>

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 variety of non-derivative and derivative instruments,  including options,
futures contracts and swaps.  These derivatives are used principally for hedging
purposes.  The Company has a Risk Policy  Committee,  comprised  of  FirstEnergy
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. 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 2003. Gains and losses from hedges of
commodity  price risks are  included in net income  when the  underlying  hedged
commodities  are  delivered.  There is  currently  a net  deferred  loss of $1.9
million included in Accumulated  Other  Comprehensive  Income as of December 31,
2002 related to  derivative  hedging  activity,  which will be  reclassified  to
earnings during the next twelve months as hedged transactions occur.

   (J)   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:

                                                 2002         2001
         ----------------------------------------------------------
                                                   (In millions)

         Regulatory transition charge.........  $434.2       $515.9
         Customer receivables for future
           income taxes.......................   124.5        140.2
         Provider of last resort deferrals....      --         83.5
         Nuclear decommissioning costs........    35.8         24.0
         Loss on reacquired debt..............     5.2          5.8
         Other................................      --          0.4
         ----------------------------------------------------------
           Total..............................  $599.7       $769.8
         ==========================================================

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.

          During 2002, certain pre-acquisition contingencies and other final
adjustments to the fair values of the assets acquired and liabilities assumed
were reflected in the final allocation of the purchase price. These adjustments
primarily related to: (1) final actuarial calculations related to pension and
postretirement benefit obligations; (2) establishment of a reserve for deferred
energy costs recognized prior to the merger; and (3) return to accrual
adjustments for income taxes. As a result of these adjustments, goodwill
increased by approximately $100.7 million. As of December 31, 2002, the Company
had recorded goodwill of approximately $898.1 million related to the merger.

                                       24

<PAGE>


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 each of the years 2002, 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.

         As of December  31,  2002,  the future  minimum  lease  payments on the
Company's  capital lease  discussed  above are $0.7 million and $0.5 million for
the years 2003 and 2004,  respectively.  The  present  value of the net  minimum
lease payments is $1.1 million and the total interest portion is $0.1 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,  2002,  the Company  had  retained  earnings
available  to pay  common  stock  dividends  of $22.6  million,  net of  amounts
restricted under the Company's FMB indentures.

   (B)   STOCK COMPENSATION PLANS-

         In 2001,  FirstEnergy  assumed  responsibility  for two new stock-based
plans as a result of its acquisition of GPU. No further stock-based compensation
can be awarded under the GPU, Inc.  Stock Option and  Restricted  Stock Plan for
MYR Group Inc. Employees (MYR Plan) or the 1990 Stock Plan for Employees of GPU,
Inc. and  Subsidiaries  (GPU Plan).  All options and restricted stock under both
Plans have been converted into FirstEnergy options and restricted stock. Options
under the GPU Plan became fully  vested on November 7, 2001,  and will expire on
or before June 1, 2010.  Under the MYR Plan,  all options and  restricted  stock
maintained their original  vesting periods,  which range from one to four years,
and will expire on or before December 17, 2006.

         Additional  stock based plans  administered by FirstEnergy  include the
Centerior  Equity  Plan (CE Plan) and the  FirstEnergy  Executive  and  Director
Incentive Compensation Plan (FE Plan). All options are fully vested under the CE
Plan, and no further awards are permitted. Outstanding options will expire on or
before  February 25, 2007.  Under the FE Plan,  total awards  cannot exceed 22.5
million  shares of common  stock or their  equivalent.  Only stock  options  and
restricted stock have been granted, with vesting periods ranging from six months
to seven years.

         Collectively,  the above  plans  are  referred  to as the FE  Programs.
Restricted common stock grants under the FE Programs were as follows:

                                                2002      2001     2000
--------------------------------------------------------------------------

   Restricted common shares granted.........  36,922    133,162   208,400
   Weighted average market price............  $36.04     $35.68    $26.63
   Weighted average vesting period (years)..     3.2        3.7       3.8
   Dividends restricted.....................  Yes          *      Yes
--------------------------------------------------------------------------

*  FE Plan dividends are paid as restricted  stock on 4,500  shares;   MYR  Plan
   dividends are paid as unrestricted cash on 128,662 shares


         Under  the  Executive  Deferred   Compensation  Plan  (EDCP),   covered
employees can direct a portion of their Annual  Incentive Award and/or Long-Term
Incentive  Award into an unfunded  FirstEnergy  Stock Account to receive  vested
stock units.  An  additional  20% premium is received in the form of stock units
based on the amount  allocated to the FirstEnergy  Stock Account.  Dividends are
calculated  quarterly  on stock  units  outstanding  and are paid in the form of
additional  stock  units.   Upon  withdrawal,   stock  units  are  converted  to
FirstEnergy  shares.  Payout  typically  occurs  three  years  from  the date of
deferral;  however,  an  election  can be made in the year  prior to  payout  to
further  defer shares into a retirement  stock account that will pay out in cash
upon  retirement.  As of  December  31,  2002,  there were  296,008  stock units
outstanding.


                                       25
<PAGE>


         Stock option  activities under the FE Programs for the past three years
were as follows:

                                              Number of      Weighted Average
        Stock Option Activities                Options        Exercise Price
--------------------------------------------------------------------------------
   Balance, January 1, 2000.............     2,153,369            $25.32
   (159,755 options exercisable)........                           24.87

     Options granted....................     3,011,584             23.24
     Options exercised..................        90,491             26.00
     Options forfeited..................        52,600             22.20
   Balance,  December 31, 2000..........     5,021,862             24.09
   (473,314 options exercisable)........                           24.11

     Options granted....................     4,240,273             28.11
     Options exercised..................       694,403             24.24
     Options forfeited..................       120,044             28.07
   Balance, December 31, 2001...........     8,447,688             26.04
   (1,828,341 options exercisable)......                           24.83

     Options granted....................     3,399,579             34.48
     Options exercised..................     1,018,852             23.56
     Options forfeited..................       392,929             28.19
   Balance,  December 31, 2002..........    10,435,486             28.95
   (1,400,206 options exercisable)......                           26.07


         As of December 31, 2002,  the weighted  average  remaining  contractual
life of outstanding stock options was 7.6 years.

         No material stock-based  employee  compensation expense is reflected in
net income for stock  options  granted  under the above plans since the exercise
price was equal to the market value of the underlying  common stock on the grant
date.  The effect of  applying  fair value  accounting  to  FirstEnergy's  stock
options is summarized in Note 1E - Stock-Based Compensation.

   (C)   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.

   (D)   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.

                                       26

<PAGE>


   (E)   LONG-TERM DEBT-

         The Company's first mortgage bond  indenture,  which secures all of the
Company's FMBs,  serve as a direct first mortgage lien on  substantially  all of
the  Company's  property  and  franchises,   other  than  specifically  excepted
property.

         The  Company   has  various   debt   covenants   under  its   financing
arrangements. The most restrictive of these relate to the nonpayment of interest
and/or  principal  on  debt,  which  could  trigger  a  default.   Cross-default
provisions also exist between FirstEnergy and the Company.

         Based on the  amount  of bonds  authenticated  by the  Trustee  through
December  31,  2002,  the  Company's   annual  sinking  and   improvement   fund
requirements for all bonds issued under the mortgage amount to $0.7 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)
                             -------------------------
                              2003..........$  0.2
                              2004.......... 125.2
                              2005..........   8.2
                              2006..........   0.2
                              2007..........   3.1
                             -------------------------

         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.

   (F)   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, 2002, accumulated other comprehensive income consisted of an
unrealized gain on investments of $2,700 and an unrealized loss on derivative
instruments of $72,000.

5. SHORT-TERM BORROWINGS:

         The Company may borrow from its affiliates on a short-term basis. As of
December 31, 2002, the Company had total short-term  borrowings of $90.4 million
from its affiliates with a weighted average interest rate of approximately 1.8%.

6.  COMMITMENTS, GUARANTEES AND CONTINGENCIES:

   (A)   CAPITAL EXPENDITURES-

         The Company's current forecast  reflects  expenditures of approximately
$328 million for property  additions and improvements from 2003 through 2007, of
which approximately $54 million is applicable to 2003.

   (B)   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

                                       27

<PAGE>

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.

   (C)   ENVIRONMENTAL MATTERS-

         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;  however, federal law provides
that all PRPs for a particular site be held liable on a joint and several basis.
Therefore,  potential  environmental  liabilities  have been  recognized  on the
Consolidated  Balance  Sheet as of December 31, 2002,  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 accrued  liabilities  aggregating  approximately  $0.3 million as of
December 31, 2002. The Company does not believe environmental  remediation costs
will have a material  adverse effect on its financial  condition,  cash flows or
results of operations.

   (D)   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.

         The Company has a 25%  ownership  interest in TMI-2,  which was damaged
during a 1979 accident. As a result of the accident, claims for alleged personal
injury were filed against the Company,  JCP&L,  Met-Ed, and GPU (the defendants)
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.  In January 2002,  the District Court granted the  defendants'  July 2001
motion for summary  judgment on the remaining 2,100 pending claims.  In February
2002,  the  plaintiffs  filed a notice of appeal to the United  States  Court of
Appeals for the Third Circuit. In December 2002, the Court of Appeals refused to
hear the appeal, which effectively ended further legal action for those claims.

7.  OTHER INFORMATION:

          The following represents the financial data which includes
supplemental unaudited prior years' information as compared to consolidated
financial statements and notes previously reported in 2001 and 2000.

   (A)   CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                              Nov. 7-      Jan. 1-
                                                              Dec. 31,     Nov. 6,
                                                  2002         2001         2001         2000
                                                  ----         ----         ----         ----


 Other cash flows from operating activities:
<S>                                              <C>         <C>          <C>         <C>
 Accrued taxes................................   $(7,984)     $26,337  |   $(21,377)   $  4,994
 All other....................................    15,931       15,253  |    (15,507)    (94,119)
                                                 -------      -------  |   ---------   --------
   Other cash provided from (used for)                                 |
     operating activities.....................   $ 7,947      $41,590  |   $(36,884)   $(89,125)
                                                 =======      =======  |   =========   ========
</TABLE>



   (B)   REVENUES - INDEPENDENT SYSTEM OPERATOR (ISO) TRANSACTIONS-

         The  Company  records   purchase  and  sales   transactions   with  PJM
Interconnection  ISO,  an  independent  system  operator,  on a gross  basis  in
accordance  with EITF Issue No. 99-19,  "Reporting  Revenue Gross as a Principal
versus Net as an Agent." The aggregate  purchase and sales  transactions for the
three years ended December 31, 2002, are summarized as follows:

                                 Nov. 7-Dec. 31, Jan. 1-Nov. 6,
                           2002       2001          2001        2000
            ----------------------------------------------------------
                                       (In millions)

            Sales.......   $34         $1     |      $29         $92
            Purchases...    75          9     |       79          36
            ----------------------------------|-----------------------


         The Company's revenues on the Consolidated Statements of Income include
wholesale  electricity  sales  revenues  from the PJM ISO from  power  sales (as
reflected in the table  above)  during  periods when the Company had  additional
available  power  capacity.  Revenues also include sales by the Company of power
sourced from the PJM ISO

                                       28

<PAGE>

(reflected  as  purchases in the table  above)  during  periods when the Company
required additional power to meet its retail load requirements.

   (C)   TRANSACTIONS WITH AFFILIATED COMPANIES-

         The primary affiliated companies transactions are as follows:

                                                  Nov. 7-     Jan. 1-
                                                 Dec. 31,     Nov. 6,
                                         2002      2001        2001      2000
------------------------------------------------------------------------------
                                                    (In millions)
Operating Revenues:
Wholesale sales-affiliated companies... $  9.1    $ 1.1  |    $10.0     $ 30.1
                                                         |
Operating Expenses:                                      |
Power purchased from FES...............  188.2     14.6  |      --         --
GPU Service, Inc. support services.....   81.5     17.0  |     93.0      109.0
Power purchased from other affiliates..    9.7      1.5  |      8.8        2.6


   (D)   RETIREMENTS BENEFITS- (1)

         Net pension and other  postretirement  benefit  costs  (income) for the
three years ended December 31, 2002 are approximately as follows:

                                                 Nov. 7-      Jan. 1-
                                                 Dec. 31,     Nov. 6,
                                         2002      2001        2001      2000
------------------------------------------------------------------------------
                                                    (In millions)
Pension Benefits......................  $(15.8)   $(4.6)  |   $(14.9)   $(9.3)
Other Postretirement Benefits.........     3.2      0.3   |      2.8      8.9

(1) Includes estimated portion of benefit costs included in billings from GPUS.

8.  RECENTLY ISSUED ACCOUNTING STANDARDS:

         FASB  Interpretation   (FIN)  No.  45,   "Guarantor's   Accounting  and
         Disclosure  Requirements for Guarantees,  Including Indirect Guarantees
         of Indebtedness of Others - an interpretation of FASB Statements No. 5,
         57, and 107 and rescission of FASB Interpretation No. 34"

         The FASB issued FIN 45 in January 2003. This interpretation  identifies
minimum guarantee  disclosures required for annual periods ending after December
15, 2002. It also clarifies  that  providers of guarantees  must record the fair
value of those  guarantees  at their  inception.  This  accounting  guidance  is
applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002.  The Company does not believe that  implementation  of FIN 45
will be material but it will continue to evaluate anticipated guarantees.

         FIN  46,   "Consolidation   of   Variable   Interest   Entities   -  an
         interpretation of ARB 51"

         In January  2003,  the FASB issued this  interpretation  of ARB No. 51,
"Consolidated Financial Statements". The new interpretation provides guidance on
consolidation of variable interest entities (VIEs), generally defined as certain
entities  in  which  equity  investors  do not  have  the  characteristics  of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance  its  activities  without  additional  subordinated  financial
support  from other  parties.  This  Interpretation  requires an  enterprise  to
disclose  the  nature  of its  involvement  with a VIE if the  enterprise  has a
significant  variable  interest  in  the  VIE  and to  consolidate  a VIE if the
enterprise is the primary  beneficiary.  VIEs created after January 31, 2003 are
immediately subject to the provisions of FIN 46. VIEs created before February 1,
2003 are subject to this  interpretation's  provisions  in the first  interim or
annual  reporting  period  beginning  after June 15, 2003 (our third  quarter of
2003).  The FASB also  identified  transitional  disclosure  provisions  for all
financial statements issued after January 31, 2003.

         The Company currently has transactions with entities in connection with
the sale of  preferred  securities,  which  may fall  within  the  scope of this
interpretation, and which are reasonably possible of meeting the definition of a
VIE in accordance with FIN 46. The Company currently consolidates these entities
and believes it will continue to consolidate following the adoption of FIN 46.

9.  SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):

         The following  summarizes  certain  consolidated  operating  results by
quarter for 2002 and 2001.

                                       29

<PAGE>


                                            Three Months Ended
                                 ---------------------------------------------
                                 March 31,  June 30, September 30,December 31,
                                   2002      2002       2002        2002
------------------------------------------------------------------------------
                                              (In millions)

Operating Revenues............   $242.8     $237.6    $269.4      $277.3
Operating Expenses and Taxes..    214.3      221.7     256.4       246.5
------------------------------------------------------------------------------
Operating Income .............     28.5       15.9      13.0        30.8
Other Income (Expense)........      0.3        0.8       1.0        (0.4)
Net Interest Charges..........     10.0        9.8       9.6         9.6
------------------------------------------------------------------------------
Net Income ...................   $ 18.8     $  6.9    $  4.4      $ 20.8
==============================================================================

<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            R 4.2       |      $ 10.8
=====================================================================================================

</TABLE>

                                       30

<PAGE>


Report of Independent Accountants


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

In our opinion,  the  accompanying  consolidated  balance sheet and consolidated
statement of capitalization and the related  consolidated  statements of income,
common  stockholder's  equity,  preferred  stock,  cash flows and taxes  present
fairly,  in all  material  respects,  the  financial  position  of  Pennsylvania
Electric  Company  (a  wholly  owned   subsidiary  of  FirstEnergy   Corp.)  and
subsidiaries  as of December 31, 2002,  and the results of their  operations and
their cash flows for the year then ended and the year ended  December  31,  2000
(pre-merger) 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  audit.  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.  The  consolidated  financial
statements of Pennsylvania  Electric Company and subsidiaries as of December 31,
2001 and 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)  were
audited by other  independent  accountants  who have  ceased  operations.  Those
independent  accountants  expressed an unqualified  opinion on those  financials
statements in their report dated March 18, 2002.


PricewaterhouseCoopers LLP

Cleveland, Ohio
February 28, 2003

                                       31

<PAGE>


The following report is a copy of a report  previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.


Report of Previous 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.

                                       32