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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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(Mark One)

|                                            |  |                                                                                                 
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|x                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the fiscal year ended July 31,
    2002
|                                           
|or                                         
|                                           
|o                                           |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|                                           
|For the transition period
    from  to     
|                                           

Commission File Number: 000-33069

COMMONWEALTH ENERGY

CORPORATION


(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 33-0769555                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

15901 Red Hill Avenue, Suite 100, Tustin,
California 92780

(Address of principal executive offices) (Zip
Code)


Registrants telephone number, including
area code (714) 258-0470

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock


(Title of class)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for at
least the past
90 days:     Yes x     No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (Paragraph 229.405 of this Chapter) is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

As of October 18, 2002, 27,334,032 shares of
the registrants common stock were outstanding. There was
no market for the registrants shares at such date.



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TABLE OF CONTENTS



|              |                                                                                                        |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I       
|              | Item 1.Business                                                                                       
|              | Item 2.Properties                                                                                     
|              | Item 3.Legal Proceedings                                                                              
|              | Item 4.Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5.Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6.Selected Financial Data                                                                        
|              | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A.Quantitative and Qualitative Disclosures About Market Risk                                    
|              | Item 8.Financial Statements and Supplementary Data                                                    
|              | Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III     
|              | Item 10.Directors and Executive Officers of the Registrant                                            
|              | Item 11.Executive Compensation                                                                        
|              | Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13.Certain Relationships and Related Transactions                                                
|              | Item 14.Controls and Procedures                                                                       
|PART IV      
|SIGNATURES   
|EXHIBIT 3.4  
|EXHIBIT 10.7 
|EXHIBIT 10.22
|EXHIBIT 10.23
|EXHIBIT 10.24
|EXHIBIT 10.25
|EXHIBIT 99.1 
|EXHIBIT 99.2 



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TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 1  | 
|Item 2.  |  | Properties                                                                                         |  |      | 8  | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 8  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 10 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 10 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 12 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 14 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 24 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 25 | 
|Item 9.  |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosures          |  |      | 25 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 25 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 28 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 34 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 36 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 36 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statements and Reports on
    Form 8-K                                         |  |      | 37 | 

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FORWARD-LOOKING STATEMENTS

A number of the matters and subject areas
discussed in this Annual Report on Form 10-K contains
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as
amended, reflecting managements current expectations. The
discussion of such matters and subject areas is qualified by the
inherent risks and uncertainties surrounding future expectations
generally, and also may differ materially from our actual future
experience involving any one or more of such matters and subject
areas. We wish to caution readers that all statements other than
statements of historical fact included in this Annual Report on
Form 10-K regarding our financial position and strategy may
constitute forward-looking statements. For example, statements
herein relating to expansion opportunities for our subsidiaries,
extension of our business model to new markets and industries,
demand in the market for UtiliHostTM services,
completion of acquisitions of certain assets, growth of retail
energy operations and demand for retail energy outsourcing and
back office solutions are all forward-looking statements . When
used in this document, the words anticipate,
believe, estimate, expects,
intend, may, project,
plan, should, and similar expressions
are intended to be among the statements that identify
forward-looking statements. All of these forward-looking
statements are based upon estimates and assumptions made by our
management, which although believed to be reasonable, are
inherently uncertain. Therefore, undue reliance should not be
placed on such estimates and statements. No assurance can be
given that any of such estimates or statements will be realized
and it is likely that actual results will differ materially from
those contemplated by such forward-looking statements. Factors
that may cause such differences include: (a) regulatory
changes in the states in which we operate that could adversely
affect our operations; (b) our continued ability to obtain
and maintain licenses from the states in which we operate;
(c) the competitive restructuring of retail marketing may
prevent us from selling electricity in certain states;
(d) our dependence upon a limited number of third parties
to (i) generate and supply to us electricity and
(ii) delay performance of, or fail to perform, their
contracts with us; and (e) our dependence upon a limited
number of utilities to (i) transmit and distribute the
electricity we sell to our customers and (ii) delay
performance of, or fail to perform, their contracts with us. We
have attempted to identify, in context, certain of the factors
that we currently believe may cause actual future experience and
results to differ from our current expectations regarding the
relevant matter of subject area. In addition to the items
specifically discussed above, our business and results of
operations are subject to the rules and uncertainties described
under the heading Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Factors That May Affect Future
Results contained herein; however, the operations and
results of our business also may be subject to the effect of
other risks and uncertainties. Such risks and uncertainties
include, but are not limited to, items described from time to
time in our reports filed with the Securities and Exchange
Commission. We assume no obligation to update the
forward-looking information to reflect actual results or changes
in the factors affecting such forward-looking information.

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PART I




Item 1. Business

Overview

Commonwealth Energy Corporation
(Commonwealth) is a provider of retail electric
power to residential, commercial, industrial and governmental
customers in the deregulated California, Michigan and
Pennsylvania electricity markets. We are licensed by the Federal
Energy Regulatory Commission (FERC) as a power
marketer and we are licensed to supply retail electric power by
applicable state agencies in California, Pennsylvania, Michigan,
New Jersey, New York, Texas and Ohio.

Commonwealth does not have its own electricity
generation facilities. The power we sell to our customers is
purchased from third party power generators. The electric power
sold by the Company to its retail customers is delivered to the
Companys customers by incumbent electric utilities. The
incumbent electric utilities measure electric power usage by the
Companys customers and bill most of the Companys
customers on behalf of the Company. The Company plans to enter
new deregulated electric power markets and to offer a variety of
other energy-related products and services in the future.
Commonwealth also sells electric power to wholesale customers in
California and Pennsylvania. We use our best efforts to sell the
surplus electric power unused by our retail customers to
wholesale trading partners, as remaining electric power cannot
be stored and will be wasted if not sold.

Commonwealth Energy Corporation has three
wholly-owned subsidiaries: electricAmerica, Inc., UtiliHost,
Inc. and electric.com, Inc. Each of these subsidiaries is
incorporated in the State of Delaware, but as of yet, none of
them is operational. We also have made an investment in Summit
Energy Ventures, LLC (Summit), a joint venture. The
consolidated financial statements of the Company include the
accounts of Summit and the Companys wholly-owned
subsidiaries. Commonwealth Energy Corporation was incorporated
in California on August 15, 1997.

As used in this Report, the terms we,
us, our, the Company and
Commonwealth refer to Commonwealth Energy
Corporation and its wholly-owned subsidiaries.

Industry Background

Prior to the inception of electricity
deregulation in 1998, the retail electric service industry was
controlled almost exclusively by utilities. Presently,
twenty-four states and the District of Columbia have either
enacted enabling legislation or issued a regulatory order to
implement retail access. The local utility typically continues
to provide transmission and distribution (delivery of energy)
services. Retail access allows customers to choose their own
supplier of generation energy services, but each states
retail access schedule varies according to the legislative
mandates or regulatory orders.

As in other industries that have deregulated,
competition in the electric service industry is intended to
provide consumers with a choice of multiple suppliers that is
expected to promote product differentiation, lowered costs and
enhanced services. To obtain these features, customers may
switch electric service from their utility to an alternative
supplier.

The electricity distribution infrastructure
utilized by utility companies prior to deregulation of the
energy industry remains the only current method of distribution
to the end-use customer. Retail electricity suppliers use this
established electricity network for the delivery of energy to
their customers. The utility company is paid a fee for use of
its wires. Fees paid to established utility companies for use of
their infrastructure are collected by the respective independent
system operator (ISO) or regional transmission
organization (RTO) for a specific region or state.
The ISO or RTO ensures that proper electricity reserve margins
are in place at all times, as electricity must have supply and
demand in near perfect balance to insure reliable service, and
typically run 5% to 10% of prevailing wholesale electricity
market prices.

In addition to this basic service, some states
allow the utility company to take on additional
responsibilities, such as reading meters, generating bills to
customers, collecting bills and taking requests for service

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changes or problems, while in other jurisdictions
the utility is not allowed, or chooses not, to perform these
services.


On September 20, 2001, the California Public
Utilities Commission (the CPUC) issued a ruling
suspending direct access. Direct access
refers to the right of retail electricity suppliers like the
Company to actively seek new customers in California from
incumbent utilities or other electricity service providers. This
ruling permits retail electricity suppliers to keep their
current customer bases, but prohibits the Company from signing
up new non-direct access customers for an undetermined period of
time.

Electric service providers procure inventory of
power to deliver to retail customers from a variety of wholesale
power producers, either through long term bi-lateral contracts
with the generators or from the Independent System Operator on a
short term basis. The power inventory obtained from the ISO is
purchased and sold by the ISO to balance the market and make
sure each corresponding sale of electricity is matched to a
buyer of electricity. The function of the ISO is to provide
system reliability to the market.

Core Products and Services

Our business activities are comprised primarily
of providing retail electricity services. Commencing in August
2001, we expanded our business offerings to include wholesale
power sales. The following table shows, for the periods
indicated, the percentage of our sales contributed by our
principal products and services for the years ended
July 31, 2000, 2001 and 2002.

|                       |  |                             |      |      |  |      |       |  |  |  |       | 
|---------------------- |  | --------------------------- | ---- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                       |  |                            
|                       |  | Percentage of Total Revenue
|                       |  | Years Ended July 31,       
|                       |  |                            
|                       |  | 2000                        |      | 2001 |  | 2002
|                       |  |                             |      |      |  |     
|Retail Energy Sales    |  |                             | 87.6 | %    |  |      | 54.6% |  |  |  | 82.3% | 
|Wholesale Energy Sales |  |                             |     |      |  |      | 43.3% |  |  |  | 15.9% | 

Retail Electricity

We sell electric power to retail and commercial
end-user customers. This electric power is delivered to our
customers by the incumbent utility distribution companies
(UDCs) or electric distribution companies
(EDCs) depending upon the jurisdiction. They measure
electric power usage and bill most of our customers on our
behalf. Three UDCs in California, one EDC in Pennsylvania and
one UDC in Michigan conduct these activities on our behalf. In
California, Pennsylvania and Michigan, the utility companies
currently assist us with a portion of the preparation, mailing
and collection of our bills to end-use customers. In addition,
the utility companies are invoicing and collecting the charges
and fees owed by us to them associated with those services as
well as the right to use the distribution network.

We offer electric service to customers on
month-to-month or longer-term service contracts. The difference
between the customers list price for energy and the sum of
our wholesale electricity purchase cost and ancillary costs
provide us a gross profit/loss margin.

Wholesale Power Procurement and
Sales

Due to the variable electricity usage patterns of
our retail customers, we may hold long or
short energy positions. A long position
occurs when we have committed to purchase through long-term
contracts more electricity than our customers need and a short
position occurs when our customers needs exceed the amount
of electricity we have committed to purchase through long-term
contracts. In both situations, we utilize the wholesale
electricity market to sell excess energy when we are
long and buy additional electricity when we are
short. In order to better manage and schedule our
energy load and our wholesale power purchases, we have
established a trading desk that buys and sells our electricity
in various regional markets. Excess energy is sold to wholesale
entities short on supply, while additional energy is procured
from time to time when required to supply our customers
usage.

Purchases and sales in the wholesale market are
regulated by FERC and reports are made on a regular basis to the
U.S. Department of Energy. Typically, electricity is more
expensive during peak hours, when

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demand and usage are highest. Weather, generation
capacity, transmission, distribution and other market issues
also are significant factors in determining our wholesale
procurement and sale strategies. Because electricity is a
real-time commodity (as soon as it is produced, it
must be delivered into the grid to meet the demand by the end
user) and cannot be stored, effective management of our
electricity supply and demand is crucial to wholesale and retail
market profitability.


Summit Energy Ventures, LLC

In July 2001, we formed Summit Ventures, LLC
(Summit), a joint venture with Steven Strasser.
Summit was formed to enable Commonwealth to diversify our
business by making investments in companies that manufacture
products that conserve or manage electricity. Commonwealth made
the initial capital contribution of $15 million into
Summit, which to date represents the entire capital contribution
to Summit. For purposes of financial reporting, the consolidated
financial statements of the Company include the accounts of
Summit as well as those of the Companys wholly-owned
subsidiaries.

To date, Summit has invested a total of
approximately $7.5 million in three companies:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Envenergy, Inc.  Envenergy is a
    developer of software and hardware for energy and facility
    management. Envenergys products provide the infrastructure
    to collect information from separate facility systems (e.g.,building automation, energy, lighting, access control,
    metering) and assimilate this raw data into useful information
    from which energy service companies, facility management
    providers, equipment and building automation system
    manufacturers and utilities can assess energy usage and costs.
    Summit currently owns approximately 8.7% of Envenergy.
|
| |  | Turbocor, LLC  Turbocor, LLC owns 51%
    of Turbocor, B.V., which, in turn owns 58% of Turbocor, Inc.
    Turbocor, Inc. manufactures energy-efficient compressors, which
    features a drive shaft that floats in a magnetic field, for
    commercial heating, ventilating, air conditioning and
    refrigeration applications. Summit currently owns approximately
    21.2% of Turbocor, LLC., which represents a 6.2% indirect
    interest in Turbocor, Inc.                                                                                                                                      
|
| |  | Power Efficiency Corporation  Power
    Efficiency Company designs, develops, assembles and markets its
    own branded solid state electronic products, called
    Performance Controllers that reduce energy
    consumption in alternating current (AC) induction motors.
    Summit currently owns approximately 28.0% of Power Efficiency
    Corporation.                                                                                                                                                                                                                                          

Our joint venture partner in Summit, Steven
Strasser, is the president and sole shareholder in Northwest
Power Management (NPM), the investment manager of
Summit. NPM is responsible for managing the funds that we have
invested in Summit. All investments must be approved by
Summits investment committee, which is comprised of three
individuals, all of whom are appointed by Commonwealth. NPM
manages the investment until such time as a decision to sell is
made. When a sale of an investment to a third-party buyer is
proposed, we have the option to buy out Summits interest
in a specific investment on the same terms as the third-party
buyer. We pay an annual management fee of $700,000 to the
investment manager.

Commonwealth owns 100% of the preferred
membership interest of Summit and 60% of the common membership
interest. Steven Strasser owns the other 40% of the Common
Membership Interest. Our preferred membership interest entitles
us to a distribution preference equal to all of our initial
invested capital plus an annual 10% preferred return before any
funds are distributed to the holders of the common membership
interests; net losses are allocated per capital contribution. In
addition, Commonwealth, as the preferred member, has a right of
first refusal in the event of any issuances of new members
interests and the right to purchase any of the investments
acquired by Summit at any time during the agreement on terms
mutually agreeable to both the investment manager and us.

Managed Back Office Services

We have developed software to better manage our
electric service customers. TACTTM (Trans-Action
Control Technology) and TRIUMPHTM (Total Resource
Internet Utility Management Power Host) are proprietary software
products that we have developed to provide services and manage
back office processes.

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TACT acts as a data translator between trading
partner transactions, while TRIUMPH is a comprehensive, modular
software package that calculates and manages back office
processes such as customer enrollment, forecasting, metering,
ancillary products, billing, accounts receivable, customer
service and settlement. By developing the TRIUMPH system
in-house, we have not had to acquire and pay for these services
from a third party. We commenced efforts to market our managed
back office services to third parties in February 2001 through
direct mail, print media and Internet advertising, primarily in
deregulated energy markets. We have formed a wholly-owned
subsidiary, UtiliHost, Inc., which we plan to use to manage
client-related back office processes for third parties, such as
municipalities, energy generators and other electric service
providers. To date, UtiliHost, Inc. has not generated any
revenues from third parties.


Product and Service Initiatives

We are working to broaden the scope of the energy
related services we provide to include energy efficient
products, energy management programs and load aggregation. Each
of these services are in the development stage and, as yet, have
not begun to contribute materially to our financial results.

Load Aggregation

Load aggregation is the process of combining
customers with different electricity usage patterns into a
portfolio of customers that can be serviced by our purchases of
electric supply. We are currently discussing with several
generators and utilities a comprehensive solution for cities and
major commercial and industrial customers to meet their energy
demands. We are able to assist cities to become municipal
utilities or by providing them with all required energy
procurement, energy management, customer service and back-office
services. We also can provide similar services for major
commercial and industrial customers to meet their electricity
demand requirements. This program will allow us the opportunity
to take a diversified approach to aggregating customers to sell
them electricity and bill them through UtiliHostTM.
While we are currently discussing this program with several
cities, to date, we have not entered into any contracts to
provide load aggregation services.

Energy Efficient and Emergency Preparedness
Products

We sell energy efficient and emergency
preparedness products, such as energy management controllers,
compact fluorescent lamps, natural gas shut-off valves and other
similar devices. These products are targeted to residential,
commercial, industrial and governmental customers. We fulfill
orders for products and ship most of these products through our
warehouse, but some are fulfilled and delivered from the
manufacturers or distributors. In either case, we collect
payment from our customers and are compensated for order
processing and procurement; however, in the case of orders
fulfilled and shipped by the manufacturers or distributors, we
do not retain payment for shipping costs. All deliveries of
products are made only after payment by check or credit card is
made from our customers.

Energy Management Programs

Energy management programs consist of energy
curtailment programs and distributed generation programs. Energy
curtailment programs permit short-term curtailment or cessation
of electric service at the discretion of the distributing
company under certain circumstances, as specified in the service
contract. These programs provide a win-win proposition for our
customers and for us by creating a financial incentive for our
customers to lower their electrical usage during certain times
of the day. In connection with the reduction in energy usage by
our customers, we also benefit because we are able to avoid the
purchase of expensive power from other suppliers to meet our
customers excess energy needs. The resulting savings from
these energy management programs are shared between the customer
and us. Our sales department markets these programs to
commercial, industrial and governmental entities seeking to save
energy costs by decreasing their energy usage during peak
periods. The availability of curtailment programs is dependent
upon the initiatives set by the ISO and/or the local
distribution company. We are presently not involved in any
energy curtailment programs; however, we plan to offer this
service in the future if ISOs and/or local distribution
companies continue these programs.

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Distributed generation programs provide customers
that have uninterruptible power requirement with on-site
electric power generation. We offer to our customers the service
of formulating reliable custom energy solutions by equipping
them with an alternative, cost-effective source for electricity
for seasonal or peak demand power. While we have offered these
programs, to date, we have not installed any systems and these
programs have not generated any revenues.

Our Customers and Markets

We began providing electric service in April 1998
as one of more than 300 licensed electric service providers
(ESPs) in the state of California by aggregating
customers using our call center. As our customer base grew, we
began to develop software solutions to better manage our back
office customer service functions associated with servicing
electricity accounts. We also began to provide service to larger
commercial, industrial and governmental customers. We expanded
our retail electricity services to end users in Pennsylvania in
January, 2000 and in Michigan in August 2002. We also
established a new tradename, electricAmerica, which
we use in all markets in which we supply retail electric power,
and began aggregating residential, commercial, industrial and
governmental customers using our call center. Currently, we sell
electric power to approximately 54,000 retail end-use
customers in California, approximately 34,000 retail
end-use customers in Pennsylvania. and approximately
200 retail customers in Michigan.

In August 2002, we began servicing commercial and
industrial customers in the Detroit Edison service territory of
Michigan. We also established a sales office in the Detroit area.

From time-to-time, we have purchased more
electricity under our bilateral contracts with wholesale
producers than is required by our retail customers. When this
occurs, we sell our excess inventory of electricity to the local
independent system operator, who matches our sale with a
purchaser in need of excess electricity.

Our Suppliers

To procure a supply of electricity for our retail
electric service sales, we purchase electricity from third-party
generators pursuant to a combination of long-term and short-term
wholesale contracts and, prior to fiscal 2001, by spot purchases
on regional power exchanges. During the four fiscal year period
ending July 31, 2002, as a percentage of total electricity
purchased, the amount of electricity that we purchased on the
spot market has significantly declined from 84.3% in fiscal 1999
to 1.2% in fiscal 2002. This decline is the result of our
entering into long-term and short-term contracts with wholesale
power providers.

Historically, the majority of our sales have come
from the resale of electricity in California purchased under a
contract with Calpine Power Services Company that expired in
June 2002. During fiscal 2002, this contract accounted for 46%
of the total energy supplied by us and comprised 52% of our
revenue. This contract was not capable of renewal on terms as
favorable to us as those contained in the original agreement.
Beginning in July 2002, we have been purchasing electricity
under two new contracts, one with Transalta Energy Marketing,
Inc. and one with Reliant Energy Services, Inc. To the extent
necessary, we continue to purchase electricity in the spot
market from time-to-time in California.

In Pennsylvania, we obtain most of the
electricity we sell pursuant to two long-term contracts with
Exelon Energy Services. Under those contracts, approximately 50%
of our electricity supplied by Exelon is produced by an
environmentally-friendly hydroelectric generation facility. To
the extent necessary, we also purchase electricity in the spot
market from time-to-time in Pennsylvania.

In Michigan, we obtain most of our wholesale
power from DTE Energy Trading, pursuant to a long-term
contract.

The California marketplace has evolved from a
market driven, minute by minute trading forum, operated by the
now bankrupt California Power Exchange, to a system which
requires parties to obtain more of their power through the use
of forward or advance purchase contracts. Power purchases are
facilitated by the California Independent System Operator
(CAISO), a market oversight body. CAISO is
responsible for ensuring that all electricity put into the grid
has a corresponding exit from the grid and for maintaining
system reliability. This matching of power transactions is
accomplished in a constant sequence of 15 minute

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increments. The Pennsylvania marketplace is
governed by a similar structure called the PJM interconnection
(PJM). The PJM is responsible for matching all power
transactions among market participants and ensuring system
reliability. The Michigan market is governed by a similar
structure called the Michigan Independent System Operator.


The price of electricity can fluctuate
significantly. In an attempt to manage this risk, we enter into
longer term wholesale power purchase agreements which allows us
to purchase fixed daily quantities of electricity at fixed
prices.

During certain times and market conditions, such
as when the supply of electricity is scarce, the wholesale price
of electricity increases and allows us to resell the electricity
that we purchased in excess of the amount needed to supply
retail and commercial end-use customers, at higher prices to
wholesale customers. This condition occurred in California
during the summer of 2000 through the winter of 2001. Because of
a number of circumstances existing at the time, including
weather, market design and conditions and scarcity of supply, we
were able to sell electricity into the wholesale market during
this period for amounts far in excess of the price at which we
purchased the electricity. This allowed us to obtain unusually
high revenues and margins for that period. We do not expect this
trend to continue and expect that Californias response to
the energy crisis of the summer of 2000 through the winter of
2001 will prevent these conditions from recurring in the future.

Sales and Marketing

We market supplies of electricity to end-user
customers in the states of California, Pennsylvania and Michigan
as electricAmerica through multiple channels. We
acquire the vast majority of our customers through our in-house
telemarketing group which handles inbound calls from customers
and makes outbound calls to targeted customers. We have
separated our sales employees into two units. We refer to the
larger group as our call center. Our call center
group is responsible for procuring orders from residential or
small commercial customers. All customers acquired by the call
center agree to our terms of service through a third party voice
log system. This sign-up device simplifies the switching process
for these customers and shortens the sales cycle.

Our smaller group of telemarketers, which we
refer to as C&I Sales, is responsible for
targeting medium and large commercial, industrial and
governmental customers through telephone solicitation as well as
face to face meetings. Customers acquired by the
C&I Sales group enter into individualized written
contracts. For this reason, the sales cycle is typically longer
because each agreement is usually customized to meet the
customers needs. The C&I Sales group also works
with third party energy consultants or energy service companies
which manage the energy expenses for large commercial and
industrial companies to acquire customers.

We also use our electricAmerica website,
www.electricAmerica.com, as a tool to help acquire customers.
The website provides customers with detailed electric supply
information in each territory that we serve and enables
customers to complete forms online, send us e-mails or find our
toll-free telephone number, 1-800-ELECTRIC.

In California, due to the suspension of direct
access on September 20, 2001, we are not allowed to acquire
customers that were not with a direct access provider as of that
date. This impaired our ability to locate and acquire customers,
especially residential and small commercial customers in
California. The suspension of direct access in California has
impaired the C&I Sales group to a lesser degree because they
have been able to acquire a few large customers from other
direct access providers. Because the size of the market for
potential customers was severely reduced by the suspension of
direct access, we implemented a direct mail customer retention
program to prevent customer attrition, reinforcing the reasons
that our customers originally chose us as their source for
electricity.

6



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Our business prospects depend upon our ability to
identify and enter into favorable energy markets and to achieve
sufficient customer scale to create a profitable operating cost
structure. Currently, we are:



| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Selectively entering retail energy markets that
    have rate structures, market rules, consumer demographics,
    energy consumption patterns, access to favorable electricity
    supply and risk management profiles that are designed to enable
    us to provide savings and flexibility to our customers at an
    acceptable margin.
|
| |  | Capitalizing on the brand recognition of
    electric through our web site at
    www.electricAmerica.com and through our inbound toll-free
    number, 1-800-ELECTRIC.                                                                                                                                                                  
|
| |  | Taking advantage of the increasing consumer
    acceptance of online commerce, both directly through our web
    sites (www.electricAmerica.com and www.electric.com) and through
    traditional channels.                                                                                                                                
|
| |  | Developing strategic marketing alliances with
    established power suppliers to offer competitive electric
    products and services to, and management of, aggregations of
    customers.                                                                                                                                                
|
| |  | Offering additional products and services to our
    customers, such as energy efficiency and emergency-preparedness
    products.                                                                                                                                                                                                         
|
| |  | Positioning UtiliHostTM to be a source
    for our clients to outsource their energy related customer
    service management.                                                                                                                                                                                                              

Competition

We believe that as retail energy markets are
opened to new participants and new services, competition will be
intense in the markets where frameworks for deregulation create
attractive opportunities for new entrants. In general, we
believe our principal competitor in each market will be the
incumbent utility in that market or its unregulated affiliate.
Incumbent utilities may have informational advantages, high name
recognition in their traditional service territory and
long-established customer relationships. In addition to the
utilities and their affiliates, we may face competition from a
number of other energy service providers, including start-up
companies focusing on Internet marketing and online service,
other energy industry participants, and possibly other
consumer-oriented service providers, any of whom may develop
businesses that will compete with us, both in specific markets
and nationally. Some of these competitors may be larger and
better capitalized than we are.

We generally compete for customers on the basis
of price or by delivering more environmentally friendly (not
derived from fossil-fuel sources) electricity than our
competitors.

We face competition in selling energy efficient
and emergency preparedness products from many sources, including
traditional hardware retailers and online energy product
retailers.

We face competition in managing back office
services from application service providers, outsourcing
vendors, utility billing vendors and large enterprise-wide
software and systems integrators.

Seasonality

Our revenues and operation margin are subject to
fluctuations during the year; primarily due to the impact
certain seasonal factors have on sales volumes and the wholesale
prices of electricity. Electricity sales volumes and operating
margins have been historically higher in the summer months than
in the fall and spring months, reflecting increased demand due
to increased cooling requirements and higher electricity sales
tariffs rates. Additionally, electricity sales volumes and
operating margins are modestly higher in the winter months than
in the fall and spring months, due to increased demand for
heating and lighting requirements.

Governmental Regulation

We are subject to regulation by various federal,
state and local governmental agencies. Our wholesale trading and
marketing operations are subject to the jurisdiction of the
Federal Energy Regulatory Commission (FERC) under
the Federal Power Act. We make sales of electricity commerce at
wholesale transactions

7



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pursuant to a Power Marketer certificate issued
by FERC. While FERC does not generally regulate the rates, terms
or conditions of these electricity sales, FERC has the authority
to institute proceedings to identify transactions involving
rates that are not just and reasonable due to market
manipulation and to reverse or unwind such transactions to
ensure just and reasonable rates.


In states that have adopted deregulation, state
public utility commissions (PUCs) have authority to
license and regulate certain of the activities of electric
supply retailers. Accordingly, we are subject to regulation by
the PUC in each state in which we make retail sales of electric
power. The requirements for licensing and the level of
regulation varies from state to state. We are currently licensed
by the applicable PUCs in California, Michigan, New Jersey,
New York, Ohio, Pennsylvania, and Texas. These licenses
permit us to sell electrical power to commercial, industrial,
governmental and residential customers.

Employees

As of July 31, 2002, we employed
158 full-time employees and 3 part-time employees,
including: 22 in corporate administration, 13 in
corporate finance, 86 in marketing and sales, and
40 in operations. None of the Companys employees is
covered by a collective bargaining agreement or is presently
represented by a labor union. The Company has not experienced
any work stoppages and considers its employee relations to be
good.

Intellectual Property

The Companys strategy for protection of its
trademarks is to routinely file U.S. federal and foreign
trademark applications for the various word names and logos used
to market its technology solutions to licensees and the general
public. The duration of the U.S. and foreign registered
trademarks can typically be maintained indefinitely, provided
proper maintenance fees are paid and trademarks are continually
used or licensed by the Company.




Item 2. Properties

Our principal executive office is located in
Tustin, California. This facility houses our administrative
operations. The Company leases approximately 33,104 square
feet of office space at these premises pursuant to a lease that
expires on April 14, 2004.

We lease additional office space for our
operations in Cherry Hill, New Jersey. This additional
space consists of 2,265 square feet pursuant to a lease
that expires on June 30, 2005.

We believe that our leased property is in good
condition, is well maintained and is adequate for our current
and immediately foreseeable operating needs.




Item 3. Legal
Proceedings

On August 16, 2001, Joseph P. Saline, one of
our directors, filed an action in California Superior Court for
Orange County (Case No. 01CC10657) seeking the production
of certain corporate documents. We filed a motion seeking to
limit Mr. Salines ability to distribute the corporate
documents he was seeking. The trial court issued an order that
prohibited Mr. Saline from disclosing or discussing those
documents with anyone other than his attorney and other members
of our Board of Directors. We provided Mr. Saline with
copies of certain corporate documents under the protection of
the court order. Mr. Saline filed an appeal, seeking to
reverse the restrictions on his right to disclose or discuss the
documents with third parties. On July 30, 2002, the
California Court of Appeals reversed the order of the Superior
Court that limited Mr. Salines ability to disseminate
the documents.

On October 29, 2001, Mr. Saline filed a
civil claim against us in California Superior Court for Orange
County (Case No. 01CC13887). In his complaint,
Mr. Saline alleged that he is the holder of
352,000 shares of preferred stock, with two-for-one
conversion and voting rights that differ with the rights set
forth in the Certificate of Determination for our Series A
Preferred Stock filed with the California Secretary of State.
The Company answered and filed a cross-complaint for declaratory
relief alleging that Mr. Saline violated federal securities
laws, committed fraud and usurped a corporate opportunity in
connection with certain purchases of

8



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our securities. We also filed an answer disputing
Mr. Salines claims. Mr. Saline filed a request
for a preliminary injunction prior to the Companys 2001
annual meeting of shareholders. On November 14, 2001, the
court issued an interim court order prohibiting us from refusing
to recognize that Mr. Saline owns 352,000 of our preferred
stock, convertible into common stock and entitled to vote on a
two-for-one basis, pending final resolution of the case. On
May 15, 2002, in connection with another pending lawsuit
filed by Mr. Saline and others, which is described below,
we entered into a settlement agreement with the plaintiffs,
pursuant to which, among other things, we agreed to submit these
pending lawsuits that Mr. Saline has filed against us to
professional mediation. The parties attended a mediation
proceeding, but were unable to reach a settlement. We continue
to vigorously defend this lawsuit. This lawsuit is still pending.


On February 23, 2001, thirteen former
employees filed a lawsuit against us in the Superior Court of
the State of California in the County of Orange Superior Court
(case number 01CC02611). The complaint was filed by David
James and twelve other former employees. The plaintiffs
complaint alleges claims for (a) unfair business practices,
(b) breach of contract, and (c) fraud and intentional
deceit. The plaintiffs allege, in summary, that they were
formerly employed by the Company and are owed commissions and
stock options from the Company under their alleged employment
agreements and based on alleged representations that were made
to them in the course of their employment. The Company filed a
cross-complaint against the original plaintiffs asserting claims
for (a) breach of contract; (b) unfair business
practices; (c) misappropriation of trade secrets;
(d) intentional interference with prospective economic
advantage; (e) negligent interference with prospective
economic advantage; (f) conversion; (g) slander;
(h) prohibitory injunctive relief; (i) mandatory
injunctive relief; and (j) declaratory relief. These claims
are based upon written confidentiality agreements signed by the
majority of the plaintiffs which the Company believes have been
breached by the plaintiffs who are alleged to be wrongfully
soliciting the Companys investors and clients utilizing
proprietary company materials and information. In addition, the
Company filed a first amended cross-complaint that asserts
additional cross-claims against plaintiff David James for
rescission and restitution, fraud, money had and received,
unjust enrichment and declaratory relief. In summary, the new
claims asserted against Mr. James allege that
Mr. James alleged employment contract and stock
options were void or voidable and subject to rescission based on
misrepresentations made to the Company by Mr. James. The
plaintiffs are seeking, among other relief, damages in the
amount of up to $10 million, plus costs and attorney fees.
Commonwealth believes that it has satisfied its contractual
obligations with respect to the plaintiffs and that there is no
factual basis for the plaintiffs claim for damages. Our
cross-complaint seeks injunctive relief and damages.
Commonwealth is vigorously defending this lawsuit.

On February 1, 2002, Joseph Saline, Kevin
Biswell, Joseph OGundiji and Michael Doak filed a
complaint in California Superior Court for Orange County against
us to determine the validity of the election of the
Companys directors at the annual meeting of shareholders
held in November 2001. On May 15, 2002, we entered into a
confidential working settlement agreement with the plaintiffs,
pursuant to which the parties agreed, among other things
(a) to set the exact number of directors within the
established range at seven until at least the end of the terms
of the directors elected at the Companys next annual
meeting of shareholders; (b) to a set of procedures for the
appointment of two new mutually acceptable directors to the
Board of Directors; (c) that Mr. Saline will be
entitled to receive compensation for his service as a
nonemployee director; (d) that Mr. Biswell will be
appointed to our advisory committee; (e) to mediate the
pending lawsuits between Mr. Saline and us; and (f) to
dispute resolution procedures and to the payment of costs
related the disputes. On June 5, 2002, the court issued an
order approving and implementing the settlement agreement.
Pursuant to the procedures agreed upon in the working settlement
agreement, William Popejoy and Eugene Sullivan were appointed as
members of the Board of Directors on September 13, 2002.

On March 22, 2002, we filed a complaint
against Mr. Saline (Case No. 02-02442,
U.S. District Court Central District of California), which
was amended on August 23, 2002, alleging that
Mr. Saline violated federal securities laws, committed
libel, committed unfair business practices and breached his
fiduciary duties

9



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##### Table of Contents



in connection with his actions and statements he
made in connection with the proxy contest with respect to our
2001 annual meeting of shareholders and in connection with
certain purchases of our securities. We are seeking to recover
damages and to recover certain preferred shares Mr. Saline
claims to have purchased prior to the shareholder meeting and
election.


We are currently, and from time to time may
become, involved in litigation concerning claims arising out of
our operations in the normal course of business. We are not
currently a party to any legal proceedings, including the legal
proceedings described above, the adverse outcome of which, in
managements opinion, individually or in the aggregate,
would have a material adverse effect on our results of
operations or financial position.




Item 4. Submission of Matters to
a Vote of Security Holders

No matters were submitted to a vote of the
Companys stockholders during the fourth quarter of Fiscal
2002.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Information

There is currently no established public trading
market for any class of our equity securities.

Holders

As of October 18, 2002, there were
approximately 2,574 holders of our Common Stock and
61 holders of our Series A Convertible Preferred Stock.

Dividend Policy

Our Series A Convertible Preferred Sock
provides for cumulative dividends that accrue at a rate of 10%
per annum. During fiscal 2001 and fiscal 2002, we have declared
and paid cash dividends of $216,548 and $30,195, respectively,
on our Series A Convertible Preferred Stock. As of
July 31, 2002, accrued cumulative unpaid dividends on our
Series A Convertible Preferred Stock were $137,970.

We have not declared or paid a cash dividend on
our common stock, and we do not anticipate paying any cash
dividend for the foreseeable future. We presently intend to
retain earnings to finance future operations, expansion and
capital investment.

Equity Compensation Plan Information

Information concerning securities authorized for
issuance under our equity compensation plans is set forth in
Part III, Item 12 of this Report, under the caption
Equity Compensation Plan Information, and that
information is incorporated herein by reference.

Recent Sales of Unregistered
Securities

We have sold or issued the following securities
during fiscal 2002 in reliance upon the exemption from
registration provided by Section 3(a)(11) of the Securities
Act of 1933, as amended:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In August and November 2001, we issued an
    aggregate of 10,000 shares of our common stock upon the
    exercise of employee stock options at a price per share of
    $0.01, receiving gross proceeds in the amount of $100 in cash.
|
| |  | In January 2002, we issued 11,000 shares of
    our common stock upon the exercise of an employee stock option
    at a price per share of $0.05, receiving gross proceeds in the
    amount of $550 in cash.                          

10



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| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2002, we issued 20,000 shares of
    our common stock upon the exercise of a directors stock
    option at a price per share of $1.00, receiving gross proceeds
    in the amount of $20,000 in cash.
|
| |  | In July 2002, we issued 10,961 shares of our
    common stock upon the exercise of an employee stock option at a
    price per share of $0.50, receiving gross proceeds in the amount
    of $5,480 in cash.     

At the time of each sale, and for the most recent
fiscal year immediately preceding each such sale, we were a
California corporation, maintained our principal office in
California, derived at least 80% of our gross revenues from
operations within California, had at least 80% of our assets
located in California, intended to use, and did use, at least
80% of the net proceeds from the sales of the securities in the
operation of our business in California and had a reasonable
basis for believing that each purchaser resided in, and was
doing business in, California. In addition, none of the
purchasers had given us notice of any resales of the securities
to persons residing outside of California.

11



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##### Table of Contents






Item 6. Selected Financial
Data

The following selected financial data as of and
for the dates and periods indicated have been derived from our
consolidated financial statements. The selected financial data
with respect to the consolidated statement of operations data
for the period August 15, 1997 (date of incorporation)
through July 31, 1998 and each of the four years in the
period ended July 31, 2002 and our consolidated balance
sheet data at July 31, 1998, 1999, 2000, 2001 and 2002 set
forth below are derived from audited consolidated financial
statements of the Company. The consolidated financial statements
as of July 31, 2001 and 2002 and for each of the three
years in the period ended July 31, 2002 and the independent
auditors report thereon, are included elsewhere herein.

|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |        | 
|---------------------------------------------- | ------- | --------------------------------------------------- | ------ | ------------------- | - | ---- | ------- | ------ | - | ---- | ------ | ------ | - | - | ------- | ------ |  | - | ------- | ------ | 
|                                               |         | Period from                                         |        |                    
|                                               |         | August 15,                                          |        | Year Ended July 31,
|                                               |         | 1997 through                                        |        |                    
|                                               |         | July 31, 1998                                       |        | 1999                |   | 2000 |         | 2001   |   | 2002
|                                               |         |                                                     |        |                     |   |      |         |        |   |     
|                                               |         |                                                    
|                                               |         | (Amounts in thousands except per share information)
|Consolidated Statement of Operations
    Data: |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Net revenue                                    |         | $                                                   | 1,387  |                     |   | $    | 39,124  |        |   | $    | 99,624 |        |   | $ | 183,264 |        |  | $ | 117,768 |       
|Direct energy costs                            |         |                                                     | 3,735  |                     |   |      | 38,729  |        |   |      | 86,732 |        |   |   | 76,615  |        |  |   | 86,198  |       
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Gross (negative) margin                        |         |                                                     | (2,348 | )                   |   |      | 395     |        |   |      | 12,892 |        |   |   | 106,649 |        |  |   | 31,570  |       
|Other costs and expenses(1)                    |         |                                                     | 5,928  |                     |   |      | 18,940  |        |   |      | 22,037 |        |   |   | 25,861  |        |  |   | 23,060  |       
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Income (loss) from operations                  |         |                                                     | (8,276 | )                   |   |      | (18,545 | )      |   |      | (9,145 | )      |   |   | 80,788  |        |  |   | 8,510   |       
|Loss on equity investments                     |         |                                                     |       |                     |   |      |        |        |   |      |       |        |   |   |        |        |  |   | (160    | )     
|Interest income, net                           |         |                                                     | 19     |                     |   |      | 123     |        |   |      | 499    |        |   |   | 1,593   |        |  |   | 939     |       
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Income (loss) before income taxes              |         |                                                     | (8,257 | )                   |   |      | (18,422 | )      |   |      | (8,646 | )      |   |   | 82,381  |        |  |   | 9,289   |       
|Provision for income taxes                     |         |                                                     |       |                     |   |      |        |        |   |      |       |        |   |   | 21,852  |        |  |   | 4,125   |       
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Net income (loss)(2)                           |         | $                                                   | (8,257 | )                   |   | $    | (18,422 | )      |   | $    | (8,646 | )      |   | $ | 60,529  |        |  | $ | 5,164   |       
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Net income (loss) per common share(3):         |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|                                               | Basic   |                                                     | $      | (.96                | ) |      | $       | (.84   | ) |      | $      | (.30   | ) |   | $       | 2.06   |  |   | $       | .19    | 
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|                                               | Diluted |                                                     | $      | (.96                | ) |      | $       | (.84   | ) |      | $      | (.30   | ) |   | $       | 1.77   |  |   | $       | .16    | 
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|Weighted-average shares outstanding(3):        |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|                                               | Basic   |                                                     |        | 8,567               |   |      |         | 21,905 |   |      |        | 28,795 |   |   |         | 29,385 |  |   |         | 27,482 | 
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       
|                                               | Diluted |                                                     |        | 8,567               |   |      |         | 21,905 |   |      |        | 28,795 |   |   |         | 34,152 |  |   |         | 31,536 | 
|                                               |         |                                                     |        |                     |   |      |         |        |   |      |        |        |   |   |         |        |  |   |         |       

|                                 |  |          |       |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |         | 
|-------------------------------- |  | -------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------- | 
|                                 |  |         
|                                 |  | July 31,
|                                 |  |         
|                                 |  | 1998     |       | 1999 |  | 2000 |        | 2001 |  | 2002
|                                 |  |          |       |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data: |  |          |       |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |         | 
|Working capital                  |  | $        | 1,896 |      |  | $    | 12,428 |      |  | $    | 12,803 |  |  | $ | 50,184  |  |  | $ | 58,842  | 
|Total assets                     |  |          | 7,205 |      |  |      | 27,858 |      |  |      | 35,444 |  |  |   | 107,016 |  |  |   | 101,229 | 
|Long-term debt                   |  |          |      |      |  |      |       |      |  |      |       |  |  |   |        |  |  |   |        | 
|Shareholders equity             |  |          | 3,131 |      |  |      | 19,900 |      |  |      | 24,236 |  |  |   | 86,037  |  |  |   | 87,952  | 




|    |                                                        
|--- | -------------------------------------------------------
|(1) | Includes stock-based compensation costs as
    follows:

|                                                      |  |                |       |  
|----------------------------------------------------- |  | -------------- | ----- | -
|                                                      |  | Amount        
|                                                      |  |               
|                                                      |  | (In thousands)
|Period from August 15, 1997 through
    July 31, 1998 |  | $              | 464   |  
|Year ended July 31, 1999                              |  |                | 5,718 |  
|Year ended July 31, 2000                              |  |                | 445   |  
|Year ended July 31, 2001                              |  |                | 1,080 |  
|Year ended July 31, 2002                              |  |                | (743  | )

12



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|    |                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Because there is no established trading market in
    shares of our common stock, in each of fiscal 2001 and 2002, we
    valued our shares for financial reporting purposes at $3.05 per
    share and $1.86 per share, respectively. The stock-based
    compensation charges for the unvested portion of these
    performance-based options in fiscal 2001 was reversed in fiscal
    2002.
|   
|(2) | No cash dividends have been paid on our common
    stock. Our convertible preferred stock provides for cumulative
    dividends, which accrue at the rate of 10% per annum and are
    payable at the discretion of our Board of Directors. Such
    dividends have been accrued as follows:                                                                                                   

|                                                      |  |                |    | 
|----------------------------------------------------- |  | -------------- | -- | 
|                                                      |  | Amount        
|                                                      |  |               
|                                                      |  | (In thousands)
|Period from August 15, 1997 through
    July 31, 1998 |  | $              | 64 | 
|Year ended July 31, 1999                              |  |                | 84 | 
|Year ended July 31, 2000                              |  |                | 84 | 
|Year ended July 31, 2001                              |  |                | 81 | 
|Year ended July 31, 2002                              |  |                | 71 | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Per share information and weighted average shares
    outstanding for the period from August 15, 1997 through
    July 31, 1998 and for the years ended July 31, 1999
    and 2000 have been restated to reflect the resolution of the
    status of our common stock issued to our founder as more fully
    disclosed in Notes 1 and 11 of the Notes to Consolidated
    Financial Statements included elsewhere herein.

13



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Our primary business has been the sale of
electric power to retail and commercial end-users in California
and, beginning in January 2000, in Pennsylvania and the sale of
electric power to wholesale customers in California and
Pennsylvania. We are licensed by FERC as a power marketer and by
the California, Michigan, Pennsylvania, New Jersey, New York,
Texas and Ohio public utilities commissions as an electric
services or electric generation supplier.

As of July 31, 2002, we delivered
electricity to approximately 89,000 customers in California
and Pennsylvania. The growth of this business depends upon the
deregulated status of each state, the availability of
cost-effective energy purchases to us and the acquisition of
retail or commercial customers by us.

We do not have our own electricity generation
facilities. The power we sell to our customers is purchased from
third-party power generators. During fiscal 2000, in both
California and Pennsylvania, we purchased electricity both under
long-term contracts and in the spot market. By the end of fiscal
2001 and throughout most of fiscal 2002, substantially all of
our electricity was purchased under long-term contracts.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses for
each period.

The following represents a summary of our
critical accounting policies, defined as those policies that we
believe are: (a) the most important to the portrayal of our
financial condition and results of operations, and (b) that
require managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about
the effects of matters that are inherently uncertain.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Independent system operator
    costs Included in direct
    energy costs along with electric power purchased and scheduling
    coordination costs are the independent system operator
    (ISO) fees. The actual ISO costs are not
    finalized until a settlement process by the ISO is performed of
    each days activities of all grid participants. Prior to
    the completion of settlement, we estimate these costs based on
    historical trends and preliminary settlement information. The
    historical trends and preliminary information may differ from
    actual fees resulting in the need to record additional costs.                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Allowance for doubtful
    accounts We maintain
    allowances for doubtful accounts for estimated losses resulting
    from non-payment of customer billings. If the financial
    condition of our customers were to deteriorate, resulting in an
    impairment of their ability to make payments, additional
    allowances may be required. In addition, as a result of market
    conditions in California during fiscal 2001, the credit
    worthiness of several participants in the marketplace with whom
    we conduct business has deteriorated significantly. For example,
    PG&E, which declared bankruptcy, has withheld payments of
    approximately $1.1 million from their remittances to us.
    Although we have filed a Proof of Claim in PG&Es
    bankruptcy proceedings to recover these amounts, we have
    established an allowance for doubtful accounts in the amount of
    these withholdings. If other utilities declare bankruptcy,
    additional allowances may be required.
|
| |  | Unbilled
    receivables Our customers
    are billed monthly at various dates throughout the month.
    Unbilled receivables represent the amount of electric power
    delivered to customers at the end of a period, but not yet
    billed. Unbilled receivables from sales in California are
    estimated by the Company as the number of kilowatt-hours
    delivered times 95% of the individual Utility Purchased Energy
    cost as published by each individual utility for residential
    customers. Unbilled receivables from sales in Pennsylvania are
    estimated in the same manner, except using the average current
    customer sales price per kilowatt-hour.                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal
    claims From time to time,
    we may be involved in litigation relating to claims arising out
    of our operations in the normal course of business. We regularly
    evaluate our exposure to threatened or pending litigation and
    other business contingencies and accrue for estimated losses on
    such matters in accordance with Statement of Financial
    Accounting Standards No. 5, Accounting for
    Contingencies. To date, we have not been affected by any
    litigation or other contingencies that have had, or are
    currently anticipated to have, a material impact on the
    Companys results of operations or financial position. As
    additional information about current or future litigation or
    other contingencies becomes available, management will assess
    whether such information warrants the recording of additional
    expense relating to its contingencies. Such additional expense
    could potentially have a material impact on our results of
    operations and financial position.

We make our estimates and judgments based on,
among other things, knowledge of operations, markets, historical
trends and likely future changes, and when appropriate, the
opinions of advisors with knowledge and experience in certain
fields. However, due to the nature of certain assets and
liabilities, there are risks and uncertainties associated with
some of the estimates and judgments which are required to be
made. Actual results could differ from these estimates under
different assumptions or conditions.

Results of Operations

Year ended July 31, 2002 compared to
year ended July 31, 2001

Retail energy sales

Electricity sales to retail and commercial
end-users decreased by $3.0 million, or 3.0%, to
$97.0 million for fiscal 2002 from $100 million for
fiscal 2001. The decrease resulted primarily from a decrease in
California electricity retail sales, partially offset by an
increase in Pennsylvania electricity retail sales. The decrease
in California electricity retail sales was due primarily to a
drop in retail energy prices. The average retail price per kWh
in California during fiscal 2002 was $.085, as compared to $.145
during fiscal 2001. Total kilowatt-hours of electricity billed
in California during fiscal 2002 was 775.6 million compared
to 563.4 million billed in the prior year. The year-to-year
increase in kilowatt-hours billed in California was due to an
increase in commercial end-users that the Company began
servicing in October 2001. The average retail price per kWh in
Pennsylvania during fiscal 2002 was $.058 compared to $.05
during fiscal 2001. Total kilowatt-hours of electricity billed
in Pennsylvania during fiscal 2002 was 468.9 million
compared to 378.6 million billed in the prior year. The
year-to-year increase in kilowatt-hours billed in Pennsylvania
was due to an increase in commercial end-users that the Company
began servicing in June 2002.

On September 20, 2001, the CPUC issued a
ruling suspending direct access pursuant to
legislation by the California state legislature requiring the
CPUC to suspend direct access in California. The
suspension of direct access means that retail
electricity suppliers, such as the Company, will not be allowed
to actively seek customers. This ruling permits the Company to
keep its current customer base, but prohibits the Company from
signing up new non direct access customers for an undetermined
period of time. During June through September 2001, we entered
into new long-term electric service agreements with several
large commercial and industrial customers in California. The
contracts were all completed prior to the September 20,
2001 CPUC ruling to suspend direct access. Based on
the historical consumption data of these commercial and
industrial customers, we expect these new contracts to add
approximately 600 million kWhs annually at sales contract
rates in the aggregate of $.089 per kWh. Delivery to these
customers began in October 2001 and all the new customer meters
were on-line by January 2002. Revenues related to these
contracts was $14.9 million for fiscal 2002.

At July 31, 2002, we have approximately
89,000 customers compared to approximately
88,000 customers at July 31, 2001.

Wholesale energy sales

Wholesale electricity sales decreased by
$60.6 million, or 76.3%, to $18.8 million during
fiscal 2002 from $79.3 million during fiscal 2001. The
decrease was primarily due to a decrease in California wholesale
energy

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sales, partially offset by an increase in
Pennsylvania wholesale electricity sales. The year-to-year
decrease in wholesale energy sales was attributable primarily to
the decrease in wholesale energy prices during fiscal 2002,
partially offset by an increase in total kilowatt-hours of
wholesale energy sold. Total kilowatt-hours of wholesale
electricity sold in California was 313.8 million in fiscal
2002 compared to 404.7 million in fiscal 2001. Total
kilowatt-hours of wholesale electricity sold in Pennsylvania was
463.2 million in fiscal 2002 compared to 268.3 million
in fiscal 2001. The average wholesale price per kWh in
California during fiscal 2002 was $.02 compared to $.17 during
fiscal 2001. The average wholesale price per kWh in Pennsylvania
during fiscal 2002 was $.02 compared to $.03 during fiscal 2001.
The decrease in California wholesale energy kWh sales in fiscal
2002 is attributable to increasing our commercial and industrial
customer base which reduced the excess kWhs that had to be sold
in the wholesale market. The increase in Pennsylvania wholesale
energy kWh sales in fiscal 2002 was the result of excess kWhs
acquired under a fixed quantity energy purchase contract entered
into to cover summer demand. Cooler than expected weather in
Pennsylvania during August and September and warmer winter
months resulted in an increase in excess energy that was sold in
the wholesale energy market.


Green power credit

Green power credit revenue decreased by
$1.9 million, or 48.5%, to $2.1 million during fiscal
2002 from $4.0 million during fiscal 2001. The green power
credit decrease is due to the expiration of the green power
credit program in December 2001. The California legislature has
approved the continuation of the program beginning
January 1, 2003.

Direct energy costs

Direct energy costs increased to
$86.2 million for fiscal 2002, an increase of
$9.6 million, or 12.5%, from $76.6 million for fiscal
2001. This increase is a result of increased direct energy costs
in Pennsylvania during fiscal 2002, partially offset by
decreased direct energy costs in California. The increase in
direct energy costs in Pennsylvania was due to an increase in
total kilowatt-hours purchased resulting from the need to
service new retail customers. Total kilowatt-hours purchased in
Pennsylvania during fiscal 2002 was 992.9 million, at an
average price of $.04 per kWh, compared to purchases
made during fiscal 2001 of 662.5 million at an average
price of $.04 per kWh. The decrease in direct energy
costs in California resulted from a decrease in the price per
kWh in California, partially offset by an increase in the number
of kWh purchased. Total kilowatt-hours purchased in California
during fiscal 2002 was 1.2 billion at an average price of
$.03 per kWh compared to purchases during fiscal 2001
of 980.1 million kilowatt-hours at an average price of
$.04 per kWh. A decrease in scheduling costs to
deliver energy to our customers also contributed to the decrease
in direct energy costs for California. California scheduling
costs decreased to $.1 million for fiscal 2002 from
$4.6 million for fiscal 2001. Californias reduced
scheduling costs were a result of credits for direct energy
costs.

Selling and marketing expenses

Selling and marketing expenses decreased
$0.1 million, or 2.4%, to $3.5 million for fiscal 2002
from $3.6 million for fiscal 2001. The decrease is due
primarily to a decrease in payroll of $0.2 million offset
by an increase in consulting expenses of $0.1 million. The
decrease in payroll expenses was the result of call center
attrition. The increase in consulting expenses was the result of
market research for our expansion into other states.

General and administrative expenses

General and administrative expenses decreased
$0.9 million, or 4.2%, to $20.3 million for fiscal
2002 from $21.2 million for fiscal 2001. The decrease is
due to decreases in legal expenses, consulting expenses and bad
debt expenses, partially offset by increases in payroll
expenses, management fees for Summit Energy Ventures LLC
(Summit), Pennsylvania gross receipts tax and
depreciation expenses. The decrease in legal expenses is due to
the higher expenses in fiscal 2001 related to the settlement
with our founder which are not present in fiscal 2002. The
increase in payroll expenses is due to the hiring of software
development employees who were formerly consultants to the
Company and bonuses paid in excess of the bonus accrual. Summit
management

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fees are an additional expense in fiscal 2002.
The increase in Pennsylvania gross receipts tax is a result of
higher retail sales in Pennsylvania in fiscal 2002 compared to
fiscal 2001. The increase in depreciation expense is the result
of fiscal 2002 software development costs of the TRIUMPH system.


Stock-based compensation charges

Stock-based compensation charges decreased by
$1.8 million, or 94.4%, to $(0.7) million for fiscal
2002 from $1.1 million for fiscal 2001. The decrease is due
to the reversal of stock-based compensation related to unvested
variable stock options due to the decrease in value of our
Common Stock in fiscal 2002.

Interest income, net

Interest income decreased by $0.7 million,
or 42.5%, to $0.9 million for fiscal 2002 from
$1.6 million for fiscal 2001. The decrease is attributable
to the decrease in cash flow available for investments provided
from operations, partially offset by the reduction in interest
expense due to the termination of our line of credit during
fiscal 2002. The average interest rate during fiscal 2002 was
2.02% compared to 4.62% during fiscal 2001. The average balance
earning interest during fiscal 2002 was $47.1 million
compared to $48.9 million during fiscal 2001.

Provision for income taxes

The provision for income taxes decreased by
$17.7 million, or 81.1%, to $4.1 million for fiscal
2002 from $21.9 million during fiscal 2001. The decrease is
due primarily to the lower net taxable income in fiscal 2002
compared to fiscal 2001.

Net income

Net income decreased by $55.4 million, or
91.5%, to $5.2 million for fiscal 2002 from
$60.5 million for fiscal 2001. This decrease in net income
is primarily attributable to a decrease in gross margin,
partially offset by the decrease in provision for income taxes
and stock-based compensation charges. The principal reason for
the decrease in gross margin was the significant decrease in
California electricity wholesale and retail prices. The average
wholesale electricity price in California during fiscal 2002 was
$.02 per kWh compared to $.17 per kWh during
fiscal 2001. The average California retail electricity price was
$.085 per kWh compared to $.145 per kWh
during fiscal 2001. Fiscal 2002 prices are in alignment with
historical prices. Fiscal 2001 prices were abnormally high as a
result of the energy crisis during that period.

Year ended July 31, 2001 compared to
year ended July 31, 2000

Retail energy sales

Electricity sales to retail and commercial
end-users increased by $12.7 million, or 14.5%, to
$100.0 million for fiscal 2001 from $87.3 million for
fiscal 2000. The increase resulted primarily from an increase in
Pennsylvania electricity retail sales, partially offset by a
decrease in California electricity retail sales. The increased
Pennsylvania retail sales were attributable to having a full
year of electricity sales in fiscal 2001 compared to seven
months of sales in the comparable period of 2000. The average
retail price per kWh in Pennsylvania during fiscal 2001 was
$.052 compared to $.0475 during fiscal 2000. Total
kilowatt-hours of electricity billed in Pennsylvania during 2001
was 378.6 million compared to 3.2 million in the prior
year. The decreased California retail sales were attributable to
a reduction in kilowatt-hours billed in California resulting
from the commercial and industrial customers that were returned
to their incumbent utilities during June and July 2000 because
their energy consumption requirements would have created
significant credit exposure for us. Many of the customers that
we returned to their incumbent utility used the majority of
their energy during peak hours which required us to purchase
electricity in the spot market during the portions of the day
when it was most expensive, often at a price in excess of our
selling price. The return of these customers to their incumbent
utilities enabled us to bring our electricity supply
requirements in California at or below the quantity of
electricity that we had secured under our long-term purchase
contract and reduced the average amount we paid for electricity
by approximately $.01 per kWh for fiscal 2001 as
compared to fiscal 2000. Total

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kilowatt-hours of electricity billed in
California during 2001 was 563.4 million compared to
1.7 billion billed in the prior year. The decrease in
kilowatt-hours billed was partially offset by an increase in
retail electricity prices. The average retail price per kWh in
California during fiscal 2001 was $.145 compared to $.0501
during fiscal 2000. At July 31, 2001, we had approximately
88,000 customers compared to approximately 81,000 customers at
July 31, 2000.


Wholesale energy sales

Wholesale electricity sales commenced in fiscal
2001. The $79.3 million wholesale sales revenue consisted
of California sales of $70.7 million and Pennsylvania sales
of $8.6 million. Our major California wholesale customer
during 2001 was the State of California Department of Water
Resources and Power. Our other significant wholesale customers
included Sempra Energy and San Diego Gas and Electric. The
California supply and demand conditions that drove up the
wholesale electricity prices during fiscal 2001 began moving
toward equilibrium in the fourth quarter as wholesale prices
began to decline.

Green power credit

Green power credit revenue decreased by
$8.3 million, or 67.7%, to $4.0 million for fiscal
2001 from $12.3 million for fiscal 2000. The green power
credits decreased due to a rate reduction from $.015 to
$.01 per kWh beginning in June 2000 and reduced sales
of electricity subject to the credit caused by the reduction in
the number of customers eligible to obtain the credit beginning
in June 2000.

Direct energy costs

Direct energy costs decreased by
$10.1 million, or 11.7%, to $76.6 million for fiscal
2001 from $86.7 million for fiscal 2000. This decrease was
a result of lower costs in California, partially offset by
increased costs in Pennsylvania. Decreased costs in California
during fiscal 2001, as compared to fiscal 2000, were due to
reduced requirements for the purchase of electricity created by
the return of certain commercial and industrial customers to
their incumbent utilities in June and July 2000, partially
offset by an increase in wholesale electricity costs in the spot
market. Increased costs in Pennsylvania are due to having only
seven months of costs for fiscal 2000 compared to a full year of
costs for fiscal 2001. In Pennsylvania, for the seven months in
fiscal 2000 that we operated there, our average monthly purchase
of electricity was 8.8 million kWh increasing to
55.3 million kWh monthly for fiscal 2001, as we established
our customer base. Direct energy costs, as a percent of net
revenues, decreased from 87.1% fiscal 2000 to 41.8% for fiscal
2001.

Selling and marketing expenses

Selling and marketing expenses decreased
$2.6 million, or 42.1%, to $3.6 million for fiscal
2001 from $6.2 million for fiscal 2000. This decrease was
primarily a result of a decrease in promotional activities as we
reduced our activities in connection with the solicitation of
new customers. Advertising costs decreased $1.9 million and
telemarketing payroll decreased $0.4 million due to the
reduction of personnel in that department.

General and administrative expenses

General and administrative expenses increased
$5.8 million, or 37.7%, to $21.2 million for fiscal
2001 from $15.4 million for fiscal 2000. This is primarily
the result of increased legal expenses of $5.3 million and
bad debt expenses of $1.3 million compared to fiscal 2000.
The increase in legal expenses is primarily related to the
settlement with our founder of $4.8 million and the
increase in bad debt expense is related to our providing for
amounts due from PG&E and California Power Exchange, both of
which have declared bankruptcy. These increases were partially
offset by a decrease in customer termination cost of
$0.7 million incurred in fiscal 2000. There were no
additional customer termination costs in fiscal 2001.

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Stock-based compensation charges

Stock-based compensation charges increased from
$0.4 million for fiscal 2000 to $1.1 million for
fiscal 2001. The stock-based compensation charges for fiscal
2001 resulted from performance-based stock options granted to
our Chairman and Chief Executive Officer.

Interest income, net

Interest income grew to $1.6 million for
fiscal 2001, an increase of $1.1 million or 220%, from
$0.5 million for fiscal 2000. The increase was attributable
to the increase in cash flow available for investments provided
from operations, offset in part by a $0.6 million increase
in interest expense due to borrowings which were outstanding on
our line of credit during fiscal 2001.

Provision for income taxes

The provision for income taxes increased to
$21.9 million during fiscal 2001 compared to no provision
for income taxes for fiscal 2000 for which we reported a loss
before income taxes. The income tax rate for fiscal 2001 was
26.6% which was below the expected income tax rate primarily due
to a reversal of the valuation allowance on our deferred tax
asset in the amount of $13.6 million.

Net income

Net income increased to $60.5 million for
fiscal 2001, an increase of $69.2 million, or 800.1%, from
the $8.6 million loss for fiscal 2000. This increase in net
income was primarily due to a $93.8 million increase in
gross margin, offset in part by the provision for income taxes
of $21.9 million. The principal reason for the
$93.8 million increase in gross margin was the significant
increase in California electricity prices. California revenues
rose substantially while the average cost per kWh of the
electricity that we sold was lower than in the prior year.
Because we were able to acquire electricity in California during
fiscal 2001 under a fixed price electricity procurement contract
which extended through June 2002, the higher prices at which we
were able to recall the electricity significantly increased our
gross margin.

Liquidity and Capital Resources

As of July 31, 2002, cash and cash
equivalents were $43.0 million compared to
$41.1 million as of July 31, 2001. Our principal
source of liquidity to fund ongoing operations for the year
ended July 31, 2002 was cash provided by operations.

Cash flow from operations for fiscal 2002 was
$3.5 million, a decrease of $58.3 million compared
with cash flow from operations in fiscal 2001 of
$61.8 million. The primary reason for the decrease in cash
flow from operations was a decrease of $55.4 million in net
income to $5.2 million for fiscal 2002 from
$60.5 million for fiscal 2001.

Cash flow used in investing activities for fiscal
2002 was $9.2 million, an increase of $8.1 million,
compared with cash used in investing activities in fiscal 2001
of $1.1 million. The primary reason for the increase was
$7.4 million used for Summit Energy investments in
Envenergy Inc., Turbocor, LLC, and Power Efficiency Corporation.
Purchase of property, equipment and intangibles consumed
$1.8 million.

Cash flow provided by financing activities for
fiscal 2002 was $7.7 million, an increase of
$31.5 million, compared with cash used in financing
activities of $23.8 million in fiscal 2001. Restricted cash
decreased by $14.0 million as a result of our use of
$8.2 million to fund investments and management fees for
Summit Energy Ventures LLC (Summit), release of the
$5.7 million letter of credit related to our energy supply
contract with Calpine Power Service Company and the
$1.7 million letter of credit related to our energy supply
contract with Connectiv Energy Supply, Inc. that were
transferred to short-term investments, offset by the
$1.5 million letter of credit established pursuant to the
Reliant Energy Services contract and interest earned of
$0.3 million of which $0.2 million was transferred to
short-term investments. Borrowings under the Coast Business
Credit Agreement decreased $3.9 million as a result of the
termination of the line of credit at

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the maturity date of June 30, 2002. Under a
settlement with our founder, we repurchased common stock for
$2.4 million during fiscal 2002.


Cash flow from operations for fiscal 2001 was
$61.8 million, an increase of $76.9 million, compared
with cash used in operations in fiscal 2000 of
$15.0 million. The primary reason for this increase was
that net profit for fiscal 2001 was $60.5 million, compared
to a net loss of $8.6 million for fiscal 2000.
Californias higher retail and wholesale prices were the
key factors relating to our profitability. Investing activities
for fiscal 2001 consisted of purchases of property and equipment
in the amount of $1.1 million, a decrease of
$0.6 million compared to fiscal 2000.

Cash used in financing activities for fiscal 2001
was $23.8 million, compared to cash provided by financing
activities of $14.7 million for fiscal 2000. The change of
$38.4 million was attributable to (a) our
$15.0 million investment in Summit which is classified as
restricted cash; (b) the absence of sales of our common
stock during fiscal 2001, which provided $12.1 million in
net proceeds during fiscal 2000; (c) an increase in
restricted cash of $4.8 million used to establish letters
of credit required by energy suppliers to support increased
purchases of electricity in fiscal 2001; and (d) the use of
$5.3 million in fiscal 2000 from borrowings under our
credit facility.

The most significant trend that has adversely
effected our liquidity and capital resources during fiscal 2002
was the return to historical energy prices in the retail and
wholesale markets in California. We believe that consumer energy
prices have leveled off and will remain at their current level
for the foreseeable future and that the wholesale energy market
has stabilized after significant fluctuations during fiscal 2000
and 2001. Based on these factors, we believe that our liquidity
and capital resources will not be adversely affected in fiscal
2003.

As a result of market conditions in California
during fiscal 2002, the credit worthiness of several
participants in the marketplace with whom we conduct business
deteriorated significantly. PG&E has withheld payments of
approximately $1.1 million from their remittances to us.
Although we have filed a proof of claim in PG&Es
bankruptcy proceedings to recover these amounts, there is no
assurance that we will recover any of the payments withheld.
Accordingly, we have established an allowance for doubtful
accounts in the amount of these withholdings.

As of January 31, 2002, $15 million in
cash was invested in Summit. Under certain circumstances, we
may, at our discretion, invest an additional $10 million in
Summit. If this additional cash were invested with Summit, it
would reduce the amount of cash that would otherwise be used for
our growth initiatives. We are not obligated to make any further
investment in Summit. In the event that the investment manager
desires to cause Summit to issue membership interests to any
other party, we shall have the right of first refusal to make
the additional capital contribution on terms not less favorable
as those proposed to such other party.

On January 4, 2002, the Board of Directors
of the Company approved a $10 million stock repurchase
program. Under this program, the Company may purchase up to
$10 million of its common stock, options and warrants, from
time to time over an 18 month period, in open market or
privately negotiated, subject to market conditions and other
factors. As of October 28, 2002, no purchases of common
stock, options or warrants have been made pursuant to this
authority.

We have entered into two new electricity supply
contracts to replace a substantial portion of the electricity
which we purchased in California under the Calpine Power
Services Company contract which expired on June 30, 2002.
The contracts are aligned to meet our projected load service
requirements. Pursuant to the terms of these new agreements, we
are obligated to minimum electric purchases of $20 million
during the year ending July 31, 2003.

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The following table shows our contractual cash
obligations and commercial commitments as of July 31, 2002:

|                               |  |       |            |                               |  |      |            |      |  |   |            |  |  |   |         | 
|------------------------------ |  | ----- | ---------- | ----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | ------- | 
|                               |  |       |            |                              
|                               |  |       |            | For the Years Ending July 31,
|                               |  |       |            |                              
|                               |  | Total |            | 2003                          |  | 2004 |            | 2005
|                               |  |       |            |                               |  |      |            |     
|Electricity purchase contracts |  | $     | 89,889,636 |                               |  | $    | 56,525,014 |      |  | $ | 33,364,622 |  |  | $ |        | 
|Operating leases               |  |       | 1,289,596  |                               |  |      | 745,789    |      |  |   | 452,135    |  |  |   | 100,672 | 
|                               |  |       |            |                               |  |      |            |      |  |   |            |  |  |   |         | 
|                               |  | $     | 91,188,232 |                               |  | $    | 57,270,803 |      |  | $ | 33,816,757 |  |  | $ | 100,672 | 
|                               |  |       |            |                               |  |      |            |      |  |   |            |  |  |   |         | 

Based upon our current plans, level of operations
and business conditions, we believe that our cash and cash
equivalents together with cash generated from operations will be
sufficient to meet our capital requirements and working capital
needs for at least the next 12 months. However, there can
be no assurance that we will not be required to seek other
financing sooner or that such financing, if required, will be
available on terms satisfactory to us.

Factors That May Affect Future
Results

If competitive restructuring of the electric
markets is delayed or does not result in viable competitive
market rules, our business will be adversely affected.

The Federal Energy Regulatory Commission
(FERC) has maintained a strong commitment over the
past six years to the deregulation of electricity markets. This
movement would seem to indicate the continuation and growth of a
competitive electric retail industry. As of October 2002,
24 states and the District of Columbia have either enacted
enabling legislation or issued a regulatory order to implement
retail access. In 18 of these states retail access is either
currently available to some or all customers, or will soon be
available. However, in many of these markets the market rules
adopted have not resulted in energy service providers being able
to compete successfully with the incumbent utilities and
customer switching rates have been low. Only recently have a
small number of markets opened to competition under rules that
we believe may offer attractive competitive opportunities. Our
business model depends on other favorable markets opening under
viable competitive rules in a timely manner. In any particular
market, there are a number of rules that will ultimately
determine the attractiveness of that market. Markets that we
enter may have both favorable and unfavorable rules. If the
trend towards competitive restructuring of retail energy markets
does not continue or is delayed or reversed, our business
prospects and financial condition could be materially adversely
impaired.

Retail energy market restructuring has been and
will continue to be a complicated regulatory process, with
competing interests advanced not only by relevant state and
federal utility regulators, but also by state legislators,
federal legislators, incumbent utilities, consumer advocacy
groups and potential market participants. As a result, the
extent to which there are legitimate competitive opportunities
for alternative energy suppliers in a given jurisdiction may
vary widely and we cannot assure shareholders that regulatory
structures will offer us competitive opportunities to sell
energy to consumers on a profitable basis. The regulatory
process could be negatively impacted by a number of factors,
including interruptions of service, significant or rapid price
increases. The legislative and regulatory processes in some
states take prolonged periods. In a number of jurisdictions, it
may be many years from the date legislation is enacted until
restructuring is completed.

In addition, although most retail energy market
restructuring has been conducted at the state and local levels,
bills have been proposed in Congress in the past that would
preempt state law concerning the restructuring of the retail
energy markets. Although none of these initiatives has been
successful, we cannot assure shareholders that federal
legislation will not be passed in the future that could
materially adversely affect our business.

We may incur substantial operating losses and
we cannot assure shareholders that we will continue to be
profitable.

We have recognized significant revenue and our
ability to generate such revenue is subject to uncertainty. In
addition, we intend to increase our operating expenses to
develop our business, including brand development, marketing and
other promotional activities and the continued development of
our billing,

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customer care and power procurement
infrastructure. Our ability to sustain profitability will depend
on, among other things:




| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | Our ability to attract and to retain a critical
    mass of customers at a reasonable cost;                   
|
| |  | Our ability to develop internal corporate
    organization and systems;                                       
|
| |  | The continued competitive restructuring of retail
    energy markets with viable competitive market rules; and
|
| |  | Our ability to manage effectively our energy
    requirements and to sell our energy at a sufficient margin.  

We may have difficulty obtaining a sufficient
number of customers.

We anticipate that we will incur significant
costs as we enter new markets and pursue customers by utilizing
a variety of marketing methods. In order for us to recover these
expenses, we must attract and retain a large number of customers
to our service.

We may experience difficulty attracting customers
because many customers may be reluctant to switch to a new
company for the supply of a commodity as critical to their
well-being as electric power. A major focus of our marketing
efforts will be to convince customers that we are a reliable
provider with sufficient resources to meet our commitments. If
our marketing strategy is not successful, our business, results
of operations, and financial condition will be materially
adversely affected.

If the Company can not obtain sufficient
amounts of credit, our future growth and profitability could be
adversely impacted.

The Company must obtain credit from a combination
of sources to support future growth and profitability. This
includes financial institutions, trade credit, strategic
alliances, and others.

We depend upon internally developed systems
and processes to provide several critical functions for our
business, and the loss of these functions could materially
adversely impact our business.

We have developed our own systems and processes
to operate our back-office functions, including customer
enrollment, metering, forecasting, settlement and billing.
Problems that arise with the performance of our back-office
functions could result in increased expenditures, delays in the
launch of our commercial operations into new markets, or
unfavorable customer experiences that could materially adversely
affect our business strategy. Also, any interruption of these
services could be disruptive to our business.

Substantial fluctuations in electricity prices
or the cost of transmitting and distributing electricity could
have a material adverse affect on us.

To provide electricity to our customers, we must,
from time to time, purchase electricity in the short-term or
spot wholesale energy markets, which are often
highly volatile. In particular, the wholesale electric power
market often experiences enormous price fluctuations during peak
load periods. Furthermore, to the extent that we enter into
contracts with customers that require us to provide energy at a
fixed price over an extended period of time, we may incur losses
caused by rising wholesale electricity prices. Periods of rising
electricity prices may reduce our ability to compete with
incumbent utilities because their regulated rates may not
immediately increase to reflect these increased costs. The
Energy Service Provider takes on the risk of purchasing power
for an uncertain load and if the load does not materialize it
leaves the ESP in a long position. Or, if
unanticipated load appears, requiring the ESP to meet its energy
requirements by purchasing additional energy leaving the ESP in
a short position, the Company could be exposed to the price
volatility of the wholesale spot markets. Historically,
electricity has been the most volatile commodity in the world.
Any of these contingencies could substantially increase our
costs of operation if we are forced to purchase electricity at
very high prices. Such factors could have a material adverse
effect on our financial condition.

We also are required to arrange for the
scheduling and transmission of wholesale electricity to the
local utilities for distribution over their distribution
networks. In some circumstances we may be unable to deliver the
energy to the local distribution point in a particular market at
the appropriate time. If we are unable to meet our delivery
requirements to the local utilities, we may be subject to fines
and penalties.

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Suppliers of electricity have been
experiencing deteriorating credit quality.

We continue to actively manage our counterparty
credit portfolio to attempt to reduce the impact of a potential
counterparty default. As of July 31, 2002, the majority of
our courterparties are rated investment grade or above by the
major rating agencies. These ratings are subject to change at
any time and with no advance warning. This situation could have
an adverse impact on the source of our electricity purchases.

If the wholesale price of electricity
decreases, we may be required to post letters of credit to
secure our obligations under our long term energy
contracts.

Since the price of the electricity we purchase
under long-term contracts is fixed over the term of the
contracts, if the market price of wholesale electricity
decreases below the contract price, the power generator may
require us to post security in the form of a letter of credit to
hedge against our defaulting on the contract and purchasing
lower cost energy on the market. If we are required to post such
security a portion of our cash would become restricted, which
could adversely affect our liquidity.

We will be required to rely on utilities with
whom we will be competing to perform some functions for our
customers.

Under the regulatory structures adopted in most
jurisdictions, we will be required to enter into agreements with
local incumbent utilities for use of the local distribution
systems, and for the creation and operation of functional
interfaces necessary for us to serve our customers. Any delay in
these negotiations or our inability to enter into reasonable
agreements could delay or negatively impact our ability to serve
customers in those jurisdictions, which could have a material
negative impact on our business, results of operations and
financial condition.

We will also be dependent on local utilities for
maintenance of the infrastructure through which electricity is
delivered to our customers. We are limited in our ability to
control the level of service the utilities provide to our
customers. Any infrastructure failure that interrupts or impairs
delivery of electricity to our customers could have a negative
effect on the satisfaction of our customers with our service,
which could have a material adverse effect on our business.

Regulations in many markets require that the
services of reading our customers energy meters and the
billing and collection process be retained by the local utility.
In those states, we will be required to rely on the local
utility to provide us with our customers information
regarding energy usage and to pay us for our customers
usage based on what the local utility collects from our
customers. We may be limited in our ability to confirm the
accuracy of the information provided by the local utility and we
may not be able to control when we receive payment from the
local utility. We also may be limited in our ability to create a
supplier relationship with our customers. If we do not receive
payments from the local utility on a timely basis, our working
capital may be impaired.

In some markets, we will be required to bear
credit risk and billing responsibility for our
customers.

In some markets, we are responsible for the
billing and collection functions for our customers. In many of
these markets, we may be limited in our ability to terminate
service to customers who are delinquent in payment. Even if we
terminate service to customers who fail to pay their utility
bill in a timely manner, we may remain liable to our suppliers
of electricity for the cost of the electricity and to the local
utilities for services related to the transmission and
distribution of electricity to those customers. The failure of
our customers to pay their bills in a timely manner or our
failure to maintain adequate billing and collection programs
could materially adversely affect our business.

We may face strong competition from incumbent
utilities and other competitors.

In most markets, our principal competitor may be
the local incumbent utility company or its unregulated
affiliates. The incumbent utilities have the advantage of
long-standing relationships with their customers and they may
have longer operating histories, greater financial and other
resources and greater name recognition in

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their markets than we do. In addition, incumbent
utilities have been subject to regulatory oversight, in some
cases for close to a century, and thus have a significant amount
of experience regarding the regulators policy preferences
as well as a critical economic interest in the outcome of
proceedings concerning their revenues and terms and conditions
of service. Incumbent utilities may seek to decrease their
tariffed retail rates to limit or to preclude the opportunities
for competitive energy suppliers and otherwise seek to establish
rates, terms and conditions to the disadvantage of competitive
energy suppliers.


Some of our competitors, including incumbent
utilities, have formed alliances and joint ventures in order to
compete in the restructured retail electricity industry. Many
customers of these incumbent utilities may decide to stay with
their long-time energy provider if they have been satisfied with
its service in the past. Therefore, it may be difficult for us
to compete against incumbent utilities and their affiliates for
customers who are satisfied with their historical utility
provider.

In addition to competition from the incumbent
utilities and their affiliates, we may face competition from a
number of other energy service providers, and other energy
industry participants who may develop businesses that will
compete with us in both local and national markets. We also may
face competition from other nationally branded providers of
consumer products and services. Some of these competitors or
potential competitors may be larger and better capitalized than
us.

Our revenues and results of operations are
subject to market risks that are beyond our control.

We sell electricity that we purchase from
third-party power generation companies into competitive
wholesale power markets or on a contractual basis. We are not
guaranteed any rate of return through mandated rates, and our
revenues and results of operations are likely to depend, in
large part, upon prevailing market prices for electricity in our
regional markets and other competitive markets. These market
prices may fluctuate substantially over relatively short periods
of time. These factors could have an adverse impact on our
revenues and results of operations.

Volatility in market prices for electricity
results from multiple factors, including:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | weather conditions,                                                                
|
| |  | seasonality,                                                                       
|
| |  | usage,                                                                             
|
| |  | illiquid markets,                                                                  
|
| |  | transmission or transportation constraints or
    inefficiencies,                  
|
| |  | availability of competitively priced alternative
    energy sources,               
|
| |  | demand for energy commodities,                                                     
|
| |  | natural gas, crude oil and refined products, and
    coal production levels,       
|
| |  | natural disasters, wars, embargoes and other
    catastrophic events, and          
|
| |  | federal, state and foreign energy and
    environmental regulation and legislation.

Our results are subject to quarterly and
seasonal fluctuations.

Our quarterly operating results have fluctuated
in the past and will continue to do so in the future as a result
of a number of factors, including variations in levels of demand
due to weather and seasonality and volatility of market prices.




Item 7A. Quantitative and
Qualitative Disclosures About Market Risk

We do not have or use any derivative instruments
to hedge the financial risks of our investments, nor do we have
any plans to enter into such instruments. We generally invest
cash equivalents in high-quality, short-term credit instruments
consisting primarily of high yielding money market funds,
bankers acceptance notes

24



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and government agency securities with maturities
of 90 days or less. We do not expect any material loss from our
investments and, therefore, believe that our potential interest
rate exposure is not material. We do not currently invoice
customers in any currency other than the United States dollar
and we do not currently incur significant expenses denominated
in foreign currencies. Accordingly, we believe that we are not
currently subject to significant risk as a result of currency
fluctuations.


Since we do not generate any of the electricity
that we sell, our business has exposure to market volatility in
prices of electricity. To mitigate risks relative to the
movements in electricity prices, we have entered into primarily
fixed-priced contracts for the purchase of electricity through
the wholesale electricity market. Nevertheless, to the extent
demand from our customers exceeds the supply we have obtained
through fixed-price contracts, we are subject to risks relative
to the movements in electricity prices.

An electricity price change of per $.01 kWh, has
an estimated annual impact on our net revenue of:

|             |  |   |              | 
|------------ |  | - | ------------ | 
|             |  |  
|California   |  | $ | 10.3 million | 
|Pennsylvania |  | $ | 9.2 million  | 




Item 8. Financial Statements and
Supplementary Data

The financial statement information, including
the report of independent accountants, required by this
Item 8 is set forth on pages F-1 to F-26 of this
Annual Report on Form 10-K and is hereby incorporated into
this Item 8 by reference. The Quarterly Financial
Information required by this Item 8 is set forth on
page F-25 of this Annual Report on Form 10-K and is
hereby incorporated into this Item 8 by reference.




Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

Not applicable.




PART III




Item 10. Directors and Executive
Officers of the Registrant

Information About Our Directors

The following table sets forth information
regarding our directors, including their age as of
October 18, 2002 and business experience during the past
five years. Each of our directors has served continuously as a
director of the Company since the date indicated in his or her
biography below, and each is currently serving a one year term
expiring at the Companys next annual meeting or until his
or her respective successor is elected and qualified.

|              |  |     |    |          |  |                                            |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | --- | -- | -------- |  | ------------------------------------------ | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  |     |    | Director |  |                                           
|Name          |  | Age |    | Since    |  | Principal Occupation and Other Information
|              |  |     |    |          |  |                                           
|Ian B. Carter |  |     | 64 |          |  |                                            | 1999 |  |  | Mr. Carter has been our Chairman and Chief
    Executive Officer since January 2000. During the preceding four
    month period prior to that, he acted as Interim President. From
    October 1988 to August 1999, Mr. Carter operated his owned
    businesses, including a mortgage banking firm and a merchant
    banking firm. Prior to that, Mr. Carter served as an
    investment specialist for Coldwell Banker Commercial Brokerage
    and worked as a Systems Engineer and Salesman with IBM. Mr.
    Carter also served in the United States Army serving in Vietnam,
    Europe and the Pentagon. Mr. Carter received his Bachelor
    of Science degree in Engineering from the United States Military
    Academy at West Point, New York and his Master in Business
    Administration in finance from the University of Southern
    California.

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|                     |  |     |    |          |  |                                            |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------ | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |  |     |    | Director |  |                                           
|Name                 |  | Age |    | Since    |  | Principal Occupation and Other Information
|                     |  |     |    |          |  |                                           
|Craig G. Goodman     |  |     | 52 |          |  |                                            | 2002 |  |  | Mr. Goodman has served as the Chief Executive
    Officer of the National Energy Marketers Association, a national
    non-profit association representing a regionally diverse
    cross-section of wholesale and retail marketers of natural gas,
    electricity and energy-related products, services, information
    and technology, since October 1997. Mr. Goodman received
    his bachelors degree in economics with honors from the
    University of Maryland and a juris doctorate degree with a
    concentration in international corporate law and economics from
    the University of Miami School of Law.                                                                                                                                                                                                                                                                                                                                                                                                  
|Junona A. Jonas      |  |     | 58 |          |  |                                            | 2001 |  |  | Ms. Jonas has been the General Manager of Alameda
    Power & Telecom, a municipal utility, since December 2000.
    From March 2000 to August 2000, she served as Chief Executive
    Officer of vetmedcenter.com, an online resource for veterinary
    information and services. From February 1999 to January 2000,
    Ms. Jonas was President and Chief Operating Officer of
    utility.com, an internet provider of energy and energy services
    to retail customers in states that have deregulated their
    electric industry. From July 1978 to February 1999, she served
    in various capacities at Pacific Gas & Electric (PG&E),
    a public utility, including serving as the first President and
    Chief Operating Officer of PG&Es retail energy
    services subsidiary, Vantus Energy Corporation, and as Vice
    President, Gas and Electricity Supply. Ms. Jonas has a
    Bachelors degree from Santa Clara University and a Masters
    degree from Stanford and Cal State University Hayward.
|Robert C. Perkins    |  |     | 63 |          |  |                                            | 1999 |  |  | Mr. Perkins has served as Chairman and Chief
    Executive Officer of Hospital Management Services, a provider of
    financial and management consulting services to hospitals and
    similar institutions, since June 1969. Mr. Perkins received his
    Bachelor of Science degree in accounting from Bob Jones
    University.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|William J. Popejoy   |  |     | 64 |          |  |                                            | 2002 |  |  | Mr. Popejoy is the Managing Member and Chief
    Executive Officer of Pacific Capital Investors since April 1999.
    From May 1997 to April 1999, he served as the Director of the
    California State Lottery. Prior to joining the State Lottery,
    Mr. Popejoy served as President and Chief Executive Officer
    for various financial institutions and was assigned the role of
    Chief Executive Officer of Orange County, California during the
    countys bankruptcy. Mr. Popejoy received his Bachelors and
    Masters degrees from California State University at Sacramento.
    Mr. Popejoy also serves as a trustee of PIMCO and as a
    director of PIMCO Commercial Securities.                                                                                                                                                                                                                                                                                                                      
|Joseph P. Saline, Jr |  |     | 61 |          |  |                                            | 2001 |  |  | Mr. Saline has served as an Operations Manager at
    Northrop Grumman Corporation in their Integrated Systems
    Division since June 1998. Mr. Saline also serves on the
    board of directors of InterBill Inc. Mr. Saline received a
    Bachelors degree from the University of Detroit and a Masters
    degree from Purdue University.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Eugene R. Sullivan   |  |     | 61 |          |  |                                            | 2002 |  |  | Judge Sullivan has served as a Senior Judge and
    as a Judge of the United States Court of Appeals (Armed Forces)
    since June 1986. Judge Sullivan is a graduate of the
    U.S. Military Academy at West Point and of Georgetown
    University Law Center.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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Information with Respect to the Companys
Executive Officers

The following table sets forth certain
information regarding our executive officers, including their
respective ages and their business experience during the last
five years, as of October 18, 2002. Executive officers are
elected by, and serve at the pleasure of, the Board of Directors.

|                                                               |  |     |    |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------- |  | --- | -- | ------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Position                                              |  | Age |    | Principal Occupation and Other Information
|                                                               |  |     |    |                                           
|Ian B. CarterChairman and  Chief Executive
    Officer         |  |     | 64 |                                            |  | Mr. Carter is also a director, and his biography
    is referenced above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Richard L. PaulsenChief Operating Officer                      |  |     | 54 |                                            |  | Mr. Paulsen has been our Chief Operating
    Officer since May 2000. From January 1991 to June 1999,
    Mr. Paulsen served as the Chief Executive Officer and
    President of Olicon Imaging Systems, Inc., a national supplier
    of diagnostic imaging products and services. Prior to that,
    Mr. Paulsen worked at Wieden and Kennedy, Inc. an
    advertising agency, as Executive Vice President and Chief
    Operating Officer and at Basic Computer Systems, Inc., a
    national supplier of application software and systems that he
    founded. Mr. Paulsen graduated from Loyola University with
    a Bachelor of Science degree in mathematics.                                                                                                                                                                                                                                                                                
|James L. OliverChief Financial Officer                         |  |     | 54 |                                            |  | Mr. Oliver has been the Chief Financial Officer
    of the Company since November 1999. From January 1997 to
    November 1999, was self employed as a management consultant.
    Prior to that, Mr. Oliver served in various capacities at a
    number of companies, including serving as Chief Financial
    Officer for two operating units of Emerson Electric Co., as
    Chief Financial Officer for a business unit of Smithkline
    Beckman, and as head of strategic and financial planning for an
    operating unit of Dresser Industries. Mr. Oliver received
    his Bachelor of Science degree in accounting and finance from
    the University of Southern California.                                                                                                                                                                                                                                                            
|John A. BarthropGeneral Counsel and  Secretary                 |  |     | 58 |                                            |  | Mr. Barthrop has been our General Counsel
    since May 1999. From August 1998 to May 1999, Mr. Barthrop
    practiced law with the firm of Eadington, Merhab &
    Eadington. From July 1996 to August 1998, he was a principal
    member of the business and litigation law firm of Smith, Sinek
    & Barthrop. Prior to that, Mr. Barthrop owned and
    operated his own law firm, served as General Counsel and
    Assistant to the President for Newman Properties, a national
    real estate development company, and served as Associate General
    Counsel for the Beneficial Standard, a conglomerate involved in
    insurance, finance and real estate. Mr. Barthrop obtained a
    Bachelor of Science degree from the University of Washington and
    a Juris Doctorate degree from University of California, Hastings
    College of Law, and is licensed to practice before the State
    Courts and the U.S. District Courts.
|Scott A. PettersonVice President and  Corporate
    Controller |  |     | 44 |                                            |  | Mr. Petterson has served as our Corporate
    Controller since July 2000. From June 1998 to July 2000, he
    served as Manager of Internal Audit for the Pittston Company, a
    diversified holding company in the freight, security and cash
    management industries. Prior to that, Mr. Petterson served
    as the Director of Internal Audit for Regency Health Services, a
    healthcare provider. Mr. Petterson graduated from the
    University of California at Santa Barbara with a Bachelor of
    Arts degree in Business Economics with a special emphasis in
    Accounting. He is a Certified Public Accountant in California
    and a member of the American Institute of Public Accountants.                                                                                                                                                                                                                                 
|Roy ReevesVice President of Marketing                          |  |     | 41 |                                            |  | Mr. Reeves has served as our Vice President of
    Marketing since December 2000. From September 1997 to December
    2000, Mr. Reeves served as Vice President of Sales &
    Marketing at CSA, Inc., now called PrepStar, an athletic trade
    magazine publisher. Prior to that, Mr. Reeves served as
    General Manager for the Interactive Media Division of High
    Technology Solutions, Inc. (HTS), and as President
    and Chief Executive Officer of TouchMedia, Inc., a multimedia
    company he founded and sold to HTS. Mr. Reeves obtained a
    Bachelor of Science degree in Business Administration with an
    emphasis in Marketing from the University of Southern California.                                                                                                                                                                                                                                           

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|                                                           |  |     |    |                                            |  |                                                                                                                                                                                                                      
|---------------------------------------------------------- |  | --- | -- | ------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Position                                          |  | Age |    | Principal Occupation and Other Information
|                                                           |  |     |    |                                           
|Linda GuckertVice President of  Information
    Technology |  |     | 53 |                                            |  | Ms. Guckert has served as our Vice President of
    Information Technology since December 2001. From 1982 to
    December 2001, Ms. Guckert served as a project manager for
    Symcas, a technology-consulting firm.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Exchange Act requires
our directors and executive officers, and persons who
beneficially own more than 10% of a registered class of our
equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of our common
stock and other equity securities. Officers, directors and
greater than 10% shareholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they file.

With the exception of Joseph P. Saline, Jr., one
of the Companys directors, who, to our knowledge has yet
to file a Form 3 indicating his initial ownership of shares
of our Common Stock, based solely on a review of the copies of
such reports furnished to us and written representations that no
other reports were required during the fiscal year, our
officers, directors and greater than 10% beneficial owners
complied with all Section 16(a) filing requirements.




Item 11. Executive
Compensation

Compensation of the Companys
Directors

Directors who also are our employees are not paid
any fees or remuneration, as such, for their service on the
Board of Directors or on any Board committee.

Cash Compensation.Each non-employee
(outside) director is paid a quarterly retainer in the
amount of $6,250 and a fee of $500 for each Board Meeting which
the Board member attends. Directors who serve on Board
Committees (other than the chairman of such committee) are paid
$300 for each committee meeting the Board member attends.
Committee Chairpersons are paid $500 for each such committee
meeting the Chairperson attends.

Stock Options.In
connection with their election to our Board, Mr. Perkins,
Ms. Jonas and Mr. Goodman each are entitled to receive
an annual grant of options to purchase up to 50,000 shares of
our common stock at an exercise price set by the Company from
time to time.

Compensation of the Companys Executive
Officers

The Company is required by the SEC to disclose
compensation paid by the Company during the last three fiscal
years to (a) the Companys Chief Executive Officer;
(b) the Companys four most highly compensated
executive officers, other than the Chief Executive Officer, who
were serving as executive officers at the end of fiscal 2002;
and (c) up to two additional individuals for whom such
disclosure would have been provided under clause (a) and
(b) above but for the fact that the individual was not
serving as an executive officer of the Company at the end of
fiscal 2002; provided, however, that no disclosure need be
provided for any executive officer, other than the Chief
Executive Officer, whose total annual salary and bonus does not
exceed $100,000.

Accordingly, the following sections disclose
information regarding compensation paid by the Company during
the last three fiscal years to (a) Mr. Carter, the
Companys Chief Executive Officer; and (b) Richard
Paulsen, James L. Oliver, John A. Barthrop, and
Scott A. Petterson, the four most highly-compensated
executive officers, other than the Chief Executive Officer, who
were serving as executive officers at the end of fiscal 2002 and
whose salary and bonus exceeded $100,000. All of these officers
are referred to in this Proxy

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Statement as the Named Executive
Officers. The Company first became a reporting Company
pursuant to Section 13(a) of the Exchange Act during Fiscal
2002.


Summary Compensation Table

The following table sets forth for each of the
past three fiscal years, all compensation received for services
rendered in all capacities by the Named Executive Officers.

|                            |                                         |                     |      |        |  |          |         |            |  |                        |         |          |  |           |        |         |     |  |   |   |  |  |           |         |  |  |   |   |  |  |   |   | 
|--------------------------- | --------------------------------------- | ------------------- | ---- | ------ |  | -------- | ------- | ---------- |  | ---------------------- | ------- | -------- |  | --------- | ------ | ------- | --- |  | - | - |  |  | --------- | ------- |  |  | - | - |  |  | - | - | 
|                            |                                         |                     |      |        |  |          |         |            |  |                       
|                            |                                         |                     |      |        |  |          |         |            |  | Long Term Compensation
|                            |                                         |                     |      |        |  |          |         |            |  |                       
|                            |                                         |                     |      |        |  |         
|                            |                                         | Annual Compensation |      | Awards |  | Payouts 
|                            |                                         |                     |      |        |  |         
|                            |                                         |                     |      | (e)    |  |          |         | (g)        |  |                       
|                            |                                         |                     |      | Other  |  | (f)      |         | Securities |  |                        |         | (i)     
|                            |                                         | (b)                 |      |        |  | Annual   |         | Restricted |  | Underlying             |         | (h)      |  | All Other
|(a)                         |                                         | Fiscal              |      | (c)    |  | (d)      |         | Compen-    |  | Stock                  |         | Options/ |  | LTIP      |        | Compen-
|Name and Principal Position |                                         | Year                |      | Salary |  | Bonus(1) |         | sation     |  | Award(s)               |         | SARs     |  | Payouts   |        | sation 
|                            |                                         |                     |      |        |  |          |         |            |  |                        |         |          |  |           |        |        
|Ian Carter                  |                                         |                     | 2002 |        |  | $        | 314,988 |            |  | $                      | 495,000 |          |  | $         | 62,553 | (2)     |     |  |  |   |  |  | 300,000   |         |  |  |  |   |  |  |  |  
|                            | Chief Executive Officer                 |                     |      | 2001   |  |          |         | 297,975    |  |                        |         | 100,000  |  |           |        | 36,241  | (2) |  |   |  |  |  |           | 300,000 |  |  |   |  |  |  |   |  | 
|                            |                                         |                     | 2000 |        |  |          | 214,844 |            |  |                        |        |          |  |           | 10,167 | (2)     |     |  |  |   |  |  | 3,300,000 |         |  |  |  |   |  |  |  |  
|Richard Paulsen             |                                         |                     | 2002 |        |  |          | 310,000 |            |  |                        | 140,000 |          |  |           | 22,046 | (3)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|                            | Chief Operating Officer                 |                     |      | 2001   |  |          |         | 245,534    |  |                        |         | 50,000   |  |           |        | 5,647   | (3) |  |   |  |  |  |           | 900,000 |  |  |   |  |  |  |   |  | 
|                            |                                         |                     | 2000 |        |  |          | 36,250  |            |  |                        |        |          |  |           |       |         |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|John Barthrop               |                                         |                     | 2002 |        |  |          | 182,016 |            |  |                        | 55,500  |          |  |           | 16,203 | (4)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|                            | General Counsel                         |                     |      | 2001   |  |          |         | 145,366    |  |                        |         | 40,000   |  |           |        | 10,406  | (4) |  |   |  |  |  |           | 500,000 |  |  |   |  |  |  |   |  | 
|                            |                                         |                     | 2000 |        |  |          | 100,674 |            |  |                        |        |          |  |           | 877    | (4)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|James L. Oliver             |                                         |                     | 2002 |        |  |          | 171,000 |            |  |                        | 89,813  |          |  |           | 19,996 | (5)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|                            | Chief Financial Officer                 |                     |      | 2001   |  |          |         | 138,208    |  |                        |         | 40,000   |  |           |        | 12,166  | (5) |  |   |  |  |  |           | 500,000 |  |  |   |  |  |  |   |  | 
|                            |                                         |                     | 2000 |        |  |          | 76,058  |            |  |                        |        |          |  |           | 2,800  | (5)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|Scott A. Petterson          |                                         |                     | 2002 |        |  |          | 119,577 |            |  |                        | 45,000  |          |  |           | 9,619  | (6)     |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  
|                            | Vice President and Corporate Controller |                     |      | 2001   |  |          |         | 98,798     |  |                        |         | 15,000   |  |           |        | 5,730   | (6) |  |   |  |  |  |           | 150,000 |  |  |   |  |  |  |   |  | 
|                            |                                         |                     | 2000 |        |  |          |        |            |  |                        |        |          |  |           |       |         |     |  |  |   |  |  |          |         |  |  |  |   |  |  |  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Bonus compensation is determined pursuant to
    employment contracts and/or by the Compensation Committee and is
    generally based upon performance measured on a calendar year
    basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | For Mr. Carter, the amount attributable to
    perquisites in Fiscal 2002 consists of an automobile allowance
    of $15,600, and reimbursement for medical expenses (including
    gross up payments to pay income taxes on reimbursements) of
    $46,953. The amount attributable to perquisites in Fiscal 2001
    consists of an automobile allowance of $15,600, and
    reimbursement for medical expenses (including gross up payments
    to pay income taxes on reimbursements) of $20,641. The amount
    attributable to perquisites in Fiscal 2000 consists of an
    automobile allowance of $7,800, and reimbursement for medical
    expenses (including gross up payments to pay income taxes on
    reimbursements) of $2,367.
|   
|(3) | For Mr. Paulsen, the amount attributable to
    perquisites in Fiscal 2002 consists of an automobile allowance
    of $9,600, and reimbursement for medical expenses (including
    gross up payments to pay income taxes on reimbursements) of
    $12,446. The amount attributable to perquisites in Fiscal 2001
    consists of an automobile allowance of $2,865, and reimbursement
    for medical expenses (including gross up payments to pay income
    taxes on reimbursements) of $2,792.                                                                                                                                                                                                                                             
|   
|(4) | For Mr. Barthrop, the amount attributable to
    perquisites in Fiscal 2002 consists of an automobile allowance
    of $7,200, and reimbursement for medical expenses (including
    gross up payments to pay income taxes on reimbursements) of
    $9,003. The amount attributable to perquisites in Fiscal 2001
    consists of an automobile allowance of $4,800, and reimbursement
    for medical expenses (including gross up payments to pay income
    taxes on reimbursements) of $5,606. The amount attributable to
    perquisites in Fiscal 2000 consists of reimbursement for medical
    expenses (including gross up payments to pay income taxes on
    reimbursements) of $877.                                               
|   
|(5) | For Mr. Oliver, the amount attributable to
    perquisites in Fiscal 2002 consists of an automobile allowance
    of $8,600, and reimbursement for medical expenses (including
    gross up payments to pay income taxes on reimbursements) of
    $11,396. The amount attributable to perquisites in Fiscal 2001
    consists of an automobile allowance of $4,800, and reimbursement
    for medical expenses (including gross up payments                                                                                                                                                                                                                                                                                                    



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|    |                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | to pay income taxes on reimbursements) of $7,366.
    The amount attributable to perquisites in Fiscal 2000 consists
    of an automobile allowance of $2,800.                                                                                                                                                                                                 
|   
|(6) | For Mr. Petterson, the amount attributable
    to perquisites in Fiscal 2002 consists of reimbursement for
    medical expenses (including gross up payments to pay income
    taxes on reimbursements) of $9,619. The amount attributable to
    perquisites in Fiscal 2001 consists of reimbursement for medical
    expenses (including gross up payments to

pay income taxes on reimbursements) of $5,730.


Stock Option Grants.

The following table shows stock option grants to
the Named Executive Officers during fiscal 2002.

Option/SAR Grants in Last Fiscal
Year

|                   |  |              |           |              |  |             |       |            |  |                    |      |        |  |  |          |  |  |   |         |  |  |   |         | 
|------------------ |  | ------------ | --------- | ------------ |  | ----------- | ----- | ---------- |  | ------------------ | ---- | ------ |  |  | -------- |  |  | - | ------- |  |  | - | ------- | 
|                   |  |              |           |              |  |             |       |            |  |                   
|                   |  |              |           |              |  |             |       |            |  | Potential         
|                   |  |              |           |              |  |             |       |            |  | Realizable Value  
|                   |  | Number of    |           | Percentage   |  |             |       |            |  | At Assumed Annual 
|                   |  | Securities   |           | of Total     |  |             |       |            |  | Rates of Stock    
|                   |  | Underlying   |           | Options/SARs |  | Exercise or |       |            |  | Price Appreciation
|                   |  | Options/SARs |           | Granted to   |  | Base        |       |            |  | for Option Term(1)
|                   |  | Granted      |           | Employees in |  | Price       |       | Expiration |  |                   
|Name               |  | (#)          |           | Fiscal Year  |  | ($/sh)      |       | Date       |  | 5%($)              |      | 10%($)
|                   |  |              |           |              |  |             |       |            |  |                    |      |       
|Ian Carter         |  |              | 300,000(2 | )            |  |             | 100.0 | %          |  | $                  | 2.50 |        |  |  | 01/01/10 |  |  | $ | 358,092 |  |  | $ | 857,692 | 
|James L. Oliver    |  |              |          |              |  |             |      |            |  |                    |     |        |  |  |         |  |  |   |        |  |  |   |        | 
|John A. Barthrop   |  |              |          |              |  |             |      |            |  |                    |     |        |  |  |         |  |  |   |        |  |  |   |        | 
|Richard Paulsen    |  |              |          |              |  |             |      |            |  |                    |     |        |  |  |         |  |  |   |        |  |  |   |        | 
|Scott A. Petterson |  |              |          |              |  |             |      |            |  |                    |     |        |  |  |         |  |  |   |        |  |  |   |        | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company is required by the SEC to use 5% and
    10% assumed rate of appreciation over the ten year option term.
    This does not represent the Companys estimate or
    projection of the future Common Stock price. If the Common Stock
    does not appreciate, the Named Executive Officers will receive
    no benefit from the options.                                                                                                                                                                                                                                                                      
|   
|(2) | These options were granted pursuant to the terms
    of Mr. Carters employment agreement, which provides
    for the granting of options to purchase up to
    300,000 shares of the Companys Common Stock each
    January from 2001 through 2004 upon meeting or exceeding the
    Companys financial performance objectives as set forth in
    its business plan. The Company exceeded the applicable
    performance goals by at least 10% in 2001, entitling
    Mr. Carter to an option to purchase 300,000 shares of
    the Companys Common Stock. These options were fully vested
    on the date of grant.

Option Exercises/ Fiscal Year End
Value.

The following table shows stock option exercises
and the value of unexercised stock options held by the Named
Executive Officers during fiscal 2002.

Aggregated Option/ SAR Exercises in Last
Fiscal Year

and FY-End Option/ SAR Values


|                   |  |                 |   |          |  |                        |   |                       |  |             |           |               |  |  |           |  |  |   |         |  |  |  |   | 
|------------------ |  | --------------- | - | -------- |  | ---------------------- | - | --------------------- |  | ----------- | --------- | ------------- |  |  | --------- |  |  | - | ------- |  |  |  | - | 
|                   |  |                 |   |          |  |                        |   |                      
|                   |  |                 |   |          |  | Number of Securities   |   | Value of Unexercised 
|                   |  |                 |   |          |  | Underlying Unexercised |   | In-the-Money         
|                   |  |                 |   |          |  | Options/SARs at        |   | Options/SARs at      
|                   |  |                 |   | Value    |  | Fiscal Year-End(#)     |   | Fiscal Year-End($)(1)
|                   |  | Shares Acquired |   | Realized |  |                        |   |                      
|Name               |  | on Exercise(#)  |   | ($)      |  | Exercisable            |   | Unexercisable         |  | Exercisable |           | Unexercisable
|                   |  |                 |   |          |  |                        |   |                       |  |             |           |              
|Ian B. Carter      |  |                 |  |          |  |                        |  |                       |  |             | 2,350,000 |               |  |  | 1,550,000 |  |  | $ | 297,000 |  |  |  |  | 
|Richard Paulsen    |  |                 |  |          |  |                        |  |                       |  |             | 450,000   |               |  |  | 450,000   |  |  |   |        |  |  |  |  | 
|John A. Barthrop   |  |                 |  |          |  |                        |  |                       |  |             | 298,000   |               |  |  | 250,000   |  |  | $ | 86,880  |  |  |  |  | 
|James L. Oliver    |  |                 |  |          |  |                        |  |                       |  |             | 250,000   |               |  |  | 250,000   |  |  |   |        |  |  |  |  | 
|Scott A. Petterson |  |                 |  |          |  |                        |  |                       |  |             | 100,000   |               |  |  | 100,000   |  |  |   |        |  |  |  |  | 



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(Footnote from the preceding page.)




---



|    |                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the positive difference between the
    Company valuation of $1.86 per share of Common Stock as of
    July 31, 2002 and the exercise price of the options. There
    is no market value for the Common Stock. This valuation was made
    by the Company for accounting and financial reporting purposes
    and does not reflect actual transactions.

Employment Contracts and Change of Control
Agreements

Ian B. Carter.Mr. Carter serves as Chairman and
Chief Executive Officer of the Company pursuant to an employment
agreement originally entered into on January 1, 2000, as
amended and restated on November 1, 2000. The agreement
provides for Mr. Carters employment through
January 31, 2005.

Mr. Carter is entitled to a minimum base
salary of $275,000 for the first year of his employment, with
annual increases of $50,000 per year for each of the first four
years, followed by a $75,000 increase for the fifth year of the
contract. In addition, Mr. Carter is entitled to receive a
bonus of $100,000 and any additional discretionary cash bonus
based on the Companys results of operation. In addition,
Mr. Carters base salary may be increased from
time-to-time by the Board of Directors. Under his employment
agreement, Mr. Carter is eligible to earn options to
purchase, in the aggregate, up to 3,600,000 shares of the
Companys common stock on the terms and subject to the
conditions described under the heading Stock Options
Granted to Companys Chairman and Chief Executive Office
and Related Stock-based Compensation in Note 9 to the
Consolidated Financial Statements, which is incorporated herein
by reference.

If during the term of the agreement,
Mr. Carter is terminated, leaves, or is replaced as a
result of: (a) all or substantially all of the assets of
the Company or more than fifty percent (50%) of the issued and
outstanding voting shares of the Company being acquired by any
one person or entity not then affiliated with the Company;
(b) control of the Company being taken over by a group of
shareholders when no significant change of ownership has taken
place; or (c) a merger, acquisition, strategic alliance or
any other event that could bring substantial capital into the
Company, the Company will pay Mr. Carter an amount equal to
eight times the annual base salary due him plus the amount of
taxes payable by Mr. Carter. In such events,
Mr. Carter has the right to require the Company to
repurchase all of his stock and all stock options referenced in
his agreement, whether earned or unearned, at a value two times
the then aggregate price value of the Companys stock.

The Company may terminate Mr. Carters
employment upon Mr. Carters death, total disability,
or for cause. Upon a termination for death or total disability,
the Company will continue to pay Mr. Carter for a period of
one year thereafter or until expiration of the term of the
agreement, whichever occurs first, his then current base salary
and bonus. For cause is limited to a conviction,
entry of plea of guilty or nolo contendere for any felony that
would materially and adversely interfere with his ability to
perform his services of his employment. In the event of a
termination for cause, Mr. Carter is entitled to receive
all compensation and benefits payable to him through the date of
termination.

Mr. Carter may terminate his employment only
upon (a) the sale of all or substantially all of the
Companys assets to a person unaffiliated with the Company
or the occurrence of a change of control without
Mr. Carters consent or (b) the Companys
material breach of the agreement. In the case of a termination
resulting from a sale of assets or change of control,
Mr. Carter is entitled to receive a payment equal to eight
times his then current base salary. In the case of termination
due to the Companys material breach of contract,
Mr. Carter is entitled to receive a payment equal to the
monetary value of all of the compensation and benefits payable
to him for the remainder of the term.

If at the expiration of the term, the Company has
met or exceeded the projections set forth in the business plan,
and the Company does not offer to extend Mr. Carters
employment on terms no less favorable than those stated in the
agreement, the Company will pay Mr. Carter a sum of
$100,000 for a period of ten years. Mr. Carter will consult
to the Company during that period and be Vice-Chairman of the
Board.

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Richard L. Paulsen.Mr. Paulsen serves as Chief
Operating Officer of the Company pursuant to an employment
agreement entered into on November 1, 2000. The agreement
provides for Mr. Paulsens employment through
December 31, 2004.

Mr. Paulsen will receive a base salary
according to the following schedule, subject to increases which
the Chief Executive Officer and the Compensation Committee may
grant from time to time: $275,000 for the first twelve months of
his employment, $325,000 for the second twelve months, $375,000
for the third twelve months and $425,000 per annum thereafter.
Mr. Paulsen will be entitled to an annual cash bonus of
$75,000 for calendar years 2001 and 2002, and $100,000
thereafter based upon the number of meters then under contract.

If during the term of the agreement there is a
change in control, then the Company will pay Mr. Paulsen a
cash bonus equal to the sum of eight times his then annual base
salary plus the amount of certain applicable taxes payable by
him. Mr. Paulsen has the right to require the Company to
repurchase all of his stock and all stock options referenced in
his agreement, whether earned or unearned, at a value two times
the then aggregate price value of the Companys stock, not
to exceed $10.00 per share.

The agreement will terminate upon the occurrence
of any of the following: Mr. Paulsens death, total
disability, material breach of the agreement or fiduciary duty
by Mr. Paulsen or written notice of Mr. Paulsens
decision to terminate his employment. If Mr. Paulsens
employment is terminated in any of the reasons described above,
he will be entitled to receive the base salary and benefits
earned through the date of termination. If
Mr. Paulsens employment is terminated for any other
reason, then he will be entitled to receive (a) his base
salary and benefits earned through the date of termination and
(b) an amount equal to one and one-half times his then
current annual base salary.

James L. Oliver.Mr. Oliver serves as Chief
Financial Officer of the Company pursuant to an employment
agreement entered into on November 1, 2000. The agreement
provides for Mr. Olivers employment through
December 31, 2004.

Mr. Oliver will receive a base salary
according to the following schedule, subject to increases which
the Chief Executive Officer and the Compensation Committee may
grant from time to time: $150,000 for the first twelve months of
his employment, $180,000 for the second twelve months, $210,000
for the third twelve months and $240,000 per annum thereafter.
Mr. Oliver will be paid an annual cash bonus of 30% of his
then current annual salary provided that the Company has met or
exceeded the projections in its annual business plan or as the
board of directors deems appropriate.

If during the term of the agreement there is a
change in control, as defined in the agreement, then the Company
will pay Mr. Oliver a cash bonus equal to the sum of four
times Mr. Olivers then current annual base salary
plus the amount of certain taxes payable by Mr. Oliver. In
the event of a sale of assets or any change of control as
defined therein, Mr. Oliver shall have the right to require
the Company to repurchase all of his stock and stock options,
then earned or to be earned, at two times the then aggregate
price value of the Companys stock not to exceed $10.00 per
share.

The agreement will terminate upon the occurrence
of any of the following: Mr. Olivers death, total
disability, material breach of the agreement or fiduciary duty
by Mr. Oliver or written notice of Mr. Olivers
decision to terminate his employment. If Mr. Olivers
employment is terminated in any of the manners described above,
he will be entitled to receive the base salary and benefits
earned through the date of termination. If
Mr. Olivers employment is terminated for any other
reason, then he will be entitled to receive (a) his base
salary and benefits earned through the date of termination and
(b) an amount equal to one and one-half times his then
current annual base salary.

John A. Barthrop.Mr. Barthrop serves as Chief
Legal Officer of the Company pursuant to an employment agreement
dated on November 1, 2000. The agreement provides for
Mr. Barthrops employment through December 31,
2004.

Mr. Barthrop will receive a base salary
according to the following schedule, subject to possible
increases which the Chief Executive Officer and the Compensation
Committee may grant from time to time: $160,000

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##### Table of Contents



for the first twelve months of his employment,
$185,000 for the second twelve months, $210,000 for the third
twelve months and $240,000 per annum thereafter.
Mr. Barthrop will be paid an annual cash bonus of 30% of
his then current annual salary provided that the Company has met
or exceeded the projections in its annual business plan or as
the Board of Directors deems appropriate.


If during the term of the agreement there is a
change in control, as defined in the agreement, then the Company
will pay Mr. Barthrop a cash bonus equal to the sum of four
times Mr. Barthrops then current annual base salary
plus the amount of certain taxes payable by Mr. Barthrop.

The agreement will terminate upon the occurrence
of any of the following: Mr. Barthrops death, total
disability, material breach of the agreement or fiduciary duty
by Mr. Barthrop or written notice of
Mr. Barthrops decision to terminate his employment.
If Mr. Barthrops employment is terminated in any of
the manners described above, he will be entitled to receive his
base salary and benefits earned through the date of termination.
If Mr. Barthrops employment is terminated for any
other reason, then he will be entitled to receive (a) the
base salary and benefits earned through the date of termination
and (b) an amount equal to one and one-half times his then
current annual base salary.

Pursuant to the employment agreements dated
November 1, 2000, Messrs. Paulsen, Barthrop and
Oliver, have been or granted option to purchase an aggregate of
900,000, 500,000 and 500,000 shares, respectively, of the
Companys Common Stock. The options will have a three-year
vesting period and an exercise price of $2.75 a share. All of
the options will expire on November 1, 2007.

Scott A. Petterson.We have entered into a Change of
Control Agreement dated November 1, 2000 with Scott A.
Petterson, our Vice President and Corporate Controller. If
during the term of the agreement there is a change in control,
as defined in the agreement, then the Company will pay
Mr. Petterson a cash bonus equal to
Mr. Pettersons then current annual base salary. In
the event of a sale of assets of any change of control as
defined therein, Mr. Petterson shall have the right to
require the Company to repurchase all of his stock and stock
options, then earned or to be earned, at two times the then
aggregate price of the Companys stock.

Compensation Committee Interlocks and Insider
Participation

Executive compensation is determined by a
Compensation Committee elected by our Board of Directors. The
Compensation Committee is currently comprised of: Robert
Perkins, Craig Goodman and Junona Jonas. The Compensation
Committee was formed by the Board in September 1999, and both
Mr. Perkins and Mr. Carter were appointed to the
Compensation Committee in December 1999. Mr. Goodman and
Ms. Jonas were appointed in January 2002 and replaced
Mr. Gates (a former board member), and Mr. Carter on
the Compensation Committee. The Compensation Committee meets
periodically or on an as needed basis and decides compensation
structure and amounts on the basis of comparable executive
compensation structures and amounts as established by a peer
group of companies, our performance and other factors as may be
determined to be useful in making such determination by the
Compensation Committee. None of the current Compensation
Committee members are or has been an officer or employee of
Commonwealth Energy Corporation. Prior to his replacement on the
compensation committee, Mr. Carter recused himself on
compensation issues relating to himself. No member of the
Compensation Committee is or has been a director or member of
the compensation committee of another entity, one of whose
executive officers serves or has served on our Compensation
Committee. In addition, no member of the Compensation Committee
is or has been the member of a compensation committee of another
entity, one of whose executive officers is or has been a member
of our Board of Directors.

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|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table contains certain information
as of the Record Date regarding all persons who were the
beneficial owners of more than 5% of the outstanding shares of
Common Stock, each of the directors of the Company, each nominee
for election to become a director, each of the executive
officers named in the Summary Compensation Table set forth below
under the caption Compensation of Executive Officers
(we refer to all these officers as the Named Executive
Officers) and all directors and executive officers as a
group. The persons named hold sole voting and investment power
with respect to the shares shown opposite their respective
names, unless otherwise indicated. The information with respect
to each person specified is as supplied or confirmed by such
person, based upon statements filed with the Securities and
Exchange Commission, or based upon the actual knowledge of the
Company.

|                                                                 |                       |                         |         |                                      |  |                         |           |           |     |                  |      |            |   |  |         |         |     |  |   |   |  |  |      |      |  
|---------------------------------------------------------------- | --------------------- | ----------------------- | ------- | ------------------------------------ |  | ----------------------- | --------- | --------- | --- | ---------------- | ---- | ---------- | - |  | ------- | ------- | --- |  | - | - |  |  | ---- | ---- | -
|                                                                 |                       |                         |         |                                     
|                                                                 |                       | Common Stock            |         | Series A Convertible Preferred Stock
|                                                                 |                       |                         |         |                                     
|                                                                 |                       |                         |         |                                      |  |                         |           |          
|                                                                 |                       | Amount and Nature of    |         |                                      |  | Amount and Nature of    |           |          
|                                                                 |                       | Beneficial Ownership(1) |         |                                      |  | Beneficial Ownership(1) |           |          
|                                                                 |                       |                         |         |                                      |  |                         |           |          
|                                                                 |                       | Number of               |         |                                      |  |                         |           | Number of |     |                  |      |           
|                                                                 |                       | Shares                  |         | Right to                             |  | Percent of              |           | Shares    |     |                  |      | Percent of
|Name                                                             |                       | Owned(2)                |         | Acquire(3)                           |  | Class                   |           | Owned(2)  |     | Right to Acquire |      | Class(4)  
|                                                                 |                       |                         |         |                                      |  |                         |           |           |     |                  |      |           
|Principal Stockholders:                                          |                       |                         |         |                                      |  |                         |           |           |     |                  |      |            |   |  |         |         |     |  |   |   |  |  |      |     
|                                                                 | Ian B. Carter         |                         |         | 50,000                               |  |                         |           | 2,350,000 |     |                  |      | 8.1        | % |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Joseph P. Saline, Jr. |                         |         |                                     |  |                         |           | 704,000   | (5) |                  |      | 2.6        | % |  |         | 352,000 | (6) |  |   |  |  |  |      | 35.2 | %
|Directors and Named Executive
    Officers:                      |                       |                         |         |                                      |  |                         |           |           |     |                  |      |            |   |  |         |         |     |  |   |   |  |  |      |     
|                                                                 | Ian B. Carter         |                         |         | 50,000                               |  |                         |           | 2,350,000 |     |                  |      | 8.1        | % |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Craig G. Goodman      |                         |         |                                     |  |                         |           |          |     |                  |      |           |   |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Junona A. Jonas       |                         |         |                                     |  |                         |           | 50,000    |     |                  |      | *          |   |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Robert C. Perkins     |                         |         | 177,000                              |  |                         |           | 75,000    | (7) |                  |      | 1.3        | % |  |         | 25,000  |     |  |   |  |  |  |      | 2.5  | %
|                                                                 | William J. Popejoy    |                         |         |                                      |  |                         |           |           |     |                  |      |            |   |  |         |         |     |  |   |   |  |  |      |      |  
|                                                                 | Joseph P. Saline, Jr. |                         |         |                                     |  |                         |           | 704,000   | (5) |                  |      | 2.6        | % |  |         | 352,000 | (6) |  |   |  |  |  |      | 35.2 | %
|                                                                 | Eugene Sullivan       |                         |         |                                     |  |                         |           |          |     |                  |      |           |   |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Richard Paulsen       |                         |         |                                     |  |                         |           | 450,000   |     |                  |      | 1.7        | % |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | John A. Barthrop      |                         |         | 2,000                                |  |                         |           | 298,000   |     |                  |      | 1.1        | % |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | James L. Oliver       |                         |         |                                     |  |                         |           | 250,000   |     |                  |      | *          |   |  |         |        |     |  |   |  |  |  |      |     |  
|                                                                 | Scott A. Petterson    |                         |         |                                     |  |                         |           | 125,000   |     |                  |      | *          |   |  |         |        |     |  |   |  |  |  |      |     |  
|All Directors and Executive Officers as a group
    (12 persons) |                       |                         | 229,000 |                                      |  |                         | 4,402,000 | (8)       |     |                  | 14.3 | %          |   |  | 377,000 | (9)     |     |  |  |   |  |  | 37.7 | %   




|  |                                                                                                      
|- | -----------------------------------------------------------------------------------------------------
|* | Indicates beneficial ownership of less than 1% of
    the issued and outstanding class of securities.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Subject to applicable community property and
    similar statutes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Includes shares beneficially owned, whether
    directly or indirectly, individually or together with associates.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Represents shares of Common Stock issuable upon
    exercise of stock options or upon conversion of other
    convertible securities held by such persons that are exercisable
    within 60 days of October 18, 2002.                                                                                                                                                                                                                                                                                                                                
|   
|(4) | The number of shares of preferred stock
    outstanding used in calculating the percentage for each listed
    person includes 226,000 disputed shares of preferred stock that
    Mr. Saline claims to own that are not reflected as
    outstanding in our records. See footnote (6) to the table
    below and Item 3  Legal Proceedings.                                                                                                                                                                                                       
|   
|(5) | Represents shares of common stock issuable upon
    the disputed shares of preferred stock that Mr. Saline
    claims to own, assuming a two-for-one conversion ratio. See
    footnote (6) below. The Certificate of Determination
    relating to the Companys Series A Convertible
    Preferred Stock provides for one-for-one voting and conversion
    rights. The Superior Court of the State of California for the
    County of Orange has issued a preliminary injunction requiring
    Commonwealth to recognize Mr. Salines ownership of

34



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##### Table of Contents



(footnotes continued from the following page.)



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 352,000 shares of preferred stock with
    two-for-one voting and conversion rights pending final
    resolution of the matter. See Item 3 
    Legal Proceedings. Under the rules of Securities and
    Exchange Commission, Mr. Saline is deemed to be the
    beneficial owner of these shares because, pursuant to the court
    order, he has the power to vote these shares.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Represents disputed shares of stock that
    Mr. Saline claims to own. Our position is that
    Mr. Saline does not beneficially own any shares of our
    capital stock. The shares listed in the table consist of shares
    that Mr. Saline claims (a) are owned by him and
    (b) are shares of preferred stock with two-for-one voting
    and conversion rights. Of the listed shares, 126,000 shares
    represent outstanding preferred stock held of record by a third
    party that Mr. Saline claims to have purchased; and
    126,000 represent shares of outstanding common stock held
    of record by a third party that Mr. Saline claims to have
    purchased (and further claims should be considered preferred
    stock). The remaining shares are not reflected as outstanding on
    our books. Mr. Saline has filed a lawsuit against us
    seeking to require us to recognize his alleged ownership of
    these disputed shares. The Superior Court for the County of
    Orange has issued a preliminary injunction requiring
    Commonwealth to recognize Salines ownership of
    352,000 shares of preferred stock with two-for-one voting
    and conversion rights pending final resolution of the matter. We
    are vigorously contesting the underlying lawsuit. See
    Item 3  Legal Proceedings. Under the
    rules of the Securities and Exchange Commission, Mr. Saline
    is deemed to be the beneficial owner of these shares because,
    pursuant to the court order, he has the power to vote these
    shares.
|   
|(7) | Includes 25,000 shares of common stock
    issuable upon conversion of shares of Series A Convertible
    Preferred Stock held by Mr. Perkins at a ratio of
    one-for-one.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(8) | Includes the shares of common stock issuable upon
    conversion of the disputed shares of preferred stock that
    Mr. Saline claims to own, assuming a two-for-one conversion
    ratio. See footnote (5) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(9) | Includes the disputed shares of preferred stock
    that Mr. Saline claims to own. See footnote (6) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Equity Compensation Plan Information

Our 1999 Equity Incentive Plan has been approved
by our shareholders. We do not have any equity compensation
plans other than the 1999 Equity Incentive Plan approved by our
shareholders, with the exception of one-time grants of warrants
or options made by the our Board of Directors from time to time.

The following table sets forth information
regarding the number of shares of our common stock that may be
issued pursuant to our equity compensation plans or arrangements
as of the end of fiscal 2002.

|                                                               |  |                      |            |                      |  |                                |      |  |  |  |           |    
|-------------------------------------------------------------- |  | -------------------- | ---------- | -------------------- |  | ------------------------------ | ---- |  |  |  | --------- | ---
|                                                               |  | (a)                  |            | (b)                  |  | (c)                           
|                                                               |  |                      |            |                      |  |                               
|                                                               |  |                      |            |                      |  | Number of Securities          
|                                                               |  | Number of            |            |                      |  | Remaining Available for Future
|                                                               |  | Securities to be     |            |                      |  | Issuance Under                
|                                                               |  | Issued Upon Exercise |            | Weighted-Average     |  | Equity Compensation Plans     
|                                                               |  | of Outstanding       |            | Exercise Price of    |  | (Excluding Securities         
|                                                               |  | Options, Warrants    |            | Outstanding Options, |  | Reflected                     
|Plan Category                                                  |  | and Rights           |            | Warrants and Rights  |  | in Column (a))                
|                                                               |  |                      |            |                      |  |                               
|Equity compensation plans approved by security
    Holders     |  |                      | 2,904,500  | (1)                  |  | $                              | 2.73 |  |  |  | 4,095,500 | (2)
|Equity compensation plans not approved by
    security holders |  |                      | 7,585,731  | (3)                  |  | $                              | 1.47 |  |  |  |          |    
|                                                               |  |                      |            |                      |  |                                |      |  |  |  |           |    
|Total                                                          |  |                      | 10,490,231 |                      |  | $                              | 1.82 |  |  |  | 4,095,500 |    




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents shares of common stock that may be
    issued pursuant to outstanding options granted under the 1999
    Equity Incentive Plan. Excludes outstanding options to purchase
    3,900,000 shares of common stock with respect to which the
    documentation is inconclusive as to whether the options were
    granted pursuant to the 1999 Equity Incentive Plan. The Company
    is in the process of analyzing the documentation in order to
    make a definitive determination as to whether such options were
    granted pursuant to the 1999 Equity Incentive Plan.

(footnotes continued on the following
page.)

35



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##### Table of Contents



(footnotes continued from the following
page.)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Represents shares of common stock that may be
    issued pursuant to options available for future grant under the
    1999 Equity Incentive Plan. Excludes outstanding options to
    purchase 3,900,000 shares of common stock with respect to
    which the documentation is inconclusive as to whether the
    options were granted pursuant to the 1999 Equity Incentive Plan.
    The Company is in the process of analyzing the documentation in
    order to make a definitive determination as to whether such
    options were granted pursuant to the 1999 Equity Incentive Plan.                                      
|   
|(3) | Represents stock options granted by our Board of
    Directors to various employees, directors and consultants
    pursuant to stand-alone agreements and not pursuant to any plan.
    Includes outstanding options to purchase 3,900,000 shares
    of common stock with respect to which the documentation is
    inconclusive as to whether the options were granted pursuant to
    our 1999 Equity Incentive Plan. The Company is in the process of
    analyzing the documentation in order to make a definitive
    determination as to whether such options were granted pursuant
    to the 1999 Equity Incentive Plan.




Item 13. Certain Relationships and
Related Transactions

On November 9, 2001, we entered into an
agreement with Technical Service Group, Inc., doing business as
Symcas-TSG (Symcas) for the right to hire employees
of, or independent contractors to, Symcas. Additionally, as part
of the same agreement, Symcas transferred, interest in and to
all of the software that Symcas has developed for us. The
agreement prohibits Symcas and its affiliates from developing
any computer software for use in the natural gas or electricity
industries that are similar to this software for a period of two
years. Symcas previously performed substantially all of our
software development, information technology support and
maintenance, and procurement of hardware and software. We
continue to utilize Symcas on a limited basis for our IT
maintenance. In the fiscal year ended July 31, 2002, we
paid to Symcas a total of $2,090,929. On December 15, 2001,
after the close of agreement with Symcas, we hired Linda
Guckert, an employee and officer of Symcas, to be our Vice
President of Information Technology.




Item 14. Controls and
Procedures

Not applicable.

36



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##### Table of Contents






PART IV



|         |                                                           
|-------- | ----------------------------------------------------------
|Item 15. | Exhibits, Financial Statements and Reports
    on Form 8-K

(a)(1) Index to Consolidated Financial
Statements:

|                                                                                                          |  |    
|--------------------------------------------------------------------------------------------------------- |  | ---
|Report of Ernst & Young LLP, independent
    auditors                                                     |  | F-1
|Consolidated balance sheets at July 31, 2001
    and 2002                                                 |  | F-2
|Consolidated statements of operations for the
    three years in the period ended July 31, 2002           |  | F-3
|Consolidated statements of shareholders
    equity for the three years in the period ended July 31, 2002 |  | F-4
|Consolidated statements of cash flows for the
    three years in the period ended July 31, 2002           |  | F-5
|Notes to consolidated financial statements                                                                |  | F-6

(a)(2) Schedule II 
Valuation and Qualifying Accounts

All other schedules for which provision is made
in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the
fourth quarter of the fiscal year covered by this Report.

(c) Exhibits. The following exhibits
are attached hereto, as required by Item 601 of
Regulation S-K:

|                                                                                 |      |                  |  |                                                                                                                                                                                                                      
|-------------------------------------------------------------------------------- | ---- | ---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                                                          |      |                 
|Number                                                                           |      | Title of Exhibit
|                                                                                 |      |                 
|                                                                                 | 3.1  |                  |  | Articles of Incorporation of Commonwealth Energy
    Corporation dated August 14, 1997 and filed with the
    Secretary of State of the State of California on August 15,
    1997(1)                                
|                                                                                 | 3.2  |                  |  | Certificate of Amendment of Articles of
    Incorporation of Commonwealth Energy Corporation dated
    December 31, 1998 and filed with the Secretary of State of
    the State of California on February 19, 1999(1)
|                                                                                 | 3.3  |                  |  | Certificate of Determination of Commonwealth
    Energy Corporation dated September 22, 1997 and filed with
    the Secretary of State of California on March 13, 1998(2)                                            
|                                                                                 | 3.4  |                  |  | Bylaws of Commonwealth Energy Corporation, as
    amended                                                                                                                                                            
|Material Contracts Relating to Management
    Compensation Plans or Arrangements
|                                                                                 | 10.1 |                  |  | Severance Agreement dated June 1, 2000,
    among Commonwealth Energy Corporation, electricAmerica, Inc. and
    Frederick M. Bloom(1)                                                                               
|                                                                                 | 10.2 |                  |  | Employment Agreement dated January 1, 2000,
    between Commonwealth Energy Corporation and Ian Carter, as
    modified by an Addendum to Employment Agreement dated as of
    November 1, 2000(1)                   
|                                                                                 | 10.3 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and Richard Paulsen(2)                                                                                                      
|                                                                                 | 10.4 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and James Oliver(2)                                                                                                         
|                                                                                 | 10.5 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and John Barthrop(2)                                                                                                        
|                                                                                 | 10.6 |                  |  | Commonwealth Energy Corporation 1999 Equity
    Incentive Plan for Employees(1)                                                                                                                                      
|                                                                                 | 10.7 |                  |  | Change of Control Agreement dated
    November 1, 2000 between Commonwealth Energy Corporation
    and Scott A. Petterson                                                                                            

37



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##### Table of Contents



|                         |       |                  |  |                                                                                                                                                                                                                   
|------------------------ | ----- | ---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                  |       |                 
|Number                   |       | Title of Exhibit
|                         |       |                 
|Other Material Contracts
|                         | 10.8  |                  |  | Power Purchase Agreement dated July 27,
    1999, between Commonwealth Energy Corporation and Calpine Power
    Services Company(3)                                                                               
|                         | 10.9  |                  |  | First Amendment to Power Purchase Agreement dated
    as of July 29, 1999(3)                                                                                                                                      
|                         | 10.10 |                  |  | Second Amendment to Power Purchase Agreement
    dated as of May 28, 1999, between Commonwealth Energy
    Corporation and Calpine Power Services Company(4)                                                      
|                         | 10.11 |                  |  | Loan and Security Agreement dated June 28,
    2000 between Commonwealth Energy Corporation, electricAmerica,
    Inc. and electric.com, Inc. and Coast Business Credit(1)                                        
|                         | 10.12 |                  |  | Warrant dated June 28, 2000, issued by
    Commonwealth Energy Corporation in favor of Coast Business
    Credit(1)                                                                                               
|                         | 10.13 |                  |  | Limited Liability Company Agreement of Summit
    Energy Ventures, LLC, as amended by the First Amendment to the
    Limited Liability Company Agreement of Summit Energy Ventures,
    LLC, dated August 2001(2) 
|                         | 10.14 |                  |  | PECO Energy Company Confirmation Agreement dated
    January 30, 2001(1)                                                                                                                                          
|                         | 10.15 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated May 13, 2001(1)                                                                                                                                   
|                         | 10.16 |                  |  | Standard Office Lease  Gross dated
    July 1, 1997, for property located at 15941 Redhill Avenue,
    Suite 200, Tustin, California, together with Rules and
    Regulations and Work Letter attached thereto(1)
|                         | 10.17 |                  |  | Standard Sublease Dated November 12, 1998,
    Between Kurt Busch And Commonwealth Energy Corporation, For
    Property Located At 15991 Redhill Avenue, Suite 200,
    Tustin, California(1)                     
|                         | 10.18 |                  |  | Amendment Number 6 to lease by and between
    Warner/ Redhill Associates and Frederick Michael Bloom(2)                                                                                                          
|                         | 10.19 |                  |  | Commonwealth vs. Bloom Settlement Agreement Terms
    dated August 10, 2001(5)                                                                                                                                    
|                         | 10.20 |                  |  | Second Amendment to the Limited Liability Company
    Agreement of Summit Energy Ventures, LLC(4)                                                                                                                 
|                         | 10.21 |                  |  | Commonwealth Energy Corporation Summary of Rights
    to Purchase Preferred Stock(4)                                                                                                                              
|                         | 10.22 |                  |  | Confirmation Letter dated May 23, 2002
    between Commonwealth Energy Corporation and Reliant Energy
    Services, Inc.                                                                                         
|                         | 10.23 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Energy Trading, Inc. dated
    July 25, 2002                                                                                     
|                         | 10.24 |                  |  | Confirmation of Multi-Block Electric Power
    Transaction between Commonwealth Energy Corporation and
    TransAlta Energy Marketing (U.S.) Inc. dated March 1,
    2002                                        
|                         | 10.25 |                  |  | Lease Agreement dated August 9, 2002,
    between Commonwealth Energy Corporation and Cherry Tree
    Investors, L.P.                                                                                             
|                         | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                                                                                                                                                 
|                         | 99.1  |                  |  | Certification of Chief Executive Officer of
    Commonwealth Energy Corporation, Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                 
|                         | 99.2  |                  |  | Certification of Chief Financial Officer of
    Commonwealth Energy Corporation, Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                 






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of these exhibits is incorporated herein by
    reference to Commonwealth Energy Corporations Form 10
    filed with the Securities and Exchange Commission on
    August 9, 2001 (File No. 000-33069).
|   
|(2) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10/A filed
    with the Securities and Exchange Commission on November 14,
    2001 (File No. 000-33069).              

38



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##### Table of Contents





|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Corporations
    Form 10/A filed with the Securities and Exchange Commission
    on June 10, 2002.             
|   
|(4) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10/A filed
    with the Securities and Exchange Commission on April 10,
    2002 (File No. 000-33069).   
|   
|(5) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10-Q filed
    with the Securities and Exchange Commission on December 17,
    2001 (File No. 000-33069).



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment is being sought with
    respect to certain portions of this agreement. Such portions
    have been omitted from this filing and have been filed
    separately with the Securities and Exchange Commission.

39



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                        |  |                                 |  |                                                                                                                
|----------------------- |  | ------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|                       
|Dated: October 28, 2002 |  | COMMONWEALTH ENERGY CORPORATION
|                        |  | By: /s/ IAN B. CARTER          
|                        |  | O                               |  | -------------------------------------------- Ian
    B. Carter Chairman of the Board and Chief Executive fficer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                                                 |  |                  |  | 
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ---------------- |  | 
|                                               |  |                                                                                                 |  |                 
|Signature                                      |  | Title                                                                                           |  | Date            
|                                               |  |                                                                                                 |  |                 
|                                              
|                                              
|/s/ IAN B. CARTERIan B. Carter                 |  | Chairman of the Board, Chief Executive Officer
    and a Director (Principal Executive Officer) |  | October 28, 2002
|                                              
|                                              
|/s/ JAMES L. OLIVERJames L. Oliver             |  | Chief Financial Officer
    (Principal Financial Officer)                                       |  | October 28, 2002
|                                              
|                                              
|/s/ SCOTT A. PETTERSONScott A. Petterson       |  | Vice President  Finance and Controller
    (Principal Accounting Officer)                      |  | October 28, 2002
|                                              
|/s/ CRAIG G. GOODMANCraig G. Goodman           |  | Director                                                                                        |  | October 28, 2002
|                                              
|/s/ JUNONA A. JONESJunona A. Jones             |  | Director                                                                                        |  | October 28, 2002
|                                              
|/s/ ROBERT C. PERKINSRobert C. Perkins         |  | Director                                                                                        |  | October 28, 2002
|                                              
|William J.
    Popejoy                         |  | Director                                                                                        |  |                 
|                                              
|/s/ JOSEPH P. SALINE, JR.Joseph P. Saline, Jr. |  | Director                                                                                        |  | October 28, 2002
|                                              
|/s/ EUGENE R. SULLIVANEugene R. Sullivan       |  | Director                                                                                        |  | October 28, 2002

40



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##### Table of Contents



CERTIFICATIONS

I, Ian B. Carter, certify that:



| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of Commonwealth Energy Corporation;                                                                                                                                                                                                                                                         
|
| | 2. Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report; and
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report.                       

| |  |                                                                                                                  |  | 
| |  | ---------------------------------------------------------------------------------------------------------------- |  | 
| |  | By: /s/ IAN B. CARTERIan B. CarterChairman of the Board and Chief Executive Officer(Principal Executive Officer)

Dated: October 28, 2002

I, James L. Oliver, certify that:



| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of Commonwealth Energy Corporation;                                                                                                                                                                                                                                                         
|
| | 2. Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report; and
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report.                       

| |  |                                                                                            |  | 
| |  | ------------------------------------------------------------------------------------------ |  | 
| |  | By: /s/ JAMES L. OLIVERJames L. OliverChief Financial Officer(Principal Financial Officer)

Dated: October 28, 2002

41



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors

Commonwealth Energy Corporation


We have audited the accompanying consolidated
balance sheets of Commonwealth Energy Corporation as of
July 31, 2001 and 2002, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the three years in the period ended
July 31, 2002. Our audit also included the financial
statement schedule listed in the index at Item 15(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits 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 audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Commonwealth Energy
Corporation at July 31, 2001 and 2002, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended July 31, 2002, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP
| |                      

Orange County, California

September 27, 2002


F-1



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |            |            |             | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | ----------- | 
|                                     |                                                                                                                                                                            |                                     
|                                     |                                                                                                                                                                            | July 31,                            
|                                     |                                                                                                                                                                            |                                     
|                                     |                                                                                                                                                                            | 2001                                 |                                            | 2002      
|                                     |                                                                                                                                                                            |                                      |                                            |           
|Current assets:                      |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     | Cash and cash equivalents                                                                                                                                                  |                                      | $                                          | 41,114,046 |            |             | $          | 43,042,229 |           
|                                     | Accounts receivable:                                                                                                                                                       |                                      |                                            |            |            |             |            |            |           
|                                     |                                                                                                                                                                            | Billed                               |                                            |            | 16,818,659 |             |            |            | 15,364,735 |            
|                                     |                                                                                                                                                                            | Unbilled                             |                                            |            | 3,338,172  |             |            |            | 8,512,982  |            
|                                     |                                                                                                                                                                            | Green power credits                  |                                            |            | 1,176,611  |             |            |            |           |            
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | 21,333,442                                 |            |            |             | 23,877,717 |           
|                                     |                                                                                                                                                                            | Less allowance for doubtful accounts |                                            |            | (3,946,388 | )           |            |            | (2,537,846 | )          
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     | Net accounts receivable                                                                                                                                                    |                                      |                                            | 17,387,054 |            |             |            | 21,339,871 |           
|                                     | Prepaid income taxes                                                                                                                                                       |                                      |                                            | 2,109,997  |            |             |            | 1,920,688  |           
|                                     | Deferred tax asset                                                                                                                                                         |                                      |                                            | 6,607,711  |            |             |            | 1,850,353  |           
|                                     | Prepaid expenses and other current assets                                                                                                                                  |                                      |                                            | 3,943,625  |            |             |            | 3,965,302  |           
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total current assets                       |            |            | 71,162,433  |            |            |            | 72,118,443  | 
|Property and equipment, net          |                                                                                                                                                                            |                                      | 3,606,078                                  |            |            |             | 3,912,094  |           
|Restricted cash                      |                                                                                                                                                                            |                                      | 28,242,911                                 |            |            |             | 14,185,961 |           
|Investments                          |                                                                                                                                                                            |                                      |                                           |            |            |             | 7,452,397  |           
|Other assets:                        |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     | Intangible assets                                                                                                                                                          |                                      |                                            | 945,000    |            |             |            | 1,069,928  |           
|                                     | Deposits and notes receivable                                                                                                                                              |                                      |                                            | 388,466    |            |             |            | 371,282    |           
|                                     | Deferred tax asset                                                                                                                                                         |                                      |                                            | 2,671,058  |            |             |            | 2,118,481  |           
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total other assets                         |            |            | 4,004,524   |            |            |            | 3,559,691   | 
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total assets                               |            | $          | 107,015,946 |            |            | $          | 101,228,586 | 
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     | Accounts payable                                                                                                                                                           |                                      | $                                          | 9,404,851  |            |             | $          | 8,968,289  |           
|                                     | Notes payable under line of credit                                                                                                                                         |                                      |                                            | 3,888,072  |            |             |            |           |           
|                                     | Other current liabilities                                                                                                                                                  |                                      |                                            | 7,685,954  |            |             |            | 4,308,084  |           
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total current liabilities                  |            |            | 20,978,877  |            |            |            | 13,276,373  | 
|Commitments and contingencies        |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|Shareholders equity:                |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     | Convertible preferred stock 
    10,000,000 shares authorized with no par value; 862,500 and
    775,000 shares issued and outstanding in 2001 and 2002,
    respectively |                                      |                                            | 842,112    |            |             |            | 819,971    |           
|                                     | Common stock  50,000,000 shares
    authorized with no par value; 29,360,363 and
    27,334,032 shares issued and outstanding in 2001 and 2002,
    respectively          |                                      |                                            | 60,304,847 |            |             |            | 57,148,272 |           
|                                     | Retained earnings                                                                                                                                                          |                                      |                                            | 24,890,110 |            |             |            | 29,983,970 |           
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total shareholders equity                 |            |            | 86,037,069  |            |            |            | 87,952,213  | 
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           
|                                     |                                                                                                                                                                            |                                      | Total liabilities and shareholders equity |            | $          | 107,015,946 |            |            | $          | 101,228,586 | 
|                                     |                                                                                                                                                                            |                                      |                                            |            |            |             |            |           

See Notes to Consolidated Financial
Statements.

F-2



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |          |  
|----------------------------------------------------------------------- | ----------------------------------- | ------------------- | ---------- | ------- | - | ---- | ----------- | --------- |  | - | ----------- | -------- | -
|                                                                        |                                     |                    
|                                                                        |                                     | Year Ended July 31,
|                                                                        |                                     |                    
|                                                                        |                                     | 2000                |            | 2001    |   | 2002
|                                                                        |                                     |                     |            |         |   |     
|Retail energy sales                                                     |                                     | $                   | 87,320,533 |         |   | $    | 99,981,187  |           |  | $ | 96,959,861  |         
|Wholesale energy sales                                                  |                                     |                     |           |         |   |      | 79,303,586  |           |  |   | 18,757,553  |         
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Net energy sales                                                        |                                     |                     | 87,320,533 |         |   |      | 179,284,773 |           |  |   | 115,717,414 |         
|Green power credits                                                     |                                     |                     | 12,303,794 |         |   |      | 3,978,989   |           |  |   | 2,050,856   |         
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Net revenue                                                             |                                     |                     | 99,624,327 |         |   |      | 183,263,762 |           |  |   | 117,768,270 |         
|Direct energy costs                                                     |                                     |                     | 86,731,876 |         |   |      | 76,615,138  |           |  |   | 86,197,559  |         
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Gross margin                                                            |                                     |                     | 12,892,451 |         |   |      | 106,648,624 |           |  |   | 31,570,711  |         
|Selling and marketing expenses                                          |                                     |                     | 6,211,360  |         |   |      | 3,597,001   |           |  |   | 3,509,830   |         
|General and administrative expenses                                     |                                     |                     | 15,380,674 |         |   |      | 21,183,396  |           |  |   | 20,293,121  |         
|Stock-based compensation charges                                        |                                     |                     | 445,277    |         |   |      | 1,080,000   |           |  |   | (742,500    | )       
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Income (loss) from operations                                           |                                     |                     | (9,144,860 | )       |   |      | 80,788,227  |           |  |   | 8,510,260   |         
|Interest income                                                         |                                     |                     | 586,479    |         |   |      | 2,319,628   |           |  |   | 1,309,354   |         
|Interest expense                                                        |                                     |                     | (87,708    | )       |   |      | (726,446    | )         |  |   | (369,760    | )       
|Loss in equity investments                                              |                                     |                     |           |         |   |      |            |           |  |   | (160,000    | )       
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Income (loss) before provision for income
    taxes                     |                                     |                     | (8,646,089 | )       |   |      | 82,381,409  |           |  |   | 9,289,854   |         
|Provision for income taxes                                              |                                     |                     |           |         |   |      | 21,851,992  |           |  |   | 4,125,440   |         
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Net income (loss)                                                       |                                     | $                   | (8,646,089 | )       |   | $    | 60,529,417  |           |  | $ | 5,164,414   |         
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Net income (loss) per common share (2000
    restated  Note 1):        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|                                                                        | Basic                               |                     | $          | (.30    | ) |      | $           | 2.06      |  |   | $           | .19      |  
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|                                                                        | Diluted                             |                     | $          | (.30    | ) |      | $           | 1.77      |  |   | $           | .16      |  
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|Stock-based compensation charges (credits) relate
    to the following: |                                     |                     |            |         |   |      |             |           |  |   |             |         
|                                                                        | Selling and marketing expenses      |                     | $          | 423,500 |   |      | $           |          |  |   | $           |         |  
|                                                                        | General and administrative expenses |                     |            | 21,777  |   |      |             | 1,080,000 |  |   |             | (742,500 | )
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         
|                                                                        |                                     | $                   | 445,277    |         |   | $    | 1,080,000   |           |  | $ | (742,500    | )       
|                                                                        |                                     |                     |            |         |   |      |             |           |  |   |             |         

See Notes to Consolidated Financial
Statements.

F-3



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | --------------- |  | ------------ | ---------- | ------ |  | -------- | ------- | ----- |  | - | --------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                 |  |              |            |                 |  |              |            |        |  |         
|                                                                                                 |  |              |            | Convertible     |  | Retained     |            |       
|                                                                                                 |  | Common Stock |            | Preferred Stock |  | Earnings     |            |       
|                                                                                                 |  |              |            |                 |  | (Accumulated |            |       
|                                                                                                 |  | Shares       |            | Amount          |  | Shares       |            | Amount |  | Deficit) |         | Total
|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |      
|Balance at July 31, 1999                                                                         |  |              | 26,755,221 | (A)             |  | $            | 45,758,101 |        |  |          | 939,000 |       |  | $ | 969,602   |   |  | $ | (26,827,660 | ) |  | $ | 19,900,043 |  
|Proceeds from sales of common stock, net of
    issuance costs of $1,828,665                     |  |              | 2,185,537  |                 |  |              | 12,020,356 |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 12,020,356 |  
|Stock options granted included in issuance costs                                                 |  |              |           |                 |  |              | 31,500     |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 31,500     |  
|Exercise of stock options                                                                        |  |              | 392,406    |                 |  |              | 70,115     |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 70,115     |  
|Compensation charge related to stock options
    granted (including $414,800 of severance costs) |  |              |           |                 |  |              | 436,577    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 436,577    |  
|Transfer of common stock from founder to officer                                                 |  |              |           |                 |  |              | 423,500    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 423,500    |  
|Cumulative unpaid dividends on convertible
    preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 84,370    |   |  |   | (84,370     | ) |  |   |           |  
|Net loss and comprehensive loss                                                                  |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | (8,646,089  | ) |  |   | (8,646,089 | )
|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |            |  
|Balance at July 31, 2000                                                                         |  |              | 29,333,164 | (A)             |  |              | 58,740,149 |        |  |          | 939,000 |       |  |   | 1,053,972 |   |  |   | (35,558,119 | ) |  |   | 24,236,002 |  
|Exercise of stock options                                                                        |  |              | 103,699    |                 |  |              | 5,678      |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 5,678      |  
|Compensation charge related to settlement of
    employee stock option disputes                  |  |              |           |                 |  |              | 139,725    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 139,725    |  
|Compensation charge related to performance-based
    stock options                               |  |              |           |                 |  |              | 1,080,000  |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 1,080,000  |  
|Income tax benefits arising from exercise of
    stock options                                   |  |              |           |                 |  |              | 339,295    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 339,295    |  
|Cumulative unpaid dividends on convertible
    preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 81,188    |   |  |   | (81,188     | ) |  |   |           |  
|Payment of dividends on preferred stock                                                          |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | (216,548  | ) |  |   |            |   |  |   | (216,548   | )
|Repurchase of preferred stock                                                                    |  |              | (76,500    | )               |  |              |           |        |  |          | (76,500 | )     |  |   | (76,500   | ) |  |   |            |   |  |   | (76,500    | )
|Net income and comprehensive income                                                              |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | 60,529,417  |   |  |   | 60,529,417 |  
|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |            |  
|Balance at July 31, 2001                                                                         |  |              | 29,360,363 |                 |  |              | 60,304,847 |        |  |          | 862,500 |       |  |   | 842,112   |   |  |   | 24,890,110  |   |  |   | 86,037,069 |  
|Exercise of stock options                                                                        |  |              | 64,829     |                 |  |              | 26,630     |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 26,630     |  
|Compensation charge related to settlement of
    employee stock option disputes                  |  |              |           |                 |  |              | 2,500      |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 2,500      |  
|Compensation charge related to performance-based
    stock options                               |  |              |           |                 |  |              | (742,500   | )      |  |          |        |       |  |   |          |   |  |   |            |   |  |   | (742,500   | )
|Repurchase of founders shares                                                                   |  |              | (1,175,160 | )               |  |              | (2,400,000 | )      |  |          |        |       |  |   |          |   |  |   |            |   |  |   | (2,400,000 | )
|Cancellation and return of founders
    accommodation shares                                    |  |              | (828,500   | )               |  |              |           |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   |           |  
|Income tax benefits arising from exercise of
    stock options                                   |  |              |           |                 |  |              | (43,205    | )      |  |          |        |       |  |   |          |   |  |   |            |   |  |   | (43,205    | )
|Cumulative unpaid dividends on convertible
    preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 70,554    |   |  |   | (70,554     | ) |  |   |           |  
|Payment of dividends on preferred stock                                                          |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | (30,195   | ) |  |   |            |   |  |   | (30,195    | )
|Repurchase of preferred stock                                                                    |  |              | (87,500    | )               |  |              |           |        |  |          | (87,500 | )     |  |   | (62,500   | ) |  |   |            |   |  |   | (62,500    | )
|Net income and comprehensive income                                                              |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | 5,164,414   |   |  |   | 5,164,414  |  
|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |            |  
|Balance at July 31, 2002                                                                         |  |              | 27,334,032 |                 |  | $            | 57,148,272 |        |  |          | 775,000 |       |  | $ | 819,971   |   |  | $ | 29,983,970  |   |  | $ | 87,952,213 |  
|                                                                                                 |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |            |  






|    |                                 
|--- | --------------------------------
|(A) | Restated as described in Note 1.

See Notes to Consolidated Financial
Statements.

F-4



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |            |            |  
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------- | ----------- | ------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                                                           |                                                                |                                  
|                                                                                                           |                                                                | Year Ended July 31,              
|                                                                                                           |                                                                |                                  
|                                                                                                           |                                                                | 2000                              |             | 2001    |            | 2002
|                                                                                                           |                                                                |                                   |             |         |            |     
|Cash Flows From Operating Activities                                                                       |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Net income (loss)                                                                                          |                                                                | $                                 | (8,646,089  | )       |            | $    | 60,529,417  |            |            | $ | 5,164,414  |           
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|                                                                                                           | Depreciation                                                   |                                   |             | 687,125 |            |      |             | 860,726    |            |   |            | 1,308,827  |           
|                                                                                                           | Amortization                                                   |                                   |             | 52,500  |            |      |             | 52,500     |            |   |            | 52,500     |           
|                                                                                                           | Provision for doubtful accounts                                |                                   |             | 846,075 |            |      |             | 4,666,126  |            |   |            | (2,313,451 | )         
|                                                                                                           | Stock-based compensation charges                               |                                   |             | 445,277 |            |      |             | 1,080,000  |            |   |            | (742,500   | )         
|                                                                                                           | Fair value of stock options issued for services
    received   |                                   |             |        |            |      |             |           |            |   |            |           |           
|                                                                                                           | Fair value of stock options issued as severance
    costs      |                                   |             | 414,800 |            |      |             |           |            |   |            |           |           
|                                                                                                           | Income tax benefits arising from exercise of
    stock options |                                   |             |        |            |      |             | 339,295    |            |   |            | (43,205    | )         
|                                                                                                           | Deferred income taxes                                          |                                   |             |        |            |      |             | (9,278,769 | )          |   |            | 5,309,935  |           
|                                                                                                           | Changes in operating assets and liabilities:                   |                                   |             |         |            |      |             |            |            |   |            |            |           
|                                                                                                           |                                                                | Billed accounts receivable        |             |         | (9,278,406 | )    |             |            | (1,529,354 | ) |            |            | 1,502,805  |  
|                                                                                                           |                                                                | Unbilled accounts receivable      |             |         | (3,919,039 | )    |             |            | 2,994,924  |   |            |            | (5,174,810 | )
|                                                                                                           |                                                                | Green power credits receivable    |             |         | 269,077    |      |             |            | 1,629,897  |   |            |            | 1,176,611  |  
|                                                                                                           |                                                                | Prepaid expenses and other assets |             |         | (13,714    | )    |             |            | (4,674,414 | ) |            |            | 184,815    |  
|                                                                                                           |                                                                | Accounts payable                  |             |         | 2,809,368  |      |             |            | 1,256,003  |   |            |            | 419,467    |  
|                                                                                                           |                                                                | Other current liabilities         |             |         | 1,305,141  |      |             |            | 3,901,596  |   |            |            | (3,377,870 | )
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Net cash provided by (used in) operating
    activities                                                    |                                                                |                                   | (15,027,885 | )       |            |      | 61,827,947  |            |            |   | 3,467,538  |           
|Cash Flows From Investing Activities                                                                       |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Purchases of property and equipment                                                                        |                                                                |                                   | (1,760,064  | )       |            |      | (1,149,927  | )          |            |   | (1,614,843 | )         
|Purchase of intangible assets                                                                              |                                                                |                                   |            |         |            |      |            |            |            |   | (177,428   | )         
|Summit Energy investments                                                                                  |                                                                |                                   |            |         |            |      |            |            |            |   | (7,452,397 | )         
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Net cash used in investing activities                                                                      |                                                                |                                   | (1,760,064  | )       |            |      | (1,149,927  | )          |            |   | (9,244,668 | )         
|Cash Flows From Financing Activities                                                                       |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Borrowings under (repayments of) line of credit                                                            |                                                                |                                   | 5,281,272   |         |            |      | (1,393,200  | )          |            |   | (3,888,072 | )         
|Decrease (increase) in restricted cash                                                                     |                                                                |                                   | (2,740,139  | )       |            |      | (22,096,572 | )          |            |   | 14,056,950 |           
|Proceeds from sales of common stock                                                                        |                                                                |                                   | 12,051,856  |         |            |      |            |            |            |   |           |           
|Repurchase of founders common stock                                                                       |                                                                |                                   |            |         |            |      |            |            |            |   | (2,400,000 | )         
|Repurchase of preferred stock                                                                              |                                                                |                                   |            |         |            |      | (76,500     | )          |            |   | (62,500    | )         
|Dividends paid on preferred stock                                                                          |                                                                |                                   |            |         |            |      | (216,548    | )          |            |   | (30,195    | )         
|Net cash used in settlement of employee stock
    option dispute                                           |                                                                |                                   |            |         |            |      |            |            |            |   | 2,500      |           
|Proceeds from exercises of stock options                                                                   |                                                                |                                   | 70,115      |         |            |      | 5,678       |            |            |   | 26,630     |           
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Net cash provided by (used in) financing
    activities                                                    |                                                                |                                   | 14,663,104  |         |            |      | (23,777,142 | )          |            |   | 7,705,313  |           
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Increase (decrease) in cash and cash
    equivalents                                                       |                                                                |                                   | (2,124,845  | )       |            |      | 36,900,878  |            |            |   | 1,928,183  |           
|Cash and cash equivalents at beginning of year                                                             |                                                                |                                   | 6,338,013   |         |            |      | 4,213,168   |            |            |   | 41,114,046 |           
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Cash and cash equivalents at end of year                                                                   |                                                                | $                                 | 4,213,168   |         |            | $    | 41,114,046  |            |            | $ | 43,042,229 |           
|                                                                                                           |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|Cash paid for:                                                                                             |                                                                |                                   |             |         |            |      |             |            |            |   |            |           
|                                                                                                           | Interest                                                       |                                   | $           | 87,708  |            |      | $           | 726,446    |            |   | $          | 369,761    |           
|                                                                                                           | Income taxes                                                   |                                   |             |        |            |      |             | 32,900,800 |            |   |            |           |           

See Notes to Consolidated Financial
Statements.

F-5



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

July 31, 2002


1. Summary of Significant
Accounting Policies

Description of Business

Commonwealth Energy Corporation (the
Company) was incorporated on August 15, 1997.
The Companys primary business has been the sale of
electric power to retail customers in California and, beginning
in January 2000, in Pennsylvania and, beginning in August 2000,
the sale of electric power to wholesale customers in California
and Pennsylvania. The Company is licensed by the Federal Energy
Regulatory Commission (FERC) as a power marketer, by
California as an Electric Service Provider and by Pennsylvania
as an Electric Generation Supplier. The Company plans to enter
new deregulated electric power markets in the future.

The electric power sold by the Company to its
retail customers is delivered to the Companys customers by
incumbent utilities that are called Utility Distribution
Companies (UDCs) in California and Electric
Distribution Companies (EDCs) in Pennsylvania, which
measure electric power usage by the Companys customers and
bill the customers on behalf of the Company. There are three
UDCs in California and one EDC in Pennsylvania, which conduct
these activities on behalf of the Company.

The Companys operations have been in one
reportable segment, the domestic electricity distribution
industry.

Basis of Presentation

The consolidated financial statements of the
Company include the accounts of the Companys wholly-owned
subsidiaries and Summit Energy Ventures, LLC
(Summit). All inter-company transactions have been
eliminated in consolidation.

Adjustment of Number of Outstanding Common
Shares and Restatement of Per Share Information

As more fully discussed in Note 11, the Company
disputed whether certain shares of its common stock issued to
its founder were validly issued. Litigation ensued between the
Company and its founder regarding this and other matters. A
settlement of this litigation was approved by the court having
jurisdiction over the case on August 15, 2001 and
stipulated that 4,720,000 of the founders disputed common
shares were void. The Companys counsel has advised that
such shares should be considered void ab initio, or having never
been issued. Accordingly, the Company has restated its prior
years financial statements to reflect the terms of this
settlement. The only change to the Companys results of
operations is in the reported net loss per share information for
the years ended July 31, 1999 and 2000, which has been
restated as follows:

|                       |  |                     |      |         |  |       |      |         |  |   |      |   |  |   |      |  
|---------------------- |  | ------------------- | ---- | ------- |  | ----- | ---- | ------- |  | - | ---- | - |  | - | ---- | -
|                       |  |                    
|                       |  | Year Ended July 31,
|                       |  |                    
|                       |  |                     |      |        
|                       |  | 1999                |      | 2000   
|                       |  |                     |      |        
|                       |  | Basic               |      | Diluted |  | Basic |      | Diluted
|                       |  |                     |      |         |  |       |      |        
|As restated            |  | $                   | (.84 | )       |  | $     | (.84 | )       |  | $ | (.30 | ) |  | $ | (.30 | )
|As originally reported |  |                     | (.69 | )       |  |       | (.69 | )       |  |   | (.26 | ) |  |   | (.26 | )

Estimates and Assumptions

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The most
significant estimates in the Companys consolidated
financial statements relate to the allowance for doubtful
accounts, unbilled

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

receivables, legal claims and the useful lives of
property and equipment and intangible assets. Actual results
could differ from those estimates.

Revenue and Cost Recognition

Net revenue from sales of electric power is
recognized as the power is delivered to the Companys
customers. Net revenue represents proceeds from energy sales.
Direct energy costs include electric power purchased,
independent system operator fees and scheduling coordination
fees. Selling and marketing expenses include salaries of sales
and marketing personnel and promotional and advertising costs.
General and administrative expenses include salaries for
corporate support personnel, rent expenses, insurance expenses,
bad debts expenses, depreciation expenses and other costs of the
corporate office.

The Companys net revenue is derived from
sales to the following class of customers:

|                                |  |                     |            |      |  |      |             |  |  |   |             | 
|------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | ----------- |  |  | - | ----------- | 
|                                |  |                    
|                                |  | Year Ended July 31,
|                                |  |                    
|                                |  | 2000                |            | 2001 |  | 2002
|                                |  |                     |            |      |  |     
|Retail and commercial end users |  | $                   | 87,320,533 |      |  | $    | 99,981,187  |  |  | $ | 96,959,861  | 
|Wholesale                       |  |                     |           |      |  |      | 79,303,586  |  |  |   | 18,757,553  | 
|                                |  |                     |            |      |  |      |             |  |  |   |             | 
|                                |  | $                   | 87,320,533 |      |  | $    | 179,284,773 |  |  | $ | 115,717,414 | 
|                                |  |                     |            |      |  |      |             |  |  |   |             | 

Common Stock Grant

On January 20, 2000, the Board of Directors
of the Company directed that, in consideration of the purchase
price being paid in a nominal amount of cash by an officer of
the Company on behalf of the Companys other shareholders,
the Company shall grant on a pro rata basis one share of common
stock for each share of common stock and preferred stock
outstanding as of January 19, 1999. All per share and
common share amounts presented in these consolidated financial
statements have been retroactively adjusted to reflect this
stock grant of 11,205,150 common shares, including 939,000
common shares related to the convertible preferred stock, which
had the same effect as a stock split.

Unbilled Receivables

The Companys customers are billed monthly
at various dates throughout the month. Unbilled receivables
represent the amount of electric power delivered to customers as
of the end of a period, but not yet billed. Unbilled receivables
from sales in California through January 19, 2001 were
estimated by the Company as the number of kilowatt hours
delivered times 95% of the California Power Exchange
(PX) cost as published by Southern California Edison
for residential customers. On January 20, 2001, the PX
ceased operations and the Company replaced 95% of the PX cost
amount with 95% of the individual Utility Purchased Energy cost
as published by each individual utility. Unbilled receivables
from sales in Pennsylvania are estimated in the same manner,
except using the average current customer sales price per
kilowatt-hour.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and
short-term investments with original maturities of three months
or less.

Property and Equipment

Property and equipment are carried at cost.
Depreciation of property and equipment is provided over their
estimated useful lives, generally five to ten years, using the
straight line method. Expenditures for maintenance, repairs and
renewals are expensed as incurred. The Company capitalizes
certain software development costs incurred on significant
projects for internal use in accordance with the provisions of
AICPA

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statement of Position 98-1, Accounting
for Software Costs.Qualifying internal and external costs,
consisting primarily of third-party system development costs
incurred during the application development stage are
capitalized and amortized on the straight-line basis over five
years.

Intangible Assets

Intangible assets are carried at cost.
Amortization of intangible assets is provided over their
estimated useful life of 2 and 20 years.

Income Taxes

The Company utilizes the liability method of
accounting for income taxes as set forth in FASB Statement
No. 109, Accounting for Income Taxes.Under the
liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of
assets and liabilities using currently enacted tax rates.

Advertising Costs

Advertising costs, consisting primarily of media
advertising, are expensed as incurred. Advertising costs were
$2,175,400, $253,120 and $128,925 for 2000, 2001 and 2002,
respectively.

Stock-Based Compensation

As permitted by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123) and FASB
Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation,the Company
accounts for stock options granted to its employees and outside
directors using the intrinsic value method. Most of the
Companys stock option grants were granted with exercise
prices below the fair value of the Companys common stock
as determined by the Companys management for financial
reporting purposes. In addition, since all stock option grants
were vested at their dates of grant, the difference between the
exercise prices and such estimated fair values was expensed as
stock-based compensation charges as of the date of grant.

Certain employees whose function was to sell
shares of the Companys common stock received a portion of
their commissions for such sales in the form of stock options.
The intrinsic value of such stock options has been charged
against the proceeds of such sales in the accompanying
consolidated statements of shareholders equity.

The Company has also granted performance-based
stock options for which vesting is contingent upon the
occurrence of certain events or the achievements of certain
levels of financial performance by the Company. The difference
between the exercise price of these stock options and the
estimated fair value of the Companys common stock as
estimated by the Companys management for financial
reporting purposes is recorded as stock-based compensation
charges over the period prior to the selling of the options
which are expected to eventually vest.

Stock options were granted to certain service
providers to the Company. These options were recorded at their
fair values using the Black-Scholes option pricing model method,
in accordance with SFAS No. 123.

Concentration of Credit Risk

The Company maintains allowances for potential
credit losses.

As of July 31, 2002, 53.3% of the
Companys billed and unbilled receivables are due from a
large number of retail and commercial end users in California
and Pennsylvania who are billed by and make remittances to the
UDCs or the EDC that deliver their electricity which, in
turn, forward such remittances to the Company.

F-8



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

One of the UDCs, Pacific Gas and Electric
(PG&E), filed for bankruptcy in April 2001 and
has withheld from payment to the Company a portion of the
remittances due to the Company. The Company has filed a Proof of
Claim in PG&Es bankruptcy proceedings to recover these
amounts which approximated $1,100,000 at July 31, 2001 and
2002. The Company has provided fully for these disputed amounts
in its allowance for doubtful accounts. The Company does not
have any similar disputes with its other UDCs.

The remainder of the Companys billed and
unbilled accounts receivable represent the Companys direct
billing of certain large commercial and industrial customers
amounting to $2,666,124. The Company also has receivables from
two wholesale customers in the amount of $431,117.

No customer has accounted for more than 10% of
net revenue in 2000, 2001 or 2002, except for two wholesale
customers, the state of California Department of Water Resources
and the PX, which represented 22.0% and 10.6%, respectively, of
net revenue in 2001.

Impairment of Long-Lived Assets

Long-lived assets to be held and used by the
Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such assets are considered to be
impaired, the impairment loss is measured by the amount by which
the carrying amount of the assets exceeds fair values.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS No. 133), which establishes
accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. This statement was amended by
SFAS No. 137 which deferred the effective date to all
fiscal quarters of fiscal years beginning after June 15,
2000. Accordingly, SFAS No. 133 was effective as of
August 1, 2000 for the Company and did not have an effect
on the Companys financial position or results of
operations. The Company has not entered into any derivative
instruments or hedging contracts. The Companys long-term
contracts for the purchase and sale of electricity are
considered normal purchases and normal
sales, respectively, within the context of
SFAS No. 133 and related pronouncements.

In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 141, Business
Combinations (SFAS No. 141), and
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). These statements change
the accounting for business combinations, goodwill and
intangibles. SFAS No. 141 eliminates the use of the
pooling-of-interests method for all business combinations
completed after June 30, 2001. It also provides new
criteria to determine whether an acquired intangible asset
should be recognized separately from goodwill.
SFAS No. 142 eliminates the amortization of goodwill
and intangible assets with an indefinite life. It also
introduces a new impairment-only approach, which should be
tested annually, to goodwill. The Company does not expect
SFAS No. 141 or SFAS No. 142 to have any
material effect on the Companys financial position or
results of operations.

Fair Value of Financial Instruments

The Companys financial instruments consist
primarily of cash, billed and unbilled accounts receivable,
accounts payable and notes payable. The carrying amounts of
these financial instruments are reflected in the accompanying
consolidated balance sheets at amounts considered by management
to approximate their fair values due to their short-term nature.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2. Market and Regulatory
Risks

California Deregulated Electric Power
Markets

California has been experiencing significant
fluctuations in the cost of wholesale energy since May 2000.
During the summer of 2000 and winter of 2001, the price of
electricity in wholesale markets reached unprecedented highs.
Since the winter of 2001, the price of electricity has returned
to near historical levels. In reaction to this crisis, FERC, the
California Public Utilities Commission (CPUC), the
State Legislature and the Governor have proposed a varying
number of methods to help restore price stability to the
California electricity marketplace. On September 20, 2001,
the CPUC issued a ruling suspending direct access in
California. The suspension of direct access means
that retail electricity suppliers, such as the Company, will not
be allowed to actively seek new customers. This ruling permits
the Company to keep its current customer base, but prohibits the
Company from signing up new customers for an undetermined period
of time. The Company is actively seeking relief from this
ruling. There is no assurance that any legislative or legal
appeal will give the Company relief from the states
suspension of direct access.

In addition to regulatory and legislative risks,
one of the UDCs in California, PG&E, with which the Company
interacts to conduct its business has filed for bankruptcy
protection. Other utilities in California also could seek
protection of bankruptcy in the future.

Historical Procurement Change

In July 2002, the California Public Utilities
Commission (CPUC) issued an interim order approving
an alternate proposal implementing a Historical Procurement
Charge (HPC) sought by Southern California Edison
(SCE). The original proposal submitted by SCE would
allow the utility to recover losses SCE claimed accrued during
last years energy crisis, from Direct Access
(DA) customers. Rejecting this proposal and
alternately voting in favor of a revised measure authored by
commissioners Brown and Peavey, the CPUC reduced the charges SCE
aimed to place on direct access customers.

The Alternative Proposed Decision authorizes SCE
to collect $391 million in HPC charges from all
DA customers by reducing their Procured Energy Credit
(PE Credit) two and seven-tenths cents
($0.027) per kWh beginning July 27, 2002. The
lowered PE Credit will continue until an exit fee for
DA customers has been approved by the CPUC, which will then
be reduced to 1 cent ($0.01) per kWh until the
$391 million is fully collected. While we expect that this
charge will significantly impact our revenue and cash flow, we
do not expect that it will preclude us from participating in the
California Market. Commonwealth Energy Corporations retail
electricity business, along with other DA participants, are
currently evaluating all options to actively respond to this
decision. SCE is currently seeking to change the terms of the
interim order to seek to recover additional procurement
shortfall revenue by increasing the HPC. The CPUC has not yet
made a determination with respect to SCEs request.

Commitments to Purchase Electric
Power

For the California market, the Companys
primary purchase contract with Calpine Power Services Company,
to acquire 3,000 kWh of electric power per day expired on
June 30, 2002. The Company has entered into a series of new
contracts to purchase electricity energy covering approximately
55% of the current load servicing requirements. The Company is
obligated to minimum electric purchases of $23.9 million
for the year ending July 31, 2003 under these commitments.

For the Pennsylvania market, the Company has
entered into various contractual arrangements for the purchase
of electric power through May 2004. The Company is obligated to
minimum electric power purchases of $32.6 million for the
year ending July 31, 2003, and $20.1 million
thereafter under these contracts.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Since the prices at which the Company purchases
this electric power are fixed during the terms of the contracts,
if the price at which the Company can resell this electric power
falls below the contract purchase price plus distribution and
scheduling costs, the Company would incur operating losses
during such periods.

Pennsylvania Operations

In accordance with its standard customer contract
in Pennsylvania, the Company may only charge certain maximum
rates for its sales of electric power which, at times, could be
less than the Companys costs of acquiring, distributing
and scheduling such electric power. Energy capacity charges for
servicing electric power in the Pennsylvania market varies
significantly from month to month and can effect gross profit
margins.

California Green Power Credits

The state of California enacted the Public
Purpose Program (Program) which established a $540 million
fund to provide overall incentives to suppliers of
green power to initially reduce, among other things,
the net costs of such power to certain consumers by
1.5 cents per kWh which, as of December 31, 2001, is
at a rate 1.0 cent per kWh. Green Power is
defined by the Program as electricity produced by at least 50%
renewable energy resources. The Company received Green Power
Credits of $3,978,989 and $2,050,856 for the years ended
July 31, 2001 and 2002, respectively. The benefit of Green
Power Credits has been passed through to the Companys
customers. The subsidy ended December 31, 2001, and has not
been extended by the state legislature.

3. Per Share Information

Basic and diluted net income (loss) per
common share, restated as described in Note 1, is computed as
follows:

|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |           | 
|---------------------------------------------------- | ----------------------------------------------- | ------------------- | ---------- | ---- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                     |                                                 |                    
|                                                     |                                                 | Year Ended July 31,
|                                                     |                                                 |                    
|                                                     |                                                 | 2000                |            | 2001 |  | 2002
|                                                     |                                                 |                     |            |      |  |     
|Numerator:                                           |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Net income (loss)                                    |                                                 | $                   | (8,646,089 | )    |  | $    | 60,529,417 |           |  | $ | 5,164,414  |          
|Preferred stock dividend                             |                                                 |                     | (84,370    | )    |  |      | (81,188    | )         |  |   | (70,554    | )        
|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Income (loss) applicable to common stock
     Basic |                                                 |                     | (8,730,459 | )    |  |      | 60,448,229 |           |  |   | 5,093,860  |          
|Assumed conversion of preferred stock                |                                                 |                     |           |      |  |      | 81,188     |           |  |   | 70,554     |          
|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Net income (loss)  Dilutive                         |                                                 | $                   | (8,730,459 | )    |  | $    | 60,529,417 |           |  | $ | 5,164,414  |          
|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Denominator(restated for 2000):                      |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Weighted-average outstanding shares 
    Basic      |                                                 |                     | 28,794,921 |      |  |      | 29,384,617 |           |  |   | 27,481,641 |          
|Dilutive shares:                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|                                                     | Exercise of dilutive stock options              |                     |            |     |  |      |            | 3,842,866 |  |   |            | 3,258,129 | 
|                                                     | Conversion of preferred stock into common stock |                     |            |     |  |      |            | 924,538   |  |   |            | 796,154   | 
|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          
|Weighted-average outstanding shares 
    Dilutive   |                                                 |                     | 28,794,921 |      |  |      | 34,152,021 |           |  |   | 31,535,924 |          
|                                                     |                                                 |                     |            |      |  |      |            |           |  |   |            |          

For the year ended, July 31, 2000, the
effects of the exercise of potentially dilutive stock options
and warrants and the assumed conversion of preferred stock into
common stock have been excluded from the calculation of dilutive
earnings per share information because the effect of their
inclusion would be anti-dilutive. For the year ended
July 31, 2001 and 2002 the effects of stock options with
exercise prices in excess of

F-11



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the estimated fair value of the Companys
common stock and of the exercise of warrants have been excluded
from the calculation of diluted earnings per share because the
effect of their inclusion would be anti-dilutive.

4. Investment in Summit Energy Ventures,
LLC

In July 2001, the Company invested $15,000,000 in
Summit and, if Summit invests 75% of the initial $15,000,000
investment, the Company may, solely at its discretion, invest up
to an additional $10,000,000 in Summit. Summit was formed in
July 2001 for the purpose of investing in energy and energy
related companies. The term of Summits existence is
through June 29, 2006, which date may be extended for up to
two additional one year periods by mutual agreement of the
parties. Summits Investment Committee, which is comprised
of three members appointed by the Companys management,
must approve of any investments to be made by Summit.
Accordingly, because of this control over Summits
investments, Summits financial statements are included in
the Companys consolidated financial statements.

As of July 31, 2002, the Companys
interest in Summit is a 100% preferred membership interest and,
after the Company receives its original capital and a 10%
preferred return, profits of Summit are to be allocated 60% to
the Company and 40% to its partner, Northwest Power Management
(Northwest); net losses are allocated per capital
contribution. Northwest receives no return until after the
Company receives return of its investment and a 10% preferred
annual return on its investment. The Company shall have the
option to purchase any of Summits investments on such
terms and conditions that are established between the Company
and Northwest.

As of July 31, 2002, Summit had made three
investments in energy related companies as follows:

|                             |  |            |           |             |  |  |        | 
|---------------------------- |  | ---------- | --------- | ----------- |  |  | ------ | 
|                             |  | Investment |           |            
|Investee                     |  | Amount     |           | % Ownership
|                             |  |            |           |            
|Envenergy, Inc.              |  | $          | 2,029,669 |             |  |  | 8.73%  | 
|Turbocor, LLC                |  |            | 2,997,257 |             |  |  | 21.16% | 
|Power Efficiency Corporation |  |            | 2,425,471 |             |  |  | 28.00% | 
|                             |  |            |           |             |  |  |        | 
|                             |  | $          | 7,452,397 |             |  |  |        | 
|                             |  |            |           |             |  |  |        | 

Based on the percentage ownership levels, the
Company accounts for Envenergy, Inc. at cost as an available for
sale equity investment, and Turbocar, LLC and Power Efficiency
Corporation under the equity method (APB 18).
Under the equity method of accounting, the Company reports their
proportionate amount of income and losses from the investment
companies.

Condensed balance sheet information for Summit at
July 31, 2001 and 2002, which is included in the
Companys consolidated financial statements, is as follows:

|                |                           |          |            |            |  |   |            |           | 
|--------------- | ------------------------- | -------- | ---------- | ---------- |  | - | ---------- | --------- | 
|                |                           |         
|                |                           | July 31,
|                |                           |         
|                |                           | 2001     |            | 2002      
|                |                           |          |            |           
|Assets:         |                           |          |            |            |  |   |            |          
|                | Cash and cash equivalents |          | $          | 14,635,411 |  |   | $          | 6,411,306 | 
|                | Investments               |          |            |           |  |   |            | 7,452,397 | 
|                | Prepaid management fees   |          |            | 379,110    |  |   |            | 350,000   | 
|                |                           |          |            |            |  |   |            |          
|                |                           | $        | 15,014,521 |            |  | $ | 14,213,703 |          
|                |                           |          |            |            |  |   |            |          
|Members equity |                           | $        | 15,014,521 |            |  | $ | 14,213,703 |          
|                |                           |          |            |            |  |   |            |          

The effect of Summits results of operations
for the year ended July 31, 2002 on the Companys
consolidated results of operations was a net loss of
$0.8 million, comprised of $160,000 of losses in investment
companies, $850,000 of professional and management fees paid,
partially offset by $200,000 of interest income.

F-12



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5. Other Current Liabilities and
Related Matters

Other current liabilities is comprised of:

|                                      |  |          |           |      |  |   |           | 
|------------------------------------- |  | -------- | --------- | ---- |  | - | --------- | 
|                                      |  |         
|                                      |  | July 31,
|                                      |  |         
|                                      |  | 2001     |           | 2002
|                                      |  |          |           |     
|Payroll and related                   |  | $        | 467,511   |      |  | $ | 999,246   | 
|Legal accruals                        |  |          | 1,476,584 |      |  |   | 1,571,753 | 
|Unallocated shared profits            |  |          |          |      |  |   | 795,071   | 
|Settlement of litigation with founder |  |          | 4,790,000 |      |  |   |          | 
|Other                                 |  |          | 951,859   |      |  |   | 942,014   | 
|                                      |  |          |           |      |  |   |           | 
|                                      |  | $        | 7,685,954 |      |  | $ | 4,308,084 | 
|                                      |  |          |           |      |  |   |           | 

Settlement of Litigation with
Founder

The Company settled all claims and counterclaims
between the Company and its founder and former Chairman and
Chief Executive Officer. On August 10, 2001, a settlement
was reached with the founder which was approved by the court
having jurisdiction over the case on August 15, 2001. The
material terms of the settlement provided that the Company pay
the founder $4,790,000 in damages and an additional $2,400,000
to purchase 1,175,160 shares of the Companys common
stock claimed to be held by the founder. The settlement
agreement also provided that the remaining 4,720,000 shares
of the Companys common stock claimed to be held by the
founder were void. The Founder also agreed to release his claims
to the shares of the Companys common stock held by the
Company pursuant to the Accommodation Agreement and to the
Companys obligation to him under a severance agreement.
The founder also agreed that he would have no future ownership
in the Company. The loss on the settlement of $4,790,000 which
is net of the previously accrued severance payable to the
founder of $927,554, was recorded as of July 31, 2001.

Unallocated Shared Profits

On August 30, 2001, the Company entered into
a strategic alliance with Calpine Energy Services, LP
(Calpine) to sell energy to Exodus Communications
(Exodus), subsequently acquired and succeeded by
Cable & Wireless Inc. The specific nature of the
agreement provides for Calpine to sell electricity energy to
Commonwealth, who in turn will sell the electricity and provide
additional services to Exodus. The gross profit, if any, after
payment of energy delivered, ISO fees and ancillary service
costs is allocated and distributed in the following proportions:
75% to Calpine and 25% to the Company. The portion of
unallocated gross profits payable to Calpine of $795,071 was
accrued as of July 31, 2002.

6. Property and Equipment,
Net

Property and equipment, net is comprised of the
following:

|                                               |  |          |            |      |  |   |            |  
|---------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                               |  |         
|                                               |  | July 31,
|                                               |  |         
|                                               |  | 2001     |            | 2002
|                                               |  |          |            |     
|Office furniture and equipment                 |  | $        | 1,227,536  |      |  | $ | 1,325,259  |  
|Information technology equipment and systems   |  |          | 4,094,531  |      |  |   | 5,605,842  |  
|Leasehold improvements                         |  |          | 119,629    |      |  |   | 125,438    |  
|                                               |  |          |            |      |  |   |            |  
|                                               |  |          | 5,441,696  |      |  |   | 7,056,539  |  
|Less accumulated depreciation and amortization |  |          | (1,835,618 | )    |  |   | (3,144,445 | )
|                                               |  |          |            |      |  |   |            |  
|                                               |  | $        | 3,606,078  |      |  | $ | 3,912,094  |  
|                                               |  |          |            |      |  |   |            |  

F-13



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7. Restricted Cash and Intangible
Assets

Restricted Cash

Restricted cash consists of the following:

|                                                                                                                                            |  |          |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                            |  |         
|                                                                                                                                            |  | July 31,
|                                                                                                                                            |  |         
|                                                                                                                                            |  | 2001     |            | 2002
|                                                                                                                                            |  |          |            |     
|Short-term investments pledged as collateral for
    letters of credit in connection with agreements for the purchase
    of electric power |  | $        | 13,607,500 |      |  | $ | 7,774,655  | 
|Cash and cash equivalents of Summit                                                                                                         |  |          | 14,635,411 |      |  |   | 6,411,306  | 
|                                                                                                                                            |  |          |            |      |  |   |            | 
|                                                                                                                                            |  | $        | 28,242,911 |      |  | $ | 14,185,961 | 
|                                                                                                                                            |  |          |            |      |  |   |            | 

The Company is required to pledge an amount
equivalent to 45 days of energy purchases under the
contracts for the purchase of electric power. The funds in
Summit are committed to the purpose of investing in energy and
energy related companies.

Intangible Assets

The Companys intangible assets represent
the net unamortized costs of purchasing, in July 1999, the
1-800-Electric telephone number and the rights to eight internet
domain names. The initial cost of these intangible assets was
$1,050,000. Amortization expense for these intangible assets was
$52,500 in 2001 and 2002.

In addition, the Company purchased certain rights
to hire employees and contractors of their primary Information
Technology vendor Symcas-TSG. The purchase agreement provided
for a covenant prohibiting the principles of Symcas from
competing or assisting either directly or indirectly any party
in the development of any software for use in natural gas or
electricity industries that provides similar functionality to
any material module of the Companys software for a period
of 2 years. The cost of $177,500 related to this covenant
was capitalized as an intangible asset and is to be amortized
over the 2 year period.

8. Line of Credit

On June 29, 2000, the Company entered into a
three-year, $15 million line of credit. Borrowings under
the line of credit, which were collateralized by accounts
receivable, inventory and other assets. In connection with
obtaining the line of credit, the Company agreed to pay a
commitment fee of $300,000, one-half of which was paid at
closing and the remainder to be paid incrementally at each
annual renewal date. The Company also issued the lender a
warrant expiring June 29, 2003 to purchase 100,000 shares
of the Companys common stock at a price of $5.50 per
share. Interest on borrowings is based on the lenders
prime rate plus 1.75% and the average effective interest rate on
borrowings outstanding during the years ended July 31, 2001
and 2002 was 13.0% and 8.5%, respectively.

On August 10, 2001, the Company restructured
its line of credit to shorten the maturity date to June 29,
2002 and to reduce the amount of the line of credit to
$10 million. This line of credit expired on June 29,
2002.

9. Shareholders Equity

Convertible Preferred Stock

The convertible preferred stock, which was
initially issued on September 15, 1997, provides for
cumulative dividends which accrue at an annual rate of 10% and
are payable at the discretion of the Company. Cumulative unpaid
dividends were $137,970 as of July 31, 2002. Each
convertible preferred share is convertible into one share of the
Companys common stock at the shareholders discretion
and has full voting rights. In addition, preferred shareholders
are entitled to preferential liquidation rights over common
stock in

F-14



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the amount of $1.00 per share plus an amount
equal to all declared but unpaid dividends. During 2001, all
holders of the convertible preferred stock were offered the
option to rescind their initial purchase of convertible
preferred stock at the initial offering price of $1.00 per
share. Holders of 114,000 shares of convertible preferred
stock, who had also received 114,000 shares of the
Companys common stock subsequently as part of the stock
grant described in Note 1, elected to rescind their initial
purchase and the Company repurchased both their preferred and
common shares.

Common Stock

The common stock of the Company has no conversion
or preemptive shareholder rights as to any securities issued by
the Company and are not liable for assessments and further
calls. Each share of common stock is entitled to one vote on all
matters voted on by shareholders, and is entitled to equal
dividends when and as declared by the Board of Directors from
funds legally available.

The Company has sold shares of its common stock
in a series of private placements. These sales of common shares
were made by a specific group of employees within the Company
who were employed by the Company at the time of the sales for
this purpose. The sales commissions paid to these employees,
both in the form of cash and stock options granted, have been
charged against the proceeds of the common stock sales in the
accompanying consolidated statements of shareholders
equity. The amount of the charge for the stock options granted
represented the difference between the option exercise price and
the fair value of the Companys common stock at the date of
grant as determined by the Company for financial reporting
purposes. All other costs related to these employees were
charged to expense.

At July 31, 2002, the Company has reserved
the following shares of its common stock for issuance upon
conversion of the issued and outstanding shares of convertible
preferred stock, exercise of warrants and exercise of
outstanding stock options:

|                                                           |  |  |            | 
|---------------------------------------------------------- |  |  | ---------- | 
|Reserved for conversion of convertible preferred
    stock |  |  | 775,000    | 
|Reserved for exercise of warrants                          |  |  | 100,000    | 
|Reserved for exercise of outstanding stock options         |  |  | 10,490,231 | 
|                                                           |  |  |            | 
|                                                           |  |  | 11,365,231 | 
|                                                           |  |  |            | 

See Note 11 for a description of the legal status
of common shares issued to the Companys founder.

Stock Options

The Companys Board of Directors has
approved grants of options to acquire a total of
13,206,325 shares of the Companys common stock to the
Companys employees, outside directors and service
providers. As of July 31, 2002, 10,490,231 of these stock
options were outstanding. The options were vested as of their
date of grant and expire in December 2002 for the options
granted prior to December 1999 and expire in December 2004
through 2010 for the options granted after December 1999.

The Companys 1999 Equity Incentive Plan
(Plan) approved by the shareholders provides
7,000,000 shares available for grant and issuance. There are no
other equity compensation plans other than this Plan, with the
exception of one-time grants of warrants or options made by the
Companys Board of Directors from time to time. At
July 31, 2002, the Company had issued options to purchase
2,904,500 shares under the Plan, which does not include an
outstanding option to purchase 3,900,000 shares of common stock
to which the documentation is inconclusive as to whether the
options were granted pursuant to the Plan. The Company is in the
process of analyzing the documentation in order to make a
definitive determination as to whether such options were granted
pursuant to the Plan.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock option activity is set forth below:

|                         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |      | 
|------------------------ | ----------------------------------------------------------- | -------------------------------------------------- | ---------- | --------- | --------- | -------------- | ------------- | ---------- | ------------- | - | ----- | - | ----- |  |  | - | ---- | 
|                         |                                                             |                                                   
|                         |                                                             | Options Outstanding                               
|                         |                                                             |                                                   
|                         |                                                             |                                                    |            | Weighted-
|                         |                                                             |                                                    |            | Average  
|                         |                                                             |                                                    |            | Exercise  |           | Weighted-      |               | Fair Value
|                         |                                                             | Number of                                          |            | Price     |           | Average        |               | of Common 
|                         |                                                             | Shares                                             |            | Per Share |           | Exercise Price |               | Stock(A)  
|                         |                                                             |                                                    |            |           |           |                |               |           
|Balance at July 31, 1999 |                                                             |                                                    | 5,226,575  |           |           |                | $ .01 - $3.75 |            |               | $ | 0.478 |   |       |  |  |  
|Options granted:         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|                         | Exercise less than fair value of common stock(A):           |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Employee commissions for stock sales             |            |           | 21,000    |                |               |            | $1.00         |   |       | $ | 1.000 |  |  | $ | 2.50 | 
|                         |                                                             |  Other employees                                  |            |           | 12,000    |                |               |            | $1.00         |   |       | $ | 1.000 |  |  | $ | 2.50 | 
|                         | Exercise price equal to fair value of common
    stock(A):  |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Employee performance-based                       |            |           | 2,600,000 |                |               |            | $2.50         |   |       | $ | 2.500 |  |  | $ | 2.50 | 
|                         |                                                             |  Other employee                                   |            |           | 750,000   |                |               |            | $2.50         |   |       | $ | 2.500 |  |  | $ | 2.50 | 
|                         |                                                             |  Outside directors                                |            |           | 250,000   |                |               |            | $2.50         |   |       | $ | 2.500 |  |  | $ | 2.50 | 
|                         |                                                             |  Non-employee                                     |            |           | 52,500    |                |               |            | $2.50         |   |       | $ | 2.50  |  |  | $ | 2.50 | 
|                         |                                                             |  Settlement and severance of former
    president |            |           | 1,000,000 |                |               |            | $2.50         |   |       | $ | 2.50  |  |  | $ | 2.50 | 
|Options exercised        |                                                             |                                                    | (392,406   | )         |           |                | $ .01 - $1.00 |            |               | $ | 0.179 |   |       |  |  |  
|Options cancelled        |                                                             |                                                    | (269,777   | )         |           |                | $ .05 - $3.75 |            |               | $ | 1.902 |   |       |  |  |  
|                         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|Balance at July 31, 2000 |                                                             |                                                    | 9,249,892  |           |           |                | $ .01 - $3.75 |            |               | $ | 1.469 |   |       |  |  |  
|Options granted:         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|                         | Exercise price less than fair value of common
    stock(A): |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Employee performance-based                       |            |           | 300,000   |                |               |            | $2.50         |   |       | $ | 2.500 |  |  | $ | 2.75 | 
|                         | Exercise price equal to fair value of common
    stock(A):  |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Other employees                                  |            |           | 2,500,000 |                |               |            | $2.75         |   |       | $ | 2.750 |  |  | $ | 2.75 | 
|                         |                                                             |  Outside directors                                |            |           | 150,000   |                |               |            | $2.75         |   |       | $ | 2.750 |  |  | $ | 2.75 | 
|Options exercised        |                                                             |                                                    | (67,200    | )         |           |                | $ .01 - $1.00 |            |               | $ | 0.072 |   |       |  |  |  
|Options cancelled        |                                                             |                                                    | (1,849,500 | )         |           |                | $ .01 - $3.75 |            |               | $ | 1.723 |   |       |  |  |  
|                         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|Balance at July 31, 2001 |                                                             |                                                    | 10,283,192 |           |           |                | $ .01 - $3.75 |            |               | $ | 1.792 |   |       |  |  |  
|Options granted:         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|                         | Exercise price less than fair value of common
    stock(A): |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Other employees                                  |            |           | 4,500     |                |               |            | $1.00 - $3.75 |   |       | $ | 2.222 |  |  | $ | 3.13 | 
|                         | Exercise price equal to fair value of common
    stock(A):  |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |   |     
|                         |                                                             |  Employee performance-based                       |            |           | 300,000   |                |               |            | $2.50         |   |       | $ | 2.500 |  |  | $ | 2.38 | 
|Options exercised        |                                                             |                                                    | (51,961    | )         |           |                | $ .01 - $1.00 |            |               | $ | 0.503 |   |       |  |  |  
|Options cancelled        |                                                             |                                                    | (45,500    | )         |           |                | $ .05 - $3.75 |            |               | $ | 1.042 |   |       |  |  |  
|                         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  
|Balance at July 31, 2002 |                                                             |                                                    | 10,490,231 |           |           |                | $ .01 - $3.75 |            |               | $ | 1.822 |   |       |  |  |  
|                         |                                                             |                                                    |            |           |           |                |               |            |               |   |       |   |       |  |  |  






|    |                  
|--- | -----------------
|(A) | At date of grant.

F-16



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average remaining contractual life
and weighted average exercise price of options outstanding and
of options exercisable as of July 31, 2002 were as follows:

|             |  |             |              |              |  |             |      |                |  |  |           |  |  |   |      | 
|------------ |  | ----------- | ------------ | ------------ |  | ----------- | ---- | -------------- |  |  | --------- |  |  | - | ---- | 
|             |  |             |              | Average      |  |             |      |               
|Range of     |  | Number of   |              | Remaining    |  |             |      | Weighted      
|Exercise     |  | Shares      |              | Contractual  |  | Shares      |      | Average       
|Prices       |  | Outstanding |              | Life (Years) |  | Exercisable |      | Exercise Price
|             |  |             |              |              |  |             |      |               
|$ .01 - $ .  |  |             | 50 3,083,056 |              |  |             | .63  |                |  |  | 3,083,056 |  |  | $ | 0.11 | 
|$1.00        |  |             | 464,675      |              |  |             | .45  |                |  |  | 464,675   |  |  | $ | 1.00 | 
|$2.50 - $3.7 |  |             | 5 6,942,500  |              |  |             | 6.00 |                |  |  | 4,442,501 |  |  | $ | 2.64 | 
|             |  |             |              |              |  |             |      |                |  |  |           |  |  |   |      | 
|Total        |  |             | 10,490,231   |              |  |             | 4.17 |                |  |  | 7,990,232 |  |  | $ | 1.56 | 
|             |  |             |              |              |  |             |      |                |  |  |           |  |  |   |      | 

Stock Options Granted to Companys
Chairman and Chief Executive Officer and Related Stock-based
Compensation

On January 1, 2000, as part of an employment
agreement with a term expiring January 31, 2005, the
Company granted 3,600,000 stock options to the
Companys Chairman and Chief Executive Officer which have
an exercise price of $2.50 per share and expire on
January 1, 2010. As of January 1, 2000, 300,000 of the
options were vested and 100,000 options vest annually on
January 1 of each year from 2001 through 2004. The
remaining 2,900,000 options are performance-based and vest
upon the occurrence of certain events. When granted, the terms
for 2,000,000 of these performance-based options provided for
the vesting upon completion of a successful Initial Public
Offering by the Company. Subsequently, on November 1, 2000,
the terms of the vesting of these 2,000,000 stock options
were modified to the performance criteria indicated with an
(A) below.

Performance criteria which were met during the
year ended July 31, 2001, the number of related stock
options vested and not earned, and stock-based compensation
recognized during the year ended July 31, 2001 are as
follows:

|                                                                                                        |  |                   |           |               |  |             |         |  |  |   |         | 
|------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ------------- |  | ----------- | ------- |  |  | - | ------- | 
|                                                                                                        |  |                   |           | Stock-based  
|                                                                                                        |  | Number of Options |           | Compensation 
|                                                                                                        |  |                   |           | Recognized in
|                                                                                                        |  | Vested            |           | Not Earned    |  | Fiscal 2001
|                                                                                                        |  |                   |           |               |  |            
|Completion of the audit of the Companys
    July 31, 2000 consolidated financial statements(A)         |  |                   | 500,000   |               |  |             |        |  |  | $ | 125,000 | 
|Settlement of the California Department of
    Corporations investigation(A)                            |  |                   | 250,000   |               |  |             |        |  |  |   | 62,500  | 
|Settlement of the California Public Utilities
    Commission investigation(A)                           |  |                   | 500,000   |               |  |             |        |  |  |   | 125,000 | 
|Exceeding the Companys business plans for
    the calendar year ended December 31, 2000 by 10% or more |  |                   | 100,000   |               |  |             | 200,000 |  |  |   | 25,000  | 
|                                                                                                        |  |                   |           |               |  |             |         |  |  |   |         | 
|                                                                                                        |  |                   | 1,350,000 |               |  |             | 200,000 |  |  | $ | 337,500 | 
|                                                                                                        |  |                   |           |               |  |             |         |  |  |   |         | 

F-17



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Performance criteria which were not met as of
July 31, 2001, the number of related stock options which
vest upon meeting the performance criteria and stock-based
compensation recognized during the year ended July 31, 2001
and reversed during the year ended July 31, 2002 are as
follows:

|                                                                                                         |  |                  |           |               |  |              |         |  |  |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ------------- |  | ------------ | ------- |  |  | - | -------- | -
|                                                                                                         |  |                  |           | Stock-based   |  | Stock-based 
|                                                                                                         |  |                  |           | Compensation  |  | Compensation
|                                                                                                         |  | Number of        |           | Recognized in |  | Reversed in 
|                                                                                                         |  | Unvested Options |           | Fiscal 2001   |  | Fiscal 2002 
|                                                                                                         |  |                  |           |               |  |             
|Completion of liquidity event, as defined in
    related agreement(A)                                    |  |                  | 750,000   |               |  | $            | 412,500 |  |  | $ | (412,500 | )
|Completion of a successful initial public offering                                                       |  |                  | 300,000   |               |  |              | 165,000 |  |  |   | (165,000 | )
|Exceeding the Companys business plans for
    the calendar year ending December 31, 2001 by 10% or more |  |                  | 300,000   |               |  |              | 165,000 |  |  |   | (165,000 | )
|                                                                                                         |  |                  |           |               |  |              |         |  |  |   |          |  
|                                                                                                         |  |                  | 1,350,000 |               |  | $            | 742,500 |  |  | $ | (742,500 | )
|                                                                                                         |  |                  |           |               |  |              |         |  |  |   |          |  

Because there is no established trading market in
shares of the Companys common stock, in each of fiscal
2002 and 2001, the Board of Directors valued our shares for
financial reporting purposes at $1.86 per share and $3.05 per
share, respectively. The stock-based compensation charges for
the unvested portion of these performance-based options in
fiscal 2001 were reversed in fiscal 2002.

If during the term of the employment agreement,
the Company makes a public offering of its shares or if the
Company supports any other form of liquidity event, then all
stock options related to this employment agreement, whether
earned or not, shall be considered vested prior to such event.

The employment agreement also provides that in
the event the Company terminates the agreement early or a change
in control of the Company occurs, the Companys Chairman
and Chief Executive Officer has the right to require the Company
to repurchase all his capital stock and stock options of the
Company, then earned or to be earned, at a repurchase price
equal to two times the then price of value of the Companys
common stock.

During the year ended July 31, 2002, the
Company granted 300,000 stock options to its Chairman and Chief
Executive Officer. As part of Mr. Carters employment
agreement, the stock option grant was for exceeding the
Companys financial objectives as set forth in the business
plan for 2001. These stock options expire on January 1,
2010. All other performance criteria which were not met as of
July 31, 2001 in the table above have also not been met as
of July 31, 2002.

Shareholder Rights Plan

In January 2002, the Company adopted a
Stockholder Rights Plan that is triggered whenever an Acquiring
Person accumulates 15% or more of the Companys stock or if
an Adverse Person acquires 10% or more of the Companys
stock and intends to implement measures which the Board of
Directors believes to be adverse to the Companys
interests. An Acquiring Person is a person or group, together
with the persons or groups affiliates, that has
acquired, or obtained the right to acquire, beneficial ownership
of 15% or more of the outstanding shares of the Companys
Common Stock. An Adverse person is a person, alone or with
affiliates, that has become the beneficial owner of more than
10% of the outstanding shares of Common Stock and (A) such
beneficial ownership is intended to cause the Company to
repurchase the Common Stock owned by such person or pressure the
Company to take action or enter into transactions intended to
provide such person with short-term financial gain under
circumstances where the Companys Board of Directors
determine that the Companys best long-term interests would
not be served by taking such action or entering into such
transactions or (B) such beneficial ownership is causing or
reasonably likely to cause a material adverse impact on the
Companys business or prospects, provided, however, that
the Companys Board of Directors does not have the right to
declare a person to be an Adverse Person if such person has
reported or is

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

required to report its ownership of the
Companys Common Stock on Schedule 13G under
Securities Exchange Act of 1934, as amended, or on
Schedule 13D if that schedule does not state any intention
to, or reserve the right to, control or influence the Company or
engage in certain other actions, so long as such person neither
reports nor is required to report such ownership. Once the
rights vest, shareholders other than the Acquiring Person or
Adverse person will be able to purchase at a predetermined price
two shares of Common Stock for the price of one share of Common
Stock.

Other Stock-Based Compensation

In connection with the granting of stock options
to certain employees and the Companys outside directors,
the amount of related compensation to be recognized was
determined by the Company to be the difference between the
option exercise price and the fair value of the Companys
common stock at the date of grant as determined by the
Companys management for financial reporting purposes.
Inasmuch as all options granted by the Company through
July 31, 2000 were fully vested as of their date of grant,
the related compensation was expensed as of the date of grant,
except for the compensation related to options granted as
commissions to employees for the sales of the Companys
common stock which was charged against the proceeds of the
common stock sales.

The Companys founder and, at the time, its
Chairman and Chief Executive Officer, gave a total of
123,500 shares of the Companys common stock owned by
him to an officer of the Company in 2000. In accordance with
Staff Accounting Bulletin No. 79, Accounting for
Expenses or Liabilities Paid by Principal Stockholder,the
estimated fair value of such shares of $423,500 was included in
stock-based compensation charges in 2000.

Stock-based compensation charges relate to the
following:

|                                                                                                               |  |                     |         |      |  |      |           |  |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | --------- |  |  | - | -------- | -
|                                                                                                               |  |                    
|                                                                                                               |  | Year Ended July 31,
|                                                                                                               |  |                    
|                                                                                                               |  | 2000                |         | 2001 |  | 2002
|                                                                                                               |  |                     |         |      |  |     
|Stock options granted with fair value of
    Companys common stock in excess of exercise price of
    options |  | $                   | 53,277  |      |  | $    |          |  |  | $ |         |  
|Performance-based stock options                                                                                |  |                     |        |      |  |      | 1,080,000 |  |  |   | (742,500 | )
|Gift of shares from founder to officers                                                                        |  |                     | 423,500 |      |  |      |          |  |  |   |         |  
|                                                                                                               |  |                     |         |      |  |      |           |  |  |   |          |  
|                                                                                                               |  |                     | 476,777 |      |  |      | 1,080,000 |  |  |   | (742,500 | )
|Less amount related to commissions on sales of
    the Companys common stock                                  |  |                     | (31,500 | )    |  |      |          |  |  |   |         |  
|                                                                                                               |  |                     |         |      |  |      |           |  |  |   |          |  
|                                                                                                               |  | $                   | 445,277 |      |  | $    | 1,080,000 |  |  | $ | (742,500 | )
|                                                                                                               |  |                     |         |      |  |      |           |  |  |   |          |  

Warrants

As part of a $15 million credit line
agreement dated June 29, 2000, the lender received warrants
to purchase 100,000 shares of common stock. The warrants
are exercisable at $5.50 per share and expire upon the maturity
of the loan agreement on June 29, 2003. The fair value of
the warrants was nominal at their date of issuance.

Pro Forma Disclosures of the Effect of
Stock-Based Compensation Plans

Pro forma information regarding results of
operations and net income (loss) per common share is
required by SFAS No. 123 for stock-based awards to
employees, which are comprised of stock options for the purchase
of the Companys common stock, as if the Company had
accounted for such awards using a valuation method permitted
under SFAS No. 123. In determining such pro forma
information, stock options to employees and outside directors
were valued using the minimum value method assuming no expected
dividends, an average expected life through the option
expiration dates, and a weighted-average risk-free

F-19



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest rate of 6.0%. The minimum value method
does not consider stock price volatility. For pro forma
purposes, the estimated minimum value of the Companys
stock-based awards to employees and outside directors were
expensed at the date of grant of the stock options for options
that were fully vested at date of grant and was expensed over
the vesting period of stock options that vest over a period of
time. The results of applying Statement No. 123 to the
Companys stock option grants to employees and outside
directors on the assumptions described above approximate the
Companys reported amounts of net income (loss) and
net income (loss) per common share for each year.

10. Income Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Net deferred income taxes consist
of the following:

|                          |                                  |          |            |            |   |   |           |           |  
|------------------------- | -------------------------------- | -------- | ---------- | ---------- | - | - | --------- | --------- | -
|                          |                                  |         
|                          |                                  | July 31,
|                          |                                  |         
|                          |                                  | 2001     |            | 2002      
|                          |                                  |          |            |           
|Deferred tax assets:      |                                  |          |            |            |   |   |           |          
|                          | Net operating loss carryforwards |          | $          | 1,021,000  |   |   | $         | 998,000   |  
|                          | Stock options                    |          |            | 2,756,000  |   |   |           | 2,429,000 |  
|                          | Allowance for doubtful accounts  |          |            | 601,000    |   |   |           | 410,000   |  
|                          | Reserves and accruals            |          |            | 4,421,000  |   |   |           | 1,693,000 |  
|                          | State income taxes               |          |            | 1,586,000  |   |   |           |          |  
|                          | Other                            |          |            |           |   |   |           | 2,000     |  
|                          |                                  |          |            |            |   |   |           |          
|                          |                                  |          | 10,385,000 |            |   |   | 5,534,000 |          
|                          | Less valuation allowance         |          |            | (1,021,000 | ) |   |           | (998,000  | )
|                          |                                  |          |            |            |   |   |           |          
|                          |                                  |          | 9,364,000  |            |   |   | 4,532,000 |          
|Deferred tax liabilities: |                                  |          |            |            |   |   |           |          
|                          | Depreciation and amortization    |          |            | (85,000    | ) |   |           | (311,000  | )
|                          | State income taxes               |          |            |           |   |   |           | (254,000  | )
|Net deferred tax asset    |                                  | $        | 9,279,000  |            |   | $ | 3,969,000 |          
|                          |                                  |          |            |            |   |   |           |          

For the year ended July 31, 2002, the
Companys provision for income taxes was comprised of the
following:

|        |  |         |            |          |  |       |           |  |  |   |           | 
|------- |  | ------- | ---------- | -------- |  | ----- | --------- |  |  | - | --------- | 
|        |  | Current |            | Deferred |  | Total
|        |  |         |            |          |  |      
|Federal |  | $       | (1,768,000 | )        |  | $     | 4,610,000 |  |  | $ | 2,842,000 | 
|State   |  |         | 583,000    |          |  |       | 700,000   |  |  |   | 1,283,000 | 
|        |  |         |            |          |  |       |           |  |  |   |           | 
|        |  | $       | (1,185,000 | )        |  | $     | 5,310,000 |  |  | $ | 4,125,000 | 
|        |  |         |            |          |  |       |           |  |  |   |           | 

For the year ended July 31, 2001, the
Companys provision for income taxes was comprised of the
following:

|        |  |         |            |          |  |       |            |   |  |   |            | 
|------- |  | ------- | ---------- | -------- |  | ----- | ---------- | - |  | - | ---------- | 
|        |  | Current |            | Deferred |  | Total
|        |  |         |            |          |  |      
|Federal |  | $       | 24,953,000 |          |  | $     | (7,728,000 | ) |  | $ | 17,225,000 | 
|State   |  |         | 6,178,000  |          |  |       | (1,551,000 | ) |  |   | 4,627,000  | 
|        |  |         |            |          |  |       |            |   |  |   |            | 
|        |  | $       | 31,131,000 |          |  | $     | (9,279,000 | ) |  | $ | 21,852,000 | 
|        |  |         |            |          |  |       |            |   |  |   |            | 

There was no provision for income taxes for the
year ended July 31, 2000.

F-20



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the federal statutory income
tax rate to the Companys provision for income taxes as a
percentage of income (loss) before income taxes is as follows:

|                                           |  |                     |       |      |  |      |       |   |  |  |      |  
|------------------------------------------ |  | ------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                                           |  |                    
|                                           |  | Year Ended July 31,
|                                           |  |                    
|                                           |  | 2000                |       | 2001 |  | 2002
|                                           |  |                     |       |      |  |     
|Federal statutory income tax rate          |  |                     | 34.0  | %    |  |      | 35.0  | % |  |  | 35.0 | %
|Valuation allowance recorded due to losses |  |                     | (34.0 | )%   |  |      |      |   |  |  |     |  
|Reversal of federal valuation allowance    |  |                     |      |      |  |      | (13.1 | ) |  |  |     |  
|State income taxes, net of federal benefit |  |                     |      |      |  |      | 3.6   |   |  |  | 9.0  |  
|Other                                      |  |                     |      |      |  |      | 1.1   |   |  |  | 0.4  |  
|                                           |  |                     |       |      |  |      |       |   |  |  |      |  
|Income tax rate per financial statements   |  |                     |      | %    |  |      | 26.6  | % |  |  | 44.4 | %
|                                           |  |                     |       |      |  |      |       |   |  |  |      |  

As of July 31, 2000, the valuation allowance
increased $2,840,000 and was recorded to reflect the uncertainty
of realization of the deferred tax asset. During 2001, the
valuation allowance increased by $362,000 for a change in the
federal income tax rate applied to the Companys temporary
differences and decreased by $13,595,000 for the release of the
valuation allowance due to the Companys profitable
operations during the year ended July 31, 2001. During
2002, the valuation allowance decreased by $23,000 and reflected
the uncertainty of the deferred tax asset related to the net
operating loss carryforward, the use of which is limited as
described in the following paragraph.

At July 31, 2002, the Company had net
operating loss carryforwards of approximately $2,330,000 and
$2,071,000 for federal and state income tax purposes,
respectively, that begin to expire in years 2018 and 2006,
respectively. The timing of the utilization of federal net
operating loss carryforwards is subject to an annual limitation
due to the change of ownership provision of the Tax
Reform Act of 1986. As a result of the annual limitation, a
portion of these carryforwards may expire before ultimately
becoming available to reduce future income tax liabilities.

On September 11, 2002, the Governor of
California signed into law new tax legislation that suspends the
use of net operating loss carryforwards into tax years beginning
on or after January 1, 2002 and 2003. Should the Company
have taxable income for the year ending July 31, 2003, it
may not look to California net operating losses generated in
prior years to offset taxable income. This suspension will not
apply to tax years beginning on or after 2004.

11. Commitments and
Contingencies

Commitments

Purchase Commitments

See Note 2 for a description of commitments
to purchase electric power.

Leasing Arrangements

The Company is obligated under long-term leases
for the rental of real estate and office equipment. The Company
conducts its main operations from facilities that are leased
under a five-year non-cancelable operating lease expiring on
April 24, 2004. The Company also leases two other locations
for its sales staff. The leases for certain locations contain
escalation clauses relating to increases to real property taxes
and maintenance costs.

F-21



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a schedule of the future minimum
rental payments required under the above operating leases as of
July 31, 2002:

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year ending July 31, |  |  
|                     |  |  
|2003                 |  | $ | 745,789   | 
|2004                 |  |   | 452,135   | 
|2005                 |  |   | 100,672   | 
|                     |  |   |           | 
|                     |  | $ | 1,298,596 | 
|                     |  |   |           | 

Rent expense for operating leases amounted to
$786,300, $697,498, and $703,935 in 2000, 2001 and 2002,
respectively.

Employment contracts

The Company has entered into employment contracts
with four of its executives which provide for aggregate base
salaries as follows during the term of the contracts:

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year ending July 31, |  |  
|                     |  |  
|2003                 |  | $ | 1,172,917 | 
|2004                 |  |   | 1,346,250 | 
|2005                 |  |   | 627,083   | 

Two of the contracts provide that in the event of
a change in control as defined in the contracts, the executive
is to receive an amount equal to eight times the annual base
salary plus the amount of income taxes payable under Internal
Revenue Service (IRS) Code § 280G whereas the
other two contracts provide that, in the event of a change in
control as defined in the contracts, the executive is to receive
an amount equal to four times the annual base salary plus the
amount of income taxes payable under IRS Code § 280G.

Three of the agreements provide that if the
executives employment is terminated for other than death,
disability, material breach of agreement or voluntary
termination, the executive will be entitled to receive one and
one-half times his then current base salary. The other agreement
provides that the Company may only terminate the
executives employment for death, disability or cause. In
the event of death or disability, the executive is entitled to
receive his then current base salary and bonus for a period of
one year or until the expiration of the term of the agreement,
whichever comes first.

Contingencies

California Department of Corporations
Investigation

The California Department of Corporations
(DOC) initiated an investigation of the Company in
1999 regarding the manner and extent of the offers and sales of
the Companys stock and whether or not said offers and
sales conformed to the requirements of the California Securities
laws or allowable exemptions to registration, and whether the
Companys employees involved in such sales should have been
licensed. Shortly after the initial inquiry, there was a change
in management of the Company and all such sales activities
ceased, and the employment of all employees involved in such
sales activities was terminated. The Company had entered into
negotiations with the DOC to resolve this investigation and
reached mutually agreeable terms of settlement, which include a
payment of $150,000 by the Company to the DOC, which the Company
accrued as of July 31, 2000, and an agreement to cooperate
with the DOC in any further investigations which may arise
related to these matters. In February 2001, upon the payment of
$150,000 by the Company to the DOC, this investigation was
closed.

F-22



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

California Public Utilities Commission
Investigation

In 1999, the Consumer Services Division of the
CPUC ordered an investigation relating to non-disclosure by the
Companys former Chairman and Chief Executive Officer of
cease and desist actions taken against him prior to his
association with the Company and to a supplemental billing by
the Company covering a six-month period during which the Company
had under-billed its customers. The Company negotiated a
settlement of all issues with the CPUC and both parties signed a
settlement agreement on January 7, 2000. The terms included
a payment of $100,000 by the Company to the CPUC and
reimbursement by the Company of the amount of the supplemental
billing to its customers through refunding amounts previously
paid or issuing credits for unpaid amounts, and that the
Companys Chief Executive Officer from July 1, 1997
through December 31, 1998 would not have any responsibility
for the business practices, management or operation of the
Company in California for a period of at least two years after
the effective date of the settlement agreement. The Company
accrued for the financial impact of the January 7, 2000
settlement agreement during the year ended July 31, 2000.
In July 2001, the CPUC investigation was ordered settled by the
CPUC. The settlement provided for among other things, the
Company to pay a fine of $219,500 and audit costs of $37,000
plus reimbursement of the supplemental billings to its customers
(which reimbursement had taken place in prior periods).

Litigation with Companys
Founder

The Companys corporate records state
8,000,000 shares of the Companys common stock were issued
to its founder on August 15, 1997 in exchange for $140,000
in the form of cash payments totaling $90,000 and personal
property having a value of $50,000; however, the Company was
unable to verify that all of this consideration was actually
paid to the Company. Accordingly, on February 23, 2001, the
Companys Board of Directors instructed the Companys
management to reflect on the corporate stock records that only a
portion of the shares issued the founder be recognized as
validly issued.

Previously, at the time the Company entered into
the severance agreement with the founder as more fully described
in Note 5, the founder and the Company entered into an
Accommodation Agreement pursuant to which 1,200,000 of the
founders common shares were placed into an escrow account
for a period of three years from which the Company could use
shares to settle claims of former employees of the Company. At
the end of the three year period, any shares remaining in the
escrow account were to be released to the founder.

Subsequent to the actions described above, claims
and counterclaims were filed by the Company and the founder. On
August 10, 2001, a settlement was reached with the founder
which was approved by the court having jurisdiction over the
case on August 15, 2001. The material terms of the
settlement provided that the Company pay the founder $4,790,000
in damages and an additional $2,400,000 to purchase
1,175,160 shares of the Companys common stock claimed
to be held by the founder. The settlement agreement also
provided that the remaining 4,720,000 shares of the
Companys common stock claimed to be held by the founder
were void. The founder agreed to release his claims to
828,500 shares of the Companys common stock held in
the escrow account pursuant to the Accommodation Agreement and
to the Companys obligation to him under the severance
agreement described in Note 5. The founder also agreed that he
would have no future ownership in the Company. The loss on the
settlement of $4,790,000, which is net of the previously accrued
severance payable to the founder of $927,554, was recorded as of
July 31, 2001 and is included in general and administrative
expenses for the year then ended.

Litigation

On February 23, 2001, thirteen former
employees filed a lawsuit against us in the Superior Court of
the State of California in the County of Orange Superior Court
(case number 01CC02611). The complaint was filed by David James
and twelve other former employees. The plaintiffs
complaint alleges claims for (1) unfair business practices,
(2) breach of contract, and (3) fraud and intentional
deceit. The plaintiffs allege, in summary, that they were
formerly employed by the Company and are owed commissions and
stock

F-23



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

options from the Company under their alleged
employment agreements and based on alleged representations that
were made to them in the course of their employment. The Company
filed a cross-complaint against the original plaintiffs
asserting claims for (1) breach of contract;
(2) unfair business practices; (3) misappropriation of
trade secrets; (4) intentional interference with
prospective economic advantage; (5) negligent interference
with prospective economic advantage; (6) conversion;
(7) slander; (8) prohibitory injunctive relief;
(9) mandatory injunctive relief; and (10) declaratory
relief. These claims are based upon written confidentiality
agreements signed by the majority of the plaintiffs which the
Company believes have been breached by the plaintiffs who are
alleged to be wrongfully soliciting the Companys investors
and clients utilizing proprietary company materials and
information. In addition, the Company filed a first amended
cross-complaint that asserts additional cross-claims against
plaintiff David James for rescission and restitution, fraud,
money had and received, unjust enrichment and declaratory
relief. In summary, the new claims asserted against
Mr. James allege that Mr. James alleged
employment contract and stock options were void or voidable and
subject to rescission based on misrepresentations made to the
Company by Mr. James. The plaintiffs are seeking, among
other relief, damages in the amount of up to $10 million,
plus costs and attorney fees. Commonwealth believes that it has
satisfied its contractual obligations with respect to the
plaintiffs and that there is no factual basis for the
plaintiffs claim for damages. Our cross-complaint seeks
injunctive relief and damages. Commonwealth is vigorously
defending this lawsuit.

From time to time, the Company is involved in
legal proceedings, claims, and litigation arising in the
ordinary course of business. Management does not believe the
outcome of these matters will have a material effect on the
Companys consolidated financial condition or its
consolidated results of operations.

12. Related Party Transactions

On November 9, 2001, the Company entered into an
agreement with Technical Service Group, Inc., doing business as
Symcas-TSG (Symcas) for the right to hire employees
of, or independent contractors to, Symcas. Additionally, as part
of the same agreement, Symcas transferred interest in and to all
of the software that Symcas has developed for the Company. The
agreement prohibits Symcas and its affiliates from developing
any computer software for use in the natural gas or electricity
industries that are similar to this software for a period of two
years. Symcas previously performed substantially all of the
Companys software development information technology
support and maintenance, and procurement of hardware and
software. The Company continues to utilize Symcas on a limited
basis for its IT maintenance. In the fiscal year ended
July 31, 2002, the Company paid to Symcas a total of
$2,090,929. On December 15, 2001, after the close of the
agreement with Symcas, the Company hired Linda Guckert, an
employee and officer of Symcas, to be the Companys Vice
President of Information Technology.

F-24



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13. Quarterly Financial Information
(Unaudited)

|                                                                    |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |     | 
|------------------------------------------------------------------- | ------- | ------------------------------------------- | -------- | ---------- | - | -------- | -------- | ------- |  | - | -------- | --- |  | - | -------- | --- | 
|                                                                    |         |                                            
|                                                                    |         | Three Months Ended                         
|                                                                    |         |                                            
|                                                                    |         | October 31                                  |          | January 31 |   | April 30 |          | July 31
|                                                                    |         |                                             |          |            |   |          |          |        
|                                                                    |         |                                            
|                                                                    |         | (In thousands except per share information)
|Year ended July 31, 2001:                                           |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |    
|Net revenue                                                         |         | $                                           | 43,106.0 |            |   | $        | 52,659.0 |         |  | $ | 48,272.6 |     |  | $ | 39,226.1 |    
|Gross margin                                                        |         |                                             | 18,833.0 |            |   |          | 41,153.9 |         |  |   | 28,431.2 |     |  |   | 18,230.0 |    
|Net income (loss)                                                   |         |                                             | 11,759.2 |            |   |          | 27,865.1 |         |  |   | 14,509.6 |     |  |   | 6,395.5  |    
|Net income (loss) per common share
    (restated)(A):               |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |    
|                                                                    | Basic   |                                             |          | .40        |   |          |          | .95     |  |   |          | .49 |  |   |          | .22 | 
|                                                                    | Diluted |                                             |          | .34        |   |          |          | .81     |  |   |          | .43 |  |   |          | .19 | 
|Net income (loss) per common share (as
    originally reported)(A): |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |    
|                                                                    | Basic   |                                             |          | .35        |   |          |          | .86     |  |   |          | .51 |  |   |          |     | 
|                                                                    | Diluted |                                             |          | .30        |   |          |          | .75     |  |   |          | .44 |  |   |          |     | 
|Year ended July 31, 2002:                                           |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |    
|Net revenue                                                         |         | $                                           | 28,160.8 |            |   | $        | 26,216.6 |         |  | $ | 28,064.9 |     |  | $ | 35,326.0 |    
|Gross margin                                                        |         |                                             | 3,358.8  |            |   |          | 7,949.4  |         |  |   | 8,132.2  |     |  |   | 12,130.3 |    
|Net income                                                          |         |                                             | (666.6   | )          |   |          | 1,103.1  |         |  |   | 1,382.4  |     |  |   | 3,345.5  |    
|Net income per common share:                                        |         |                                             |          |            |   |          |          |         |  |   |          |     |  |   |          |    
|                                                                    | Basic   |                                             |          | (.02       | ) |          |          | .04     |  |   |          | .05 |  |   |          | .12 | 
|                                                                    | Diluted |                                             |          | (.02       | ) |          |          | .03     |  |   |          | .04 |  |   |          | .11 | 






|    |  |                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) |  | See Note 1, Adjustment of Number of
    Outstanding Shares and Restatement of Per Share
    Informationfor a description of the basis of the
    restatement of the per share information for the quarters ended
    October 31, January 31, and April 30, 2001.

F-25



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##### Table of Contents



SCHEDULE II

COMMONWEALTH ENERGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS


(in thousands)


|                          |                         |           |   |            |  |            |   |               |  |  |   |           |  |  |   |           | 
|------------------------- | ----------------------- | --------- | - | ---------- |  | ---------- | - | ------------- |  |  | - | --------- |  |  | - | --------- | 
|                          |                         | Column A  |   | Column B   |  | Column C   |   | Column D     
|                          |                         |           |   |            |  |            |   |              
|                          |                         |           |   | Charged to |  |            |   |              
|                          |                         |           |   | Costs and  |  |            |   |              
|                          |                         |           |   | Expenses   |  |            |   |              
|                          |                         | Beginning |   | or Sales   |  |            |   | Balance at   
|                          |                         | of Period |   | Allowances |  | Deductions |   | End of Period
|                          |                         |           |   |            |  |            |   |              
|Year ended July 31, 2002: |                         |           |   |            |  |            |   |               |  |  |   |           |  |  |   |          
|                          | Allowance for Bad Debts |           | $ | 3,946,388  |  |            | $ | 2,313,451     |  |  | $ | 3,721,993 |  |  | $ | 2,537,846 | 
|Year ended July 31, 2001: |                         |           |   |            |  |            |   |               |  |  |   |           |  |  |   |          
|                          | Allowance for Bad Debts |           |   | 1,458,984  |  |            |   | 4,666,126     |  |  |   | 2,178,722 |  |  |   | 3,946,388 | 
|Year ended July 31, 2000: |                         |           |   |            |  |            |   |               |  |  |   |           |  |  |   |          
|                          | Allowance for Bad Debts |           |   | 612,909    |  |            |   | 846,075       |  |  |   |          |  |  |   | 1,458,984 | 
|Year ended July 31, 1999: |                         |           |   |            |  |            |   |               |  |  |   |           |  |  |   |          
|                          | Allowance for Bad Debts |           |   |           |  |            |   | 612,909       |  |  |   |          |  |  |   | 612,909   | 

F-26



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##### Table of Contents



EXHIBIT INDEX

|                                                                                 |       |                  |  |                                                                                                                                                                                                                      
|-------------------------------------------------------------------------------- | ----- | ---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                                                          |       |                 
|Number                                                                           |       | Title of Exhibit
|                                                                                 |       |                 
|                                                                                 | 3.1   |                  |  | Articles of Incorporation of Commonwealth Energy
    Corporation dated August 14, 1997 and filed with the
    Secretary of State of the State of California on August 15,
    1997(1)                                
|                                                                                 | 3.2   |                  |  | Certificate of Amendment of Articles of
    Incorporation of Commonwealth Energy Corporation dated
    December 31, 1998 and filed with the Secretary of State of
    the State of California on February 19, 1999(1)
|                                                                                 | 3.3   |                  |  | Certificate of Determination of Commonwealth
    Energy Corporation dated September 22, 1997 and filed with
    the Secretary of State of California on March 13, 1998(2)                                            
|                                                                                 | 3.4   |                  |  | Bylaws of Commonwealth Energy Corporation, as
    amended                                                                                                                                                            
|Material Contracts Relating to Management
    Compensation Plans or Arrangements
|                                                                                 | 10.1  |                  |  | Severance Agreement dated June 1, 2000,
    among Commonwealth Energy Corporation, electricAmerica, Inc. and
    Frederick M. Bloom(1)                                                                               
|                                                                                 | 10.2  |                  |  | Employment Agreement dated January 1, 2000,
    between Commonwealth Energy Corporation and Ian Carter, as
    modified by an Addendum to Employment Agreement dated as of
    November 1, 2000(1)                   
|                                                                                 | 10.3  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and Richard Paulsen(2)                                                                                                      
|                                                                                 | 10.4  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and James Oliver(2)                                                                                                         
|                                                                                 | 10.5  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and John Barthrop(2)                                                                                                        
|                                                                                 | 10.6  |                  |  | Commonwealth Energy Corporation 1999 Equity
    Incentive Plan for Employees(1)                                                                                                                                      
|                                                                                 | 10.7  |                  |  | Change of Control Agreement dated
    November 1, 2000 between Commonwealth Energy Corporation
    and Scott A. Petterson.                                                                                           
|Other Material Contracts                                                        
|                                                                                 | 10.8  |                  |  | Power Purchase Agreement dated July 27,
    1999, between Commonwealth Energy Corporation and Calpine Power
    Services Company(3)                                                                                  
|                                                                                 | 10.9  |                  |  | First Amendment to Power Purchase Agreement dated
    as of July 29, 1999(3)                                                                                                                                         
|                                                                                 | 10.10 |                  |  | Second Amendment to Power Purchase Agreement
    dated as of May 28, 1999, between Commonwealth Energy
    Corporation and Calpine Power Services Company(4)                                                         
|                                                                                 | 10.11 |                  |  | Loan and Security Agreement dated June 28,
    2000 between Commonwealth Energy Corporation, electricAmerica,
    Inc. and electric.com, Inc. and Coast Business Credit(1)                                           
|                                                                                 | 10.12 |                  |  | Warrant dated June 28, 2000, issued by
    Commonwealth Energy Corporation in favor of Coast Business
    Credit(1)                                                                                                  
|                                                                                 | 10.13 |                  |  | Limited Liability Company Agreement of Summit
    Energy Ventures, LLC, as amended by the First Amendment to the
    Limited Liability Company Agreement of Summit Energy Ventures,
    LLC, dated August 2001(2)    
|                                                                                 | 10.14 |                  |  | PECO Energy Company Confirmation Agreement dated
    January 30, 2001(1)                                                                                                                                             
|                                                                                 | 10.15 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated May 13, 2001(1)                                                                                                                                      
|                                                                                 | 10.16 |                  |  | Standard Office Lease  Gross dated
    July 1, 1997, for property located at 15941 Redhill Avenue,
    Suite 200, Tustin, California, together with Rules and
    Regulations and Work Letter attached thereto(1)   
|                                                                                 | 10.17 |                  |  | Standard Sublease Dated November 12, 1998,
    Between Kurt Busch And Commonwealth Energy Corporation, For
    Property Located At 15991 Redhill Avenue, Suite 200,
    Tustin, California(1)                        



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##### Table of Contents



|        |       |                  |  |                                                                                                                                                                                                  
|------- | ----- | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                 
|Number  |       | Title of Exhibit
|        |       |                 
|        | 10.18 |                  |  | Amendment Number 6 to lease by and between
    Warner/ Redhill Associates and Frederick Michael Bloom(2)                                                                                         
|        | 10.19 |                  |  | Commonwealth vs. Bloom Settlement Agreement Terms
    dated August 10, 2001(5)                                                                                                                   
|        | 10.20 |                  |  | Second Amendment to the Limited Liability Company
    Agreement of Summit Energy Ventures, LLC(4)                                                                                                
|        | 10.21 |                  |  | Commonwealth Energy Corporation Summary of Rights
    to Purchase Preferred Stock(4)                                                                                                             
|        | 10.22 |                  |  | Confirmation Letter dated May 23, 2002
    between Commonwealth Energy Corporation and Reliant Energy
    Services, Inc.                                                                        
|        | 10.23 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Energy Trading, Inc. dated
    July 25, 2002                                                                    
|        | 10.24 |                  |  | Confirmation of Multi-Block Electric Power
    Transaction between Commonwealth Energy Corporation and
    TransAlta Energy Marketing (U.S.) Inc. dated March 1,
    2002                       
|        | 10.25 |                  |  | Lease Agreement dated August 9, 2002,
    between Commonwealth Energy Corporation and Cherry Tree
    Investors, L.P.                                                                            
|        | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                                                                                                                                
|        | 99.1  |                  |  | Certification of Chief Executive Officer of
    Commonwealth Energy Corporation, Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002
|        | 99.2  |                  |  | Certification of Chief Financial Officer of
    Commonwealth Energy Corporation, Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of these exhibits is incorporated herein by
    reference to Commonwealth Energy Corporations Form 10
    filed with the Securities and Exchange Commission on
    August 9, 2001 (File No. 000-33069).
|   
|(2) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10/A filed
    with the Securities and Exchange Commission on November 14,
    2001 (File No. 000-33069).              
|   
|(3) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Corporations
    Form 10/A filed with the Securities and Exchange Commission
    on June 10, 2002.                           
|   
|(4) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10/A filed
    with the Securities and Exchange Commission on April 10,
    2002 (File No. 000-33069).                 
|   
|(5) | Each of these exhibits is incorporated by
    reference to Commonwealth Energys Form 10-Q filed
    with the Securities and Exchange Commission on December 17,
    2001 (File No. 000-33069).              



|  |                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment is being sought with
    respect to certain portions of this agreement. Such portions
    have been omitted from this filing and have been filed
    separately with the Securities and Exchange Commission.