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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,
    2003
|                                           
|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
(§ 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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o     No x

The aggregate market value of the voting and
non-voting common equity held by non-affiliates as of
January 31, 2003, the last business day of the
registrants most recently completed second fiscal quarter,
cannot be determined because there is no market for the
registrants shares.

As of October 15, 2003, 27,644,567 shares of
the registrants common stock were outstanding.



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TABLE OF CONTENTS



|              |                                                                                              |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business.                                                                           
|              | Item 1A.Executive Officers of the Registrant.                                               
|              | 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 Operation.
|              | 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.
|              | Item 9A.Controls and Procedures.                                                            
|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.                     
|              | Item 13.Certain Relationships and Related Transactions.                                     
|              | Item 14.Principal Accounting Fees and Services.                                             
|PART IV      
|              | Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K.                    
|SIGNATURES   
|EXHIBIT 10.6 
|EXHIBIT 10.7 
|EXHIBIT 10.20
|EXHIBIT 10.21
|EXHIBIT 10.22
|EXHIBIT 10.23
|EXHIBIT 14.1 
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|Item 1A. |  | Executive Officers of the Registrant                                                      |  |      | 8  | 
|Item 2.  |  | Properties                                                                                |  |      | 10 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 10 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 12 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 12 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 14 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operation  |  |      | 16 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 29 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 30 | 
|Item 9.  |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosures |  |      | 30 | 
|Item 9A. |  | Controls and Procedures                                                                   |  |      | 30 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 31 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 33 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 40 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 41 | 
|Item 14. |  | Principal Accounting Fees and Services                                                    |  |      | 42 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement and Reports on Form
    8-K                                 |  |      | 43 | 
|         |  | Signatures                                                                                |  |      | 46 | 

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FORWARD-LOOKING STATEMENTS

A number of the matters and subject areas
discussed in this Annual Report on Form 10-K contain
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 UtiliHost 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, expect,
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 generate and supply to us electricity; (e) fluctuations
in market prices for electricity; and (f) our dependence
upon a limited number of utilities to transmit and distribute
the electricity we sell to our customers. 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 or
subject area. In addition to the items specifically discussed
above, our business and results of operations are subject to the
risks and uncertainties described under the heading
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation  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 is an energy
services company. We provide retail electric power to our
residential, commercial, industrial and governmental customers
in the deregulated California, Michigan and Pennsylvania
electricity markets. We are licensed by the Federal Energy
Regulatory Commission, or 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. As used in this Report, the terms
we, us, our, the
Company and Commonwealth refer to Commonwealth
Energy Corporation and its wholly-owned subsidiaries.

We do not have our own electricity generation
facilities. The power we sell to our customers is purchased from
third party power generators. The electric power we sell to our
retail customers is delivered to our customers by incumbent
electric utilities. The incumbent electric utilities measure
electric power usage by our customers and bill most of our
customers on our behalf. We plan to enter new deregulated
electric power markets and to offer a variety of energy-related
products and services in the future. We also sell surplus
electric power not needed to meet our retail customers
requirements in wholesale electricity markets. We only sell this
excess power to assist us in balancing our energy supply with
the demand of our retail customers. We do not trade in the
wholesale electricity markets for speculative purposes.

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 hold a majority interest in Summit
Energy Ventures, LLC (Summit), a joint venture that
invests in companies that manufacture or market energy
efficiency products. The consolidated financial statements of
the Company include the accounts of Summit, Power Efficiency
Corporation (one of the companies in which Summit has invested)
as of May 8, 2003 and the Companys wholly-owned
subsidiaries. Commonwealth Energy Corporation was incorporated
in California on August 15, 1997.

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, or ISO, or regional transmission organization
for a specific region or state. The ISO or regional transmission
organization 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. These
ancillary transmission and reliability services typically run 5%
to 10% of prevailing wholesale electricity market prices. We
generally pass these costs on to our retail customers.

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Electric service providers procure power to
deliver to retail customers from a variety of wholesale power
producers, either through long term bilateral contracts with the
generators or from the ISO 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.

Power purchases in California are facilitated by
the California Independent System Operator, or 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 increments. The Pennsylvania marketplace is
governed by a similar structure called the PJM interconnection.
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.

In addition to basic service of distributing
electricity to retail customers, 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 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 us 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 us from signing up new non-direct
access customers in California for an undetermined period of
time.

Core Services

Our primary business is retail electricity
services. 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, known
as UDCs, or electric distribution companies, known as 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 under
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.

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 spot 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
customers electricity load and our wholesale power
purchases, we have established a power resources department that
buys and sells our electricity in various regional markets.
Excess energy is sold to entities short on supply, while
additional energy is procured from time to time when required to
supply our customers usage. This spot market buying and
selling is done to balance our energy supply with the demand of
our retail customers.

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 demand and usage are highest.
Weather, generation capacity, transmission, distribution and
other

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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
energy market profitability.


Product and Service Initiatives

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

Energy Efficiency 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 intend to
expand our offerings in this area and market energy efficient
products to consumers and businesses throughout North America.

In July 2001, we formed Summit Energy Ventures,
LLC, or Summit, a joint venture with Steven Strasser. Summit
makes investments in companies that manufacture products that
conserve or manage electricity. We made the initial capital
contribution of $15 million into Summit, which to date
represents the entire capital contribution to Summit.

To date, Summit has invested a total of
approximately $8 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 and 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, B.V.  Turbocor, B.V. owns
    62.1% of Turbocor, Inc., a manufacturer of energy-efficient
    compressors for commercial heating, ventilating, air
    conditioning and refrigeration applications. Summit currently
    owns approximately 8.8% of Turbocor, B.V., which represents a
    5.5% indirect interest in Turbocor, Inc.                                                                                                                                                                                                                                                                      
|
| |  | Power Efficiency Corporation  Power
    Efficiency Corporation designs, develops, assembles and markets
    its own branded solid state electronic products, called
    Performance Controllers that reduce energy
    consumption in alternating current induction motors. Summit
    currently owns approximately 53% of Power Efficiency Corporation.                                                                                                                                                                                                                                                         

In the fourth quarter of the fiscal year ended
July 31, 2003, or fiscal 2003, Summits investment in
Power Efficiency Corporation became a controlling interest. For
purposes of financial reporting, our consolidated financial
statements include the accounts of Summit and Power Efficiency
Corporation as well as those of our wholly-owned subsidiaries.

Our joint venture partner in Summit, Steven
Strasser, is the president and sole shareholder in Northwest
Power Management, or 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

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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 as compensation for its performance of
investment management services and administrative services for
Summit.


We own 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, as the
preferred member, we have a right of first refusal in the event
of any issuances of new membership interests. Under the terms of
the Summit operating agreement, we have the right to purchase
any of the investments acquired by Summit at any time during the
agreement on terms mutually agreeable to both NPM and us. We
have the choice to pay for the investments in cash or to credit
any balance in our capital account in Summit against the
purchase price of the investment. If we are unable to reach
agreement with NPM with respect to the fair market value of such
investment, then NPM is required to obtain a valuation of the
investment from a nationally recognized investment bank or
appraisal firm which firm shall be approved by Summits
investment committee; provided, however, that the valuation of
the investment shall be the projected value of the investment at
the termination of the Summit operating agreement, which is June
2006.

We formed Summit as part of our strategy to
diversify our business by marketing energy efficiency products.
We believe Summit will provide us with opportunities in the
energy efficiency products market, either by acquiring a
controlling interest in the companies in which Summit has
invested when such companies have developed and distributed
successful products, or through marketing and distribution
arrangements. We intend to use our ownership interest in these
companies to help us enter into preferred marketing agreements
and other opportunities with these Summit companies with respect
to selling their energy efficiency products.

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 associated with our retail customers.
TACTTM acts as a data translator between trading
partner transactions, while TRIUMPHTM 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
TRIUMPHTM 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., to
act as a platform for providing outsourcing services to manage
client-related back office processes for third parties, such as
municipalities, energy generators and other electric service
providers. We have begun to market these services to third
parties, but to date, we have not generated any revenues from
third parties relating to our managed back office services.

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. We believe this program will allow us the
opportunity to take a diversified approach to aggregating
customers to sell them electricity and bill them

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directly.


In Pennsylvania during fiscal 2003 as part of the
PECO Energy Co. 1998 restructuring settlement, we were awarded
49,172 out of a possible 64,000 small commercial customers in
the effected territory through a bid process. We received
approximately 40,000 of those customers after they were given an
opportunity to opt-out of the process and remain
electric generation customers of PECO. Our award of these
customers is an example of our ability to consolidate and
service a portfolio of customers. We intend to continue to
acquire existing aggregated customer portfolios from utilities
and other industry participants.

In September 2002, California passed a law
enabling California cities and counties to establish Community
Choice Aggregation programs. Such programs allow cities and
counties to aggregate residential, commercial, industrial and
municipal electric service customers into a portfolio that can
be supplied electric generation from ESPs and other non-utility
providers. We are marketing services to assist cities and
counties in such efforts and intend to provide them with
required energy procurement, energy management, customer service
and back-office services. While we are in discussions with
several cities, to date, we have not entered into any contracts
to provide them load aggregation services.

Energy Management

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 will continue to offer
this service when ISOs and/or local distribution companies make
these programs available.

Distributed generation programs provide customers
with on-site electric power generation. We offer to our
customers the service of designing and implementing reliable
custom energy solutions by equipping them with alternative,
cost-effective or renewable sources for seasonal or peak demand
power. We are in the process of installing a photo voltaic
distributed generation application for a water district in
Southern California.

Our Customers and Markets

We began providing electric service in April 1998
as one of more than 300 licensed electric service providers, or
ESPs, in the state of California by aggregating customers using
our contact 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 have begun to focus on
targeting businesses customers rather than residential
customers. We use our trade name electricAmerica in
all markets in which we supply retail electric power. We
aggregate residential, commercial, industrial and governmental
customers using our contact center. Currently, we sell electric
power to approximately 51,000 retail end-use customers in
California, approximately 64,000 retail end-use customers in
Pennsylvania and approximately 3,000 retail customers in
Michigan.

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Our Suppliers

The price of electricity can fluctuate
significantly. In an attempt to manage this risk, we enter into
long-term wholesale power purchase agreements which allows us to
purchase fixed daily quantities of electricity at fixed prices.
We purchase electricity from a variety of generators in the
wholesale electricity markets under bilateral contracts for
terms that vary in length from one month to three years forward.
Additionally, we buy and sell incremental volumes of electricity
in the short-term or spot wholesale markets as necessary to
balance our electricity supply with our customers load
requirements.

In California, we obtain most of the electricity
we sell under contracts with three suppliers. To the extent
necessary, we continue to purchase electricity in the wholesale
spot market from time-to-time in California.

In Pennsylvania, we obtain most of the
electricity we sell pursuant to long-term contracts,
approximately 76% of which is with a single energy supplier. To
the extent necessary, we also purchase electricity in the
wholesale spot market from time-to-time in Pennsylvania.

In Michigan, we obtain most of our power from a
single energy generator, pursuant to long-term contracts.

Wholesale electricity is readily available from
various sources in each of the states in which we have
customers. Based upon current information from our suppliers, we
do not anticipate any shortage of supply. In the event that it
becomes necessary for us to obtain wholesale electricity from an
alternative supplier, we believe that an alternative supplier
could be secured within a reasonable period of time. However,
there can be no assurance that we would be able to timely secure
an alternative supply of electricity at comparable prices to our
long-term contracts, and the failure to replace a supplier in a
timely manner at comparable prices could materially harm our
operations.

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
sales 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 contact center. Our contact center group is
responsible for procuring orders from residential or small
commercial customers. All customers acquired by the contact
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 marketers, which we refer to
as our commercial and industrial sales, or C&I Sales, group,
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 our 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 has 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 our C&I Sales group to a lesser degree because they
have been able to acquire a few large customers from other
direct access providers.

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Our retail energy sales 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 an unregulated utility
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, when customers demand electricity derived from
environmentally-friendly fuel sources, 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 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 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 tariffed rates. Additionally,
electricity sales volumes 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

In states that have adopted deregulation, state
public utility commissions, or PUCs, have authority to license
and regulate certain of the activities of electric supply
retailers. Accordingly, we are subject to

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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 vary 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.


We are subject to regulation by various federal,
state and local governmental agencies. Our wholesale purchases
and sales are subject to the jurisdiction of the FERC under the
Federal Power Act. We make wholesale sales of electricity
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.

Employees

As of July 31, 2003, we employed 172
full-time employees and 1 part-time employee, including: 27 in
corporate administration, 9 in corporate finance, 84 in
marketing and sales, and 51 in operations. None of our employees
is covered by a collective bargaining agreement or is presently
represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.

Intellectual Property

Our strategy for protection of our trademarks is
to routinely file U.S. federal and foreign trademark
applications for the various word names and logos used to market
our 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 us.




Item 1A. Executive Officers of the
Registrant.

Information About Our Executive
Officers

The following table sets forth information
regarding our executive officers, including their respective
business experience during the last five years and age as of
October 15, 2003. 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, President and Chief Executive Officer |  |     | 65 |                                            |  | Mr. Carter has been our Chairman and Chief
    Executive Officer since January 2000, and our President since
    March 2003. During the preceding four month period prior to
    January 2000, 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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|                                              |  |     |    |                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------------------------------------------- |  | --- | -- | ------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Position                             |  | Age |    | Principal Occupation and Other Information
|                                              |  |     |    |                                           
|Richard L. PaulsenChief Operating Officer     |  |     | 55 |                                            |  | 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        |  |     | 55 |                                            |  | Mr. Oliver has been our Chief Financial Officer
    since November 1999. From January 1997 to November 1999, he 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 |  |     | 61 |                                            |  | Mr. Barthrop has been our General Counsel and
    Secretary 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.
|Roy ReevesVice President of Marketing         |  |     | 42 |                                            |  | 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                                                       |  |     | 54 |                                            |  | Ms. Guckert has served as our Vice President
    of Information Systems since December 2001. From 1982 to
    December 2001, Ms. Guckert served as a project manager for
    Symcas, a technology-consulting firm she founded.
    Ms. Guckert attended Clarion State Teachers College and
    studied programming and business applications at Orange Coast
    College and Coastline Community College.                                                                                                                                                                                                                                                                                                                                                                                
|Robert GunninVice President of Risk Management                                                              |  |     | 52 |                                            |  | Mr. Gunnin has been our Vice President of
    Risk Management since May 2003. From March 2001 to May 2003, he
    served as Director of Trading for DTE Energy, the unregulated
    energy trading affiliate of DTE Energy. From March 2000 to
    February 2001, he served as Vice President of Risk Management
    for ICF Consulting, a consulting company to the energy industry.
    From December 1998 to February 2000, he served as Vice President
    of Energy Trading for Mieco, Inc., an energy trading company.
    Prior to that, Mr. Gunnin was an auditor with Price
    Waterhouse. Mr. Gunnin earned a Masters Degree in Business
    Administration from Pepperdine University and a Bachelor of
    Science in Accounting from the University of Southern California.
|Michael NelsonVice President of Market Development and Regulatory Affairs
    and Associate General Counsel |  |     | 32 |                                            |  | Mr. Nelson has served as Associate General
    Counsel of Commonwealth Energy since August 1999. Since June
    2003 he has served as our Vice President of Market Development
    and Regulatory Affairs. From August 1998 to August 1999,
    Mr. Nelson practiced law with the firm of Eadington,
    Merhab & Eadington. Mr. Nelson received a Bachelor
    of Arts Degree from Canisius College and a Juris Doctorate from
    California Western School of Law.                                                                                                                                                                                                                                                                                                                    






|        |            
|------- | -----------
|Item 2. | Properties.

Our principal executive office is located in
Tustin, California. This facility houses our administrative
operations. We lease approximately 33,104 square feet of
office space at these premises pursuant to a lease that expires
on April 14, 2004. We believe that we will be able to renew
or find adequate replacement offices for this lease at
comparable costs.

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 an order
granting him access to all of our documents and records. We
filed a cross-petition alleging that Mr. Saline unlawfully
disseminated confidential information belonging to us, breached
his confidentiality agreement with us, breached his fiduciary
duty to us, and illegally tape recorded meetings. Our
cross-petition sought, among other things, to limit Mr.
Salines ability to distribute the corporate documents he
was seeking. The trial court issued an order granting
Mr. Saline access to certain documents, but prohibited
Mr. Saline from disclosing or discussing the documents he
requested 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

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disclose or discuss the documents with third
parties and to reverse the trial courts limits on
Mr. Salines inspection rights. On July 30, 2002,
the California Court of Appeal reversed the order of the
Superior Court that limited Mr. Salines ability to
disseminate the documents. The Court of Appeal further granted
Mr. Saline with access to all of our documents and records.
The Court of Appeal also ordered that Mr. Saline shall
recover the costs of his appeal from us. In March 2003, the
court denied our motion for summary judgment with respect to our
counter claims. In September 2003, we amended our
cross-petition. As amended, our cross-petition alleges that
Mr. Saline committed breach of contract (failure to adhere
to his confidentiality agreement with us), breached his
fiduciary duty (failure to disclose his ownership interest in
New World Power Corporation and use of nonpublic information in
connection with the purchase of securities), committed libel
(making false and misleading statements in proxy materials),
violated the California Criminal Code (intentionally tape
recording other directors without their consent); committed
intentionally inducement of breach of contract, and engaged in
unfair business practices (committing unfair, unlawful and
fraudulent acts). This case is currently pending.


On October 29, 2001, Mr. Saline filed a
civil claim against us in California Superior Court for Orange
County (Case No. 01CC13887). Mr. Saline alleges that
we breached a contract to sell to Mr. Saline preferred
shares, are estopped to deny the rights and privileges of
Mr. Salines preferred stock, unlawfully denied him
his voting rights and committed unfair business practices. 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 from the rights set forth in the
Certificate of Determination for our Series A Preferred
Stock filed with the California Secretary of State.
Mr. Saline also has made claims for damages, including
punitive damages. We filed an answer disputing
Mr. Salines claims and filed a cross-complaint for
declaratory relief. Mr. Saline filed a request for a
preliminary injunction prior to our 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
November 14, 2002, the court, after making a preliminary
finding that the shares were void as a matter of
law, issued an order dissolving the interim court order. A trial
was held in June 2003. On September 24, 2003, the court
issued an order prohibiting us from refusing to recognize that
Mr. Saline owns 352,000 of preferred stock, convertible
into common stock and entitled to vote on a two-for-one basis.
We intend to appeal the courts ruling. Currently, the
352,000 shares of preferred stock have been reflected in
our financial statements as Other convertible preferred
stock and are referenced in the beneficial ownership table
set forth in Item 12 Security Ownership of Certain
Beneficial Owners and Management. A second phase of the
trial to consider Mr. Salines claims for damages is
pending.

On February 23, 2001, several 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 who worked with David James in
raising investment capital for us. The plaintiffs
complaint alleged claims for unfair business practices, breach
of contract, and fraud and intentional deceit. The plaintiffs
alleged, in summary, that they were formerly employed by us and
are owed commissions and stock options from us under their
alleged employment agreements and based on alleged
representations that were made to them by former officers of
Company in the course of their employment. We filed a
cross-complaint asserting claims for breach of contract; unfair
business practices; misappropriation of trade secrets;
intentional interference with prospective economic advantage;
negligent interference with prospective economic advantage;
conversion; slander; prohibitory injunctive relief; mandatory
injunctive relief; and declaratory relief, which we dismissed
without prejudice. In addition, we filed a first amended
cross-complaint that asserted additional cross-claims against
plaintiff David James for rescission and restitution, fraud,
money had and received, unjust enrichment and declaratory
relief. The plaintiffs sought, among other relief, damages in
the amount of $10.3 million, plus costs and attorneys
fees. A jury trial was held in this matter beginning in October
2002. On December 10, 2002, the jury returned a verdict
finding for the plaintiffs in the amount of $2.7 million of
compensatory damages. During the trial, we voluntarily dismissed
our cross-complaint without prejudice. In January 2003, we filed
post-trial motions for a new trial and for a judgment
notwithstanding the verdict, seeking to have the
$2.7 million verdict for the plaintiffs set aside. In March

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2003, the court denied the post-trial motions for
a new trial and for a judgment notwithstanding the verdict. We
filed a notice of appeal in March 2003, seeking reversal of the
judgment in favor of the plaintiffs. On June 26, 2003, the
court ruled that we were the prevailing party on the contract
claims brought by the plaintiffs and that we were entitled to
recover attorneys fees and costs from the plaintiffs
totaling approximately $1.1 million. The plaintiffs have
appealed the courts ruling awarding us attorneys
fees. These appeals are currently pending. In order to stay the
enforcement of the judgment pending appeal, we initially posted
an appellate bond of approximately $4.1 million. In
September 2003, the court issued an order permitting us to
reduce the bond to $2.6 million.


We filed a complaint in the Orange County
Superior Court on February 14, 2003 against Sylvia E.
Bates, as Trustee of the Robert M. Bates Family Trust,
seeking a judicial declaration invalidating 252,000 shares
of our capital stock the defendant claims to hold.
Ms. Bates filed and served a general denial to the
complaint on April 25, 2003. A mandatory settlement
conference has been scheduled for December 12, 2003. This
case is currently pending.

We filed a complaint in Orange County Superior
Court on February 14, 2003 against Joseph Ogundiji, as
Trustee of the Ogundiji Family Holdings Trust, seeking a
judicial declaration invaliding 80,000 shares of our
capital stock the defendant claims to hold. On April 11,
2003, Mr. Ogundiji filed and served an answer and
cross-complaint alleging claims against us for breach of
contract, conversion, declaratory relief, promissory estoppel,
unlawful denial of voting rights pursuant to California
Corporations Code section 709, illegal stock dividend in
violation of California Corporations Code section 25120, and
unjust enrichment. The cross-complaint seeks an unspecified
amount of general and punitive damages. This case is currently
pending.

We are currently, and from time to time may
become, involved in other litigation concerning claims arising
out of our operations in the normal course of business. While we
cannot predict the ultimate outcome of our pending matters or
how they will affect our results of operations or financial
position, management currently does not expect any of the legal
proceedings to which we are currently a party, including the
legal proceedings described above, individually or in the
aggregate, to 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 our
shareholders during the fourth quarter of fiscal 2003.




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 15, 2003, there were
2,927 holders of record of our common stock and
59 holders of record of our Series A Convertible
Preferred Stock.

Dividend Policy

Our Series A Convertible Preferred Stock
provides for cumulative dividends that accrue at a rate of 10%
per annum. During fiscal 2002 and fiscal 2003, we have declared
and paid cash dividends of $30,195 and $92,100, respectively, on
our Series A Convertible Preferred Stock. As of
July 31, 2003, accrued cumulative unpaid dividends on our
Series A Convertible Preferred Stock were $90,548. All
accrued dividends on the Series A Preferred must be paid
before any dividends are declared or paid on shares of common
stock.

12



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In addition, there is a dispute with respect to
352,000 shares of preferred stock that are not currently
reflected as outstanding on our shareholder list. The validity
of these disputed shares of preferred stock is the subject of
pending litigation. See Item 3. Legal
Proceedings. If these disputed shares of preferred stock
are determined to be valid, a portion of such shares would
accrue interest at a rate of 12% per annum, while the remainder
would accrue interest at a rate of 14% per annum. At
July 31, 2003, the amount of such accrued unpaid dividends
on these shares would have been $42,240. All accrued dividends
on these disputed shares of preferred stock would be required to
be paid before any dividends are declared or paid on shares of
common stock.

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
Item 12. Security Ownership of Certain Beneficial
Owners and Management  Equity Compensation Plan
Information, and that information is incorporated herein
by reference.

13



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##### Table of Contents






Item 6. Selected Financial
Data.

The selected financial data in the following
tables sets forth (a) balance sheet data as of
July 31, 2002 and 2003, and statement of operations data
for the fiscal years ended July 31, 2001, 2002 and 2003
derived from our consolidated financial statements audited by
Ernst & Young LLP, independent auditors, which are
included elsewhere in this filing, and (b) balance sheet
data as of July 31, 1999, 2000 and 2001, and statements of
operations data for the fiscal years ended July 31, 1999
and 2000, derived from our consolidated financial statements
audited by Ernst & Young LLP, which are not included in this
filing. The information below should be read in conjunction with
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation
and Item 8. Financial Statements and
Supplementary Data included elsewhere in this filing.

|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |        | 
|--------------------------------------------------- | ------- | --------------------------------------------------- | ------- | ------ | - | ---- | ------ | ------ | - | ---- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                    |         |                                                    
|                                                    |         | Fiscal Year Ended July 31                          
|                                                    |         |                                                    
|                                                    |         | 1999                                                |         | 2000   |   | 2001 |        | 2002   |   | 2003
|                                                    |         |                                                     |         |        |   |      |        |        |   |     
|                                                    |         |                                                    
|                                                    |         | (Amounts in thousands except per share information)
|Consolidated Statement of Operations
    Data:      |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Net revenue                                         |         | $                                                   | 39,124  |        |   | $    | 99,624 |        |   | $    | 183,264 |        |  | $ | 117,768 |        |  | $ | 165,526 |       
|Direct energy costs                                 |         |                                                     | 38,729  |        |   |      | 86,732 |        |   |      | 77,281  |        |  |   | 87,340  |        |  |   | 128,179 |       
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Gross profit                                        |         |                                                     | 395     |        |   |      | 12,892 |        |   |      | 105,983 |        |  |   | 30,428  |        |  |   | 37,347  |       
|Other expenses(1)                                   |         |                                                     | 18,518  |        |   |      | 21,921 |        |   |      | 25,195  |        |  |   | 21,918  |        |  |   | 24,947  |       
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Income (loss) from operations                       |         |                                                     | (18,123 | )      |   |      | (9,029 | )      |   |      | 80,788  |        |  |   | 8,510   |        |  |   | 12,400  |       
|Loss on litigation awards                           |         |                                                     | (422    | )      |   |      | (116   | )      |   |      |        |        |  |   |        |        |  |   | (2,200  | )     
|Loss on equity investments                          |         |                                                     |        |        |   |      |       |        |   |      |        |        |  |   | (160    | )      |  |   | (567    | )     
|Minority interest                                   |         |                                                     |        |        |   |      |       |        |   |      |        |        |  |   |        |        |  |   | 187     |       
|Interest income, net                                |         |                                                     | 123     |        |   |      | 499    |        |   |      | 1,593   |        |  |   | 939     |        |  |   | 715     |       
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Income (loss) before provision for income
    taxes |         |                                                     | (18,422 | )      |   |      | (8,646 | )      |   |      | 82,381  |        |  |   | 9,289   |        |  |   | 10,535  |       
|Provision for income taxes                          |         |                                                     |        |        |   |      |       |        |   |      | 21,852  |        |  |   | 4,125   |        |  |   | 5,113   |       
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Net income (loss)(2)                                |         | $                                                   | (18,422 | )      |   | $    | (8,646 | )      |   | $    | 60,529  |        |  | $ | 5,164   |        |  | $ | 5,422   |       
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Net income (loss) per common share(3)(4):           |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|                                                    | Basic   |                                                     | $       | (.84   | ) |      | $      | (.30   | ) |      | $       | 2.06   |  |   | $       | .19    |  |   | $       | .19    | 
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|                                                    | Diluted |                                                     | $       | (.84   | ) |      | $      | (.30   | ) |      | $       | 1.77   |  |   | $       | .16    |  |   | $       | .18    | 
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|Weighted-average shares outstanding(3)(4):          |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|                                                    | Basic   |                                                     |         | 21,905 |   |      |        | 28,795 |   |      |         | 29,385 |  |   |         | 27,482 |  |   |         | 27,424 | 
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       
|                                                    | Diluted |                                                     |         | 21,905 |   |      |        | 28,795 |   |      |         | 34,152 |  |   |         | 31,536 |  |   |         | 30,236 | 
|                                                    |         |                                                     |         |        |   |      |        |        |   |      |         |        |  |   |         |        |  |   |         |       

|                                 |  |      |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |  | 1999 |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                 |  |      |        |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data: |  |      |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|Working capital                  |  | $    | 12,428 |      |  | $    | 12,803 |      |  | $    | 50,184  |  |  | $ | 58,841  |  |  | $ | 56,411  | 
|Total assets                     |  |      | 27,858 |      |  |      | 35,444 |      |  |      | 107,016 |  |  |   | 101,229 |  |  |   | 125,870 | 
|Shareholders equity(4)          |  |      | 19,900 |      |  |      | 24,236 |      |  |      | 86,037  |  |  |   | 87,952  |  |  |   | 93,017  | 




|    |                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes stock-based compensation charges
    (credits) of $5,718, $445, $1,080, $(743) and $0 in the
    fiscal years ended July 31, 1999, 2000, 2001, 2002 and
    2003, respectively. See Managements Discussion and
    Analysis of Financial Condition and Results of
    Operation  Results of Operations and
    Note 2 of the Notes to Consolidated Financial Statements,
    for further details.



(Footnotes continued on the next
page.)


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(Footnotes continued from preceding
page.)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | No cash dividends have been paid on our common
    stock. Our Series A convertible preferred stock provide for
    cumulative dividends, which accrue at the rate of 10% per annum,
    and are payable at the discretion of our Board of Directors.
    Such accrued dividends were $84, $84, $81, $70 and $91 in the
    fiscal years ended July 31, 1999, 2000, 2001, 2002 and
    2003, respectively. In addition, we are subject to a court order
    with respect to disputed shares of preferred stock that are not
    currently reflected as outstanding on our shareholder list. The
    validity of these disputed shares of preferred stock is the
    subject of pending litigation. See Item 3. Legal
    Proceedings. If these disputed shares of preferred stock
    are determined to be valid, a portion of such shares would
    accrue dividends at a rate of 12% per annum, while the remainder
    would accrue interest at a rate of 14% per annum. Such accrued
    dividends would have been $42 in fiscal year ended July 31,
    2003 and are reflected in our accompanying financial statements.
    See Note 6 of the Notes to Consolidated Financial
    Statements included elsewhere herein, for the computation of
    earnings per common share.
|   
|(3) | Per share information and weighted average shares
    outstanding 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
    Note 14 of the Notes to Consolidated Financial Statements,
    included elsewhere herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | Per share information, weighted average shares
    outstanding and shareholders equity for the year ended
    July 31, 2003 reflect the 352 shares of preferred stock,
    referenced in our financial statements as Other preferred
    stock, related to pending litigation. See Item 3.
    Legal Proceedings and Notes 6, 12 and 14 of the Notes
    to Consolidated Financial Statements for further details.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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

Our primary business has been the sale of
electric power to retail and commercial end-users in California,
Pennsylvania and, beginning in September 2002, in Michigan, 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, 2003, we delivered
electricity to approximately 118,000 customers in California,
Michigan 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. During
fiscal 2003, we purchased electricity both under long-term
contracts and in the spot market.

Results of Operation

In the following comparative analysis, all
percentages are calculated based on dollars in thousands.

Year ended July 31, 2003 compared to
year ended July 31, 2002

Net revenue

Our net revenue for fiscal 2003 was
$165.5 million, an increase of $47.7 million, or
40.6%, from $117.8 million in fiscal 2002. Net energy sales
were $160.0 million, or 96.6%, of our fiscal 2003 net
revenue, as compared to $115.7 million, or 98.3%, of our
fiscal 2002 net revenue. Green power credits recognized from the
State of California accounted for the balances of our net
revenue.

Energy sales to retail customers constituted
$153.4 million, or 95.9%, of our net energy sales for
fiscal 2003, as compared to $97.0 million, or 83.8%, for
fiscal 2002. Sales of excess energy in the wholesale markets
constituted $6.5 million, or 4.1%, of our net energy sales
for fiscal 2003, as compared to $18.8 million, or 16.2%,
for fiscal 2002. Excess energy is sold into the wholesale market
after we have supplied the requirements of our retail customers.
These sales are a natural by-product of balancing the power load
used by our customers against the power we have previously
purchased under contracts in anticipation of our forecasted
customer demand. Power is also purchased in this balancing
process when required.

We sold 1,120.3 million kilowatt-hours
(kWh) at an average retail price per kWh of $0.077
in California during fiscal 2003, as compared to
775.6 million kWh sold at an average retail price per kWh
of $0.085 during fiscal 2002. This increase was due primarily to
the acquisition of large commercial customers from other ESPs.
The decrease in price is partially attributable to the
historical procurement charge in the Southern California Edison
territory. For a more complete discussion of the historical
procurement charge and related CPUC activities see Factors
That May Affect Future Results  Historical
procurement charges and customer rate changes could adversely
affect our revenue and cash flows in the Southern California
Edison utility district in this Item 7. We sold
836.5 million kWh at an average retail price per kWh of
$0.060 in Pennsylvania during fiscal 2003, as compared to
468.9 million kWh sold at an average retail price per kWh
of $0.058 during fiscal 2002. This increase was due primarily to
the acquisition of approximately 40,000 customers in
Pennsylvania under a bid process that was a part of an electric
utility restructuring in Pennsylvania. We sold
230.4 million kWh at an average retail price per kWh of
$0.058 in Michigan during fiscal 2003, as compared to no billing
during fiscal 2002.

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The $56.4 million, or 58.2%, increase in our
fiscal 2003 retail energy sales primarily was attributable to an
increase in our customer base as we entered the Michigan market
and gained market share in Pennsylvania.

We sold 71.4 million kWh at an average
wholesale price per kWh of $0.036 in California during fiscal
2003, as compared to 313.8 million kWh sold at an average
retail price per kWh of $0.023 during fiscal 2002. We sold
140.1 million kWh at an average wholesale price per kWh of
$0.028 in Pennsylvania during fiscal 2003, as compared to
463.2 million kWh sold at an average wholesale price per
kWh of $0.025 during fiscal 2002. We did not sell any wholesale
energy in Michigan during fiscal 2003, as our Michigan supplier
was operating under a load following, full requirements
contract. Such contracts provide for all customer power and
related expenses at a predetermined price per kWh.

The $12.3 million, or 65.4%, decrease in our
fiscal 2003 excess energy sold into the wholesale market was
attributable primarily to improved forecasting methods employed
by us in California and Pennsylvania, and increased customer
load in Pennsylvania which resulted in less excess energy
available for sale.

The $3.5 million, or 172.8%, increase in our
fiscal 2003 green power credits was attributable primarily to
the recognition in the current fiscal year of green power
credits for the final seven months of fiscal 2002 and the first
eight months of fiscal 2003 due to the reinstatement by the
State of California of the Public Purpose Program to provide
incentives to suppliers of renewable power to reduce the cost of
such power to certain customers. This green power credit program
was discontinued for periods after March 2003.

We had approximately 118,000 retail customers at
July 31, 2003, an increase of 29,000, or 32.6%, from 89,000
at July 31, 2002. This increase was due primarily to the
successful acquisition of approximately 40,000 customers in
Pennsylvania under a bid process that was a part of an electric
utility restructuring in Pennsylvania. The addition of these
customers occurred in May and June 2003. Our customer count, net
of the 40,000 additions in Pennsylvania, was reduced due to our
focus on increasing our commercial and industrial customer base,
which have much higher average electricity usage, while reducing
the number of residential customers, which have lower
electricity usage.

Direct energy costs

Direct energy costs which are recognized
concurrent with related energy sales, include the cost of
purchased electric power, fees incurred from various
energy-related service providers and energy-related taxes that
cannot be passed through to the customer. Our direct energy
costs were $128.2 million for fiscal 2003, an increase of
$40.9 million, or 46.8%, from $87.3 million for fiscal
2002. We purchased 1,207.4 million kWh at an average price
per kWh of $0.043 in California during fiscal 2003, as compared
to 1,184.5 million kWh at an average price per kWh of
$0.034 during fiscal 2002. We purchased 1,084.5 million kWh
at an average price per kWh of $0.041 in Pennsylvania during
fiscal 2003, as compared to 992.9 million kWh at an average
price per kWh of $0.039 during fiscal 2002. We purchased
278.0 million kilowatt-hours at an average price per kWh of
$0.049 in Michigan during fiscal 2003, as compared no purchases
during fiscal 2002, as this was a new market in fiscal 2003. The
fiscal 2003 increase in our direct energy costs primarily was
attributable to increased kWh purchases to accommodate our entry
into the Michigan market and additional customers in
Pennsylvania as we gained market share. To a lesser extent, the
fiscal 2003 increase was attributable to higher kWh prices paid
as a result of increased natural gas prices incurred by our
suppliers.

Selling and marketing expenses

Our selling and marketing expenses were
$4.2 million for fiscal 2003, an increase of
$0.7 million, or 20.8%, from $3.5 million for fiscal
2002. The fiscal 2003 increase was primarily attributable to
increased marketing efforts associated with our expansion into
the Pennsylvania and Michigan markets and further market
research conducted on certain states under consideration for
future expansion.

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General and administrative expenses

Our general and administrative expenses were
$20.7 million for fiscal 2003, an increase of
$2.3 million, or 12.5%, from $18.4 million for fiscal
2002. The fiscal 2003 increase was primarily attributable to
increases in legal expenses incurred in connection with
litigation and the proxy contest related to our last annual
meeting of shareholders, merit compensation and premiums on
directors and officers insurance policies, partially offset by
certain cost savings achieved through the internalization of
certain previously outsourced information technology
capabilities. Our general and administrative expenses for fiscal
2002 were reduced by the $0.07 million reversal of
previously recognized stock-based compensation.

Income from Operations

Primarily as a result of all of the preceding
factors, our income from operations increased $3.9 million,
or 45.7%, to $12.4 million for fiscal 2003 from
$8.5 million for fiscal 2002.

Loss on Litigation Award

We incurred a $2.7 million loss on a
litigation award during fiscal 2003, in connection with a
lawsuit filed by several former employees, of which we had
previously accrued $0.5 million, with the remaining
$2.2 million balance recognized in fiscal 2003.

Loss on Equity Investments

We incurred a $0.6 million aggregate loss on
equity investments for fiscal 2003, as compared to a
$0.2 million aggregate loss for fiscal 2002. The loss on
equity investments for fiscal 2003 primarily reflects our
proportionate recognition of losses under the equity method of
accounting from our consolidation of Summit Energy Ventures, LLC
(Summit); namely, the losses incurred by Power
Efficiency Corporation (PEC) through April 30,
2003, and, to a significantly lesser extent, Turbocor BV
(Turbocor) through January 2003. Effective
May 1, 2003, we began consolidating PEC as Summit had
obtained a majority ownership position in PEC. Effective
February 1, 2003, because Summits ownership position
in Turbocor had been reduced to a level at which it no longer
exercised significant influence, we began accounting for
Turbocor under the cost method of accounting, whereby any
proportionate losses were excluded from our results of
operations. In contrast, fiscal 2002 primarily reflected our
proportionate recognition under the equity method of accounting,
from our consolidation of Summit, of the losses incurred by
Turbocor and PEC from the dates of Summits initial equity
investments in Turbocor and PEC, in January 2002 and June 2002,
respectively.

Minority Interest

Minority interest represents that portion of
PECs post-consolidation losses that are allocable to the
non-Summit investors based on their aggregate minority ownership
interest in PEC.

Interest Income, net

Our interest income, net, was $0.7 million
for fiscal 2003, a decrease of $0.2 million, or 23.9%, from
$0.9 million for fiscal 2002. The fiscal 2003 net decrease
resulted from a $0.6 million decrease in interest income,
partially offset by a $0.4 million decrease in interest
expense. The fiscal 2003 decrease in interest income primarily
was attributable to lower yields realized on short-term
investments and, to a significantly lesser extent, lower average
investment balances. The fiscal 2003 decrease in interest
expense primarily was attributable to the non-recurrence of
$0.4 million of fiscal 2002 interest expense incurred in
connection with borrowings under our then outstanding credit
facility, which was terminated in June 2002.

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Income before Provision for Income
Taxes

Our income before provision for income taxes was
$10.5 million for fiscal 2003, an increase of
$1.2 million, or 13.4%, from $9.3 million for fiscal
2002.

Provision for Income Taxes

Our provision for income taxes was
$5.1 million for fiscal 2003, compared to $4.1 million
for fiscal 2002. Our effective income tax rate was 48.5% for
fiscal 2003, compared to 44.4% for fiscal 2002. The fiscal 2003
increase in our effective income tax rate was attributable
primarily to an increase due to the expiration of certain stock
options in fiscal 2003, the value of which was charged to
expense for financial reporting purposes but not deductible for
income tax purposes, partially offset by a decrease in our
valuation allowance as a result of our utilization of net
operating loss carryforwards for federal income tax purposes.

Net Income

Our net income was $5.4 million for fiscal
2003, an increase of $0.2 million, or 5%, from
$5.2 million for fiscal 2002. Our basic and diluted net
income per common share was $0.19 and $0.18, respectively, for
fiscal 2003, as compared to $0.19 and $0.16, respectively, for
fiscal 2002. The calculation of net income per common share
gives effect to 352,000 shares of preferred stock, referenced in
our financial statement as Other convertible preferred
stock related to pending litigation. See Item 3.
Legal Proceedings and Notes 6, 12 and 14 of the Notes
to Consolidated Financial Statements for further details.

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

Net revenue

Our net revenue for fiscal 2002 was
$117.8 million, a decrease $65.5 million, or 35.7%,
from $183.3 million in fiscal 2001. Net energy sales were
$115.7 million, or 98.3%, of our fiscal 2002 net revenue,
as compared to $179.3 million, or 97.8%, of our fiscal 2001
net revenue. Green power credits recognized from the State of
California accounted for the balances of our net revenue.

Energy sales to retail customers constituted
$97.0 million, or 83.8%, of our net energy sales for fiscal
2002, as compared to $100.0 million, or 55.7%, for fiscal
2001. Sales of excess energy in the wholesale markets
constituted $18.8 million, or 16.2%, of our net energy
sales for fiscal 2002, as compared to $79.3 million, or
44.2%, for fiscal 2001. The very high level of excess energy
sold in the wholesale market in fiscal 2001 was the result of
the unprecedented rise in electric power prices in California.
These prices already were moving toward normal levels by the
fourth quarter of fiscal 2001.

We sold 775.6 million kWh at an average
retail price per kWh of $0.085 in California during fiscal 2002,
as compared to 563.4 million kWh sold at an average retail
price per kWh of $0.145 during fiscal 2001. We sold 468.9
million kWh at an average retail price per kWh of $0.058 in
Pennsylvania during fiscal 2002, as compared to
378.6 million kWh sold at an average retail price per kWh
of $0.050 during fiscal 2001.

The $3.0 million, or 3.0%, decrease in our
fiscal 2002 retail energy sales was attributable primarily to
the price decrease realized in California, being substantially
offset by the volume increases realized in California and
Pennsylvania, and, to a lesser extent, the price increase
realized in Pennsylvania. The average retail price per kWh
realized in California during fiscal 2002 was representative of
normal average price whereas the inflated average retail price
realized in California during fiscal 2001 reflected the
statewide energy crisis. The volume increases realized were
attributable to increases in the number of commercial customers
in California and Pennsylvania since October 2001 and June 2002,
respectively. The price increase realized in Pennsylvania was
primarily due to more energy purchased under fixed price
contracts in fiscal 2002 compared to fiscal 2001.

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We sold 313.8 million kWh of excess power
into the wholesale markets at an average price per kWh of $0.023
in California during fiscal 2002, as compared to
404.7 million kWh sold at an average retail price per kWh
of $0.17 during fiscal 2001. We sold 463.2 million kWh at
an average wholesale price per kWh of $0.025 in Pennsylvania
during fiscal 2002, as compared to 268.3 million kWh sold
at an average wholesale price per kWh of $0.032 during fiscal
2001.

The $60.5 million, or 76.3%, decrease in our
fiscal 2002 excess energy sold in the wholesale markets
primarily was attributable to the price decrease realized in
California, and, to a significantly lesser extent, the price
decrease realized in Pennsylvania and the volume decrease
realized in California. Slightly offsetting the preceding
results was the volume increase realized in Pennsylvania. The
volume decrease realized in California was attributable
primarily to us having lower excess balances available for sale
in the wholesale market as a result of our growing retail
customer base. The volume increase realized in Pennsylvania was
attributable primarily to excess balances being available for
sale in the wholesale market as a result of decreased retail
demand due to more moderate late summer and winter temperatures
than forecast.

The $1.9 million, or 48.5%, decrease in our
fiscal 2002 green power credits primarily was attributable to
the expiration of the State of Californias green power
credit program in December 2001. The California legislature
subsequently approved reinstating the green power credit
program, however, due to program uncertainty, no revenue from
periods subsequent to January 1, 2002 were reflected in
fiscal 2002 revenue.

We had approximately 89,000 retail customers at
July 31, 2002, an increase of 1,000, or 1.1%, from 88,000
at July 31, 2001.

Direct energy costs

Our direct energy costs were $87.3 million
for fiscal 2002, an increase of $10.0 million, or 13.0%,
from $77.3 million for fiscal 2001. We purchased
1,184.5 million kWh at an average price per kWh of $0.034
in California during fiscal 2002, as compared to
980.1 million kWh sold at an average price per kWh of
$0.039 during fiscal 2001. We purchased 992.9 million kWh
at an average price per kWh of $0.039 in Pennsylvania during
fiscal 2002, as compared to 662.5 million kWh sold at an
average price per kWh of $0.040 during fiscal 2001.

The fiscal 2002 increase in our direct energy
costs primarily was attributable to volume increases in
Pennsylvania, and, to a lesser extent, in California, partially
offset by the price decrease realized in California. Our
increased purchases in California and Pennsylvania were to
accommodate added retail customers. The price decrease realized
in California primarily was attributable to normalizing energy
prices after the energy crisis in fiscal 2001.

Selling and marketing expenses

Our selling and marketing expenses were
$3.5 million for fiscal 2002, a decrease of
$0.1 million, or 2.4%, from $3.6 million for fiscal
2001. The fiscal 2002 decrease primarily was attributable to a
decrease realized in our payroll expenses, being partially
offset by an increase incurred in our consulting expenses. The
decrease in our payroll expenses was primarily the result of
call center personnel attrition. The increase in our consulting
expenses was the result of market research conducted on certain
states under consideration for future service expansion.

General and administrative expenses

Our general and administrative expenses were
$18.4 million for fiscal 2002, a decrease of
$3.2 million, or 14.8%, from $21.6 million for fiscal
2001. The fiscal 2002 decrease primarily was attributable to a
$1.8 million variation in stock-based compensation, from a
$1.1 million charge in fiscal 2001 to a $0.7 million
credit in fiscal 2002. The fiscal 2002 credit resulted from our
reversing of a portion of our fiscal 2001 charge due to a
subsequent decrease in the value of our common stock against
which the value of certain unvested variable stock options are
continually reassessed. The balance of the fiscal 2002

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decrease primarily was attributable to lower
legal, consulting and bad debt expenses, being partially offset
by higher payroll and amortization expenses as well as
management fees incurred for Summit. The decrease realized in
legal expenses for fiscal 2002 primarily was attributable to
fiscal 2001 reflecting non-recurring legal costs associated with
a dispute settlement reached with our founder. The increase
realized in payroll expenses primarily was due to the hiring of
software development employees who were formerly engaged as
consultants. The increase realized in amortization expense
primarily was attributable to previously capitalized software
development costs incurred for our TRIUMPH system. The
management fees incurred for Summit constitute a new expense in
fiscal 2002 that we anticipate will be recurring for the
foreseeable future.


Income from Operations

Primarily as a result of the preceding factors,
our income from operations decreased by $72.3 million, or
89.5%, to $8.5 million for fiscal 2002, from
$80.8 million for fiscal 2001.

Loss on Equity Investments

We incurred a $0.2 million aggregate loss on
equity investments for fiscal 2002 as a result of our
consolidation of Summit. This loss primarily reflects our
proportionate recognition under the equity method of accounting
of the losses incurred by Turbocor and PEC from the dates of
Summits initial equity investments in them during January
2002 and June 2002, respectively.

Interest Income, net

Our interest income, net, was $0.9 million
for fiscal 2002, a decrease of $0.7 million, or 41.0%, from
$1.6 million for fiscal 2001. The fiscal 2002 net decrease
resulted from a $1.0 million decrease in interest income,
partially offset by a $0.4 million decrease in interest
expense. The decrease in interest income primarily was
attributable to significantly lower average interest rates
realized on slightly lower average investment balances. The
decrease in interest expense was attributable primarily to lower
average outstanding borrowings as a result of our repayment and
termination of a line of credit borrowing facility in June 2002.

Income before Provision for Income
Taxes

Our income before provision for income taxes was
$9.3 million for fiscal 2002, a decrease of
$73.1 million, or 88.7%, from $82.4 million for fiscal
2001.

Provision for Income Taxes

Our provision for income taxes was
$4.1 million for fiscal 2002, a decrease of
$17.8 million, or 81.1%, from $21.9 million for fiscal
2001. Our effective income tax rate was 44.4% for fiscal 2002,
as compared to 26.6% for fiscal 2001. The fiscal 2002 increase
in our effective income tax rate was attributable primarily to
the comparative fiscal 2001 period reflecting the favorable
impact of our release of our valuation allowance as a result of
our utilization of net operating loss carryforwards for federal
and state income tax purposes in fiscal 2001 due to our first
year of profitability.

Net Income

Our net income was $5.2 million for fiscal
2002, a decrease of $55.3 million, or 91.5%, from
$60.5 million for fiscal 2001. Our basic and diluted net
income per common share was $0.19 and $0.16, respectively, for
fiscal 2002, as compared to $2.06 and $1.77, respectively, for
fiscal 2001.

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Liquidity and Capital Resources

General

In recent fiscal years, we have sustained our
operations and funded our growth substantially with internally
generated cash flows from operations. Based on our planned
operations and growth expectations for the foreseeable future,
we currently do not anticipate requiring any external sources of
financing through at least fiscal 2004, if not beyond.

Consolidated Cash and Cash Equivalents,
Working Capital and Current Ratio

Our unrestricted cash and cash equivalents
decreased by $2.1 million, or 4.9%, to $40.9 at
July 31, 2003, as compared with $43.0 million at
July 31, 2002. Our working capital decreased by
$2.4 million, or 4.1%, to $56.4 million at
July 31, 2003, from $58.8 million at July 31,
2002. Our current ratios, which are defined as current assets
divided by current liabilities, were 2.76 and 5.43 at
July 31, 2003 and 2002, respectively.

With our favorable liquidity position, we elected
to allow our previously existing $10.0 million line of
credit borrowing facility to expire on June 29, 2002. We
currently do not have any established credit facilities in place
for future borrowings. We believe that we would be able to
establish credit facilities at acceptable rates and terms in the
future should it be necessary; although we currently see no need
for such facilities through at least fiscal 2004.

Consolidated Cash Flows

Fiscal 2003 versus Fiscal
2002

Our operating activities provided
$5.6 million in cash and cash equivalents during fiscal
2003, an increase of $2.1 million, or 61.6%, from
$3.5 million in cash and cash equivalents provided during
fiscal 2002. The fiscal 2003 increase primarily reflects the
$0.2 million increase in our net income and the positive
cash flow effects of increased accounts payable and accrued
liabilities. Partially offsetting the increase in cash and cash
equivalents was the negative cash flow effects of increased
accounts receivable and prepaid expenses and other assets, and
the adding back of lower non-cash charges.

Our investing activities utilized
$1.5 million in cash and cash equivalents during fiscal
2003, as compared to $9.2 million in cash and cash
equivalents utilized during fiscal 2002. The fiscal 2003
decrease principally is attributable to the comparable fiscal
2002 period reflecting substantive initial investments in
energy-related companies made through Summit. To a significantly
lesser extent, the fiscal 2003 decrease reflects decreased
purchases for property and equipment offset by the acquisition
of a majority ownership in PEC.

Our financing activities utilized
$6.2 million in cash and cash equivalents during fiscal
2003, as compared to $7.7 million in cash and cash
equivalents provided by financing activities during fiscal 2002.
Financing activities in fiscal 2003 principally reflects the
negative cash flow effect of an aggregate increase in our
restricted cash and cash equivalents as a result of the letters
of credit required in connection with energy purchase agreements
and a litigation appeal bond. In contrast, financing activities
in fiscal 2002 principally reflected the positive cash flow
effect of an aggregate decrease in our restricted cash and cash
equivalents as a result of the release of letters of credit upon
the expiration of energy purchase agreements and the deployment
of cash by Summit into investments in energy-related companies.
Partially offsetting this positive cash flow effect in fiscal
2002 were principal repayments of borrowings outstanding under
our then existing line of credit facility and repurchases of
outstanding common shares.

Fiscal 2002 versus Fiscal
2001

Our operating activities provided
$3.5 million in cash and cash equivalents during fiscal
2002, a decrease of $58.4 million, or 94.4%, from the
$61.8 million in cash and cash equivalents provided during
fiscal 2001. The fiscal 2002 decrease reflects principally the
$55.4 million decrease in our net income. To a

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significantly lesser extent, the fiscal 2002
decrease reflects primarily the negative cash flow effects of
decreased accounts payable and other current liabilities and
increased accounts receivable. Slightly offsetting this
decreased was the adding back of increased aggregate non-cash
charges.


Our investing activities utilized
$9.2 million and $1.2 million in cash and cash
equivalents during fiscal 2002 and 2001, respectively. The
fiscal 2002 increase primarily reflects substantive initial
investments in energy-related companies made through Summit,
and, to a significantly lesser extent, increased purchases of
property and equipment.

Our financing activities provided
$7.7 million in cash and cash equivalents during fiscal
2002, as compared to $23.8 million in cash and cash
equivalents utilized by financing activities during fiscal 2001.
Financing activities in fiscal 2002 reflected primarily the
positive cash flow effect of an aggregate decrease in our
restricted cash and cash equivalents as a result of the release
of letters of credit upon the expiration of energy purchase
agreements and the decrease in Summits cash account as a
result of their investments during the year, partially offset by
the negative cash flow effects of principal repayments of
borrowings outstanding under our then existing line of credit
facility and repurchases of outstanding common shares held by
our founder. Financing activities in fiscal 2001 principally
reflected the negative cash flow effect of an aggregate increase
in our restricted cash and cash equivalents as a result of our
investment in Summit Energy Ventures, and, to a significantly
lesser extent, principal repayments of borrowings outstanding
our then existing line of credit facility.

As a result of the foregoing, our unrestricted
cash and cash equivalents increased by $1.9 million to
$43.0 million at July 31, 2002 as compared with
$41.1 million at July 31, 2001.

Planned Capital Expenditures

Our planned capital expenditures for the fiscal
year ending July 31, 2004 (fiscal 2004)are
$1.7 million. Planned capital expenditures include computer
hardware and software, office equipment and furniture. The
expenditures are expected to be pro rata throughout the year and
funded out of working capital.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Contractual Obligations

We currently are party to a number of supply
contracts requiring us to purchase electrical power covering
approximately 81% of the current load servicing requirements. As
these contracts contain fixed prices at which we will be
required to make such purchases, our future results of
operations for the fiscal periods covered by these contracts
will be significantly influenced by our then ability to resell
this purchased electrical power to our customers at prices
sufficient to cover our direct and indirect costs and to realize
a profit.

Our most significant operating leases pertain to
our corporate facilities. All of our other operating leases
pertain to various equipment and technology. Certain of these
operating leases are noncancellable and contain rent escalation
clauses relating to increases to real property taxes and
maintenance costs. We incurred aggregate rent expense under
operating leases of $697,000, $704,000, and $742,000 during
fiscal 2001, 2002 and 2003, respectively.

We have five executive employment agreements in
existence at July 31, 2003 that commit us to pay future
base salaries. Under these agreements we may also be required to
pay bonuses in the event of a change of control and/or upon
early termination of employment. For a description of the change
of control and severance bonuses with respect to our Named
Executive Officers, see Item 11. Executive
Compensation  Employment Agreements.

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The following table shows our contractual
commitments as of July 31, 2003:

|                               |  |                        |         |                        |  |           |        |           |  |   |        |  |  |  |   | 
|------------------------------ |  | ---------------------- | ------- | ---------------------- |  | --------- | ------ | --------- |  | - | ------ |  |  |  | - | 
|                               |  |                        |         |                       
|                               |  |                        |         | Payments due by period
|                               |  |                        |         |                       
|                               |  |                        |         | Less than              |  |           |        | More than
|Contractual Obligations        |  | Total                  |         | 1 year                 |  | 1-3 years |        | 3 years  
|                               |  |                        |         |                        |  |           |        |          
|                               |  |                       
|                               |  | (dollars in thousands)
|Electricity purchase contracts |  | $                      | 154,079 |                        |  | $         | 90,022 |           |  | $ | 64,057 |  |  |  |  | 
|Operating leases               |  |                        | 862     |                        |  |           | 693    |           |  |   | 169    |  |  |  |  | 
|Employment Agreements          |  |                        | 2,408   |                        |  |           | 1,491  |           |  |   | 917    |  |  |  |  | 
|                               |  |                        |         |                        |  |           |        |           |  |   |        |  |  |  |   | 
|Total                          |  | $                      | 157,349 |                        |  | $         | 92,206 |           |  | $ | 65,143 |  |  |  |  | 
|                               |  |                        |         |                        |  |           |        |           |  |   |        |  |  |  |   | 

Seasonal and Inflationary Influences

Demand for electrical power is continually
influenced, both positively and negatively, by prevailing
weather conditions. To the extent that one or more of our
markets experiences a prolonged period of unseasonal weather, we
will be required to either attempt to procure additional
electricity to service our customers or to sell surplus
electricity in the open market.

Application of Critical Accounting
Policies

Accounting policies discussed below are those
that we consider to be critical to an understanding of our
financial statements because their application places the most
significant demands on our ability to judge the effect of
inherently uncertain matters on our financial results. For all
of these policies, we caution that future events rarely develop
exactly as forecast, and the best estimates routinely require
adjustment.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 adjust the related 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
    creditworthiness 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 are estimated by us as
    the number of kilowatt-hours delivered to the customer times the
    average current customer sales price per kilowatt-hour.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | 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. As a result, we have accrued a total of
    $2.7 million as of July 31, 2003, for a loss on
    litigation award in connection with an action brought by former
    employees. As additional                                                                                                                                                                                                                                                                                                                                                                     

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 our contingencies. Such additional expense
    could potentially have a material impact on our results of
    operations and financial position. See Item 3. Legal
    Proceedings of this annual report on Form 10-K for a
    description of our pending legal proceedings.

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 seven 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 February 2003,
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 any 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 and 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 the retail markets are open for competition.

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 face many uncertainties that may cause
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, 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;                    

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| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | 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.

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 can be highly
volatile. In particular, the wholesale electric power market can
experience large price fluctuations during peak load periods.
Furthermore, to the extent that we enter into contracts with
customers that require us to provide electricity at a fixed
price over an extended period of time, and to the extent that we
have not purchased electricity to cover those commitments, 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.
Energy Service Providers like us take on the risk of purchasing
power for an uncertain load and if the load does not materialize
it leaves us in a long position that would be resold
into the wholesale electricity market. Sales of this surplus
electricity may be at prices below our cost. Or, if
unanticipated load appears that may result in an insufficient
supply of electricity, we would need to purchase the additional
supply. These purchases could be at prices that are higher than
our sales price to our customers. Either situation could create
losses for us as we are exposed to the price volatility of the
wholesale spot markets. Any of these contingencies could
substantially increase our costs of operation. Such factors
could have a material adverse effect on our financial condition.

We are dependent on local utilities for
distribution of electricity to our customers over their
distribution networks. If these local utilities are unable to
properly operate their distribution networks, or if the
operation of their distribution networks is interrupted for
periods of time, we will be unable to deliver electricity to our
customers during those interruptions. This would results in lost
revenue to us, which would adversely impact the results of our
operations.

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Historical procurement charges and customer
rate changes in the Southern California Edison utility district
could adversely affect our revenue and cash flows.

Under a Settlement agreement with the California
Public Utility Commission (CPUC), Southern
California Edison (SCE) was authorized to recoup
$3.6 billion in debt incurred during the energy crisis of
2000-2001 from all customers. This debt was to be collected
under the Procurement Related Obligations Account
(PROACT) from bundled (non direct access)
customers and under the Historical Procurement Charge
(HPC) from direct access (DA) customers.

In July 2002, the CPUC issued an interim order
implementing the HPC sought by SCE. This interim order
authorized SCE to collect $391 million in HPC charges from
all DA customers by reducing their Procured Energy Credit
(PE Credit) by $0.027 per kWh beginning
July 27, 2002. The lowered PE Credit continued until an
exit fee for DA customers was approved by the CPUC. Effective
January 1, 2003, it was reduced to $0.01 per kWh. For the
fiscal year ended July 31, 2003, we estimate that HPC
charges have impacted our sales and pretax earnings by a range
of $4.8 million to $6.0 million. We are unable to
precisely determine the actual HPC charges applied to our
customers by SCE because there are different charges, by
customer type, and this charge is only on the electricity usage
above the monthly baseline usage allocation.

On September 5, 2003 the CPUC issued
Decision 03-09-016 granting SCEs request to recover
additional shortfall and authorizing the HPC balance to be
revised to $473 million; however, the $0.01 per kWh monthly
charge remained in place. As of August 1, 2003, SCE revised
its billing methodology to a bottoms-up design
effectively doing away with the PE Credit and the net effect of
the HPC on our rates. While the HPC no longer impacts our rate
calculations going forward, a recent SCE rate reduction includes
the impact of the HPC. This rate reduction will impact sales and
pretax profit in the SCE district. The rate reduction will be in
place in 2004 and will approximate the effect of the HPC dollar
impact of 2003.

Recently, SCE acknowledged that the PROACT debt
was paid in full by bundled customers at the end of July 2003.
As a result, on August 1, 2003, all SCE rates were lowered.
As a direct result, to retain our customers in the SCE utility
district, we lowered our customer rates proportionately. Our
estimate of the annual financial impact of this rate reduction
is a decline in sales and pretax profit during fiscal 2004, in
the range of $3.0 to $3.5 million. This reduction is
separate from, but in addition to, the HPC reduction seen in
2003.

These changes on our customers in the SCE
district will continue to cause a significant impact on our
revenue and cash flow; however, we do not expect that it will
preclude us from participating in the California market.

Some 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, 2003, 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 potential default on the contract. If we are
required to post such security, a portion of our cash would
become restricted, which could adversely affect our liquidity.

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We are 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 with those utilities could delay or negatively impact
our ability to serve customers in those jurisdictions. This
could have a material negative impact on our business, results
of operations and financial condition.

We are 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 energy usage data
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. The local utilitys
systems and procedures may limit or slow down our ability to
create a supplier relationship with our customers that would
delay the timing of when we can begin to provide electricity to
our new 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 are 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 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 face strong competition from incumbent
utilities and other competitors.

In some markets, our principal competitor may be
the local incumbent utility company or unregulated utility
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 their markets than we
do. In addition, incumbent utilities have been subject to
regulatory oversight 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
their 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

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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 to our retail customers
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,                                                                                                                      
|
| |  | unexpected changes in customer usage,                                                                                             
|
| |  | transmission or transportation constraints or
    inefficiencies,                                                                 
|
| |  | demand for electricity,                                                                                                           
|
| |  | natural gas, crude oil and refined products, and
    coal supply availability to generators from whom we purchase
    electricity,
|
| |  | natural disasters, wars, embargoes and other
    catastrophic events, and                                                         
|
| |  | federal, state and foreign energy and
    environmental regulation and legislation.                                               

Our results of operation and financial
condition could be affected by pending and future
litigation.

We are currently a defendant in several pending
lawsuits. We believe our substantive and procedural defenses in
each of these cases are meritorious, but we cannot predict the
outcome of any such litigation. In addition, we may become
subject to additional lawsuits in the future. If we are held
liable for significant damages in any lawsuit, our operations
and financial condition may be harmed. In addition, we could
incur substantial expenses in connection with any such
litigation, including substantial fees for attorneys and other
professional advisors. These expenses could adversely affect our
operations and cash position if they are material in amount. See
Item 3. Legal Proceedings for a description of
our current material legal proceedings.




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 credit quality money market funds,
bankers acceptance notes 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 associated with this
price volatility, we have entered into a number of 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 wholesale price
volatility risk.

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An electricity price change of per $0.01 kWh, has
an estimated annual impact on our net revenue of:

|             |  |   |               | 
|------------ |  | - | ------------- | 
|             |  |  
|California   |  | $ | 11.8  million | 
|Pennsylvania |  | $ | 16.3  million | 
|Michigan     |  | $ | 9.3 million   | 

As of July 31, 2003, we have not used
derivative instruments to hedge any of our exposure to changes
in forward electricity prices. Beginning in fiscal 2004, we may
open a brokerage account with a futures commission merchant that
would allow us to utilize exchange traded futures contracts on
electricity as part of our overall strategy with respect to
hedging our forward price risk exposure.

Because all of our energy sales and purchases,
and substantially all of our other purchases, are transacted or
denominated in United States dollars, we currently are not
materially susceptible to currency market risks.

Since we had no short or long-term debt
outstanding at July 31, 2003, our only exposure to interest
rate risks is limited to our investment of excess cash balances
in interest-bearing instruments. However, as our practice has
been, and currently continues to be, to only invest in
high-quality debt instruments with maturities of 90 days or
less, we currently are not materially susceptible to interest
rate risks.






|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The financial statement information, including
the report of independent auditors, required by this Item 8
is set forth on pages F-1 to F-28 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-28 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.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

Our Chairman and Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended) as of the end of the period covered by
this annual report on Form 10-K and, based on this
evaluation, have concluded that the disclosure controls and
procedures are effective.

There have been no changes in our internal
control over financial reporting that occurred during our fourth
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.

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##### Table of Contents






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 15, 2003, and business experience during the past
five years. Each of our directors has served continuously as one
of our directors since the date indicated in his or her
biography below, and each is currently serving a one year term
expiring at our 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    |  |     | 65 |          |  |                                            | 1999 |  |  | Mr. Carter has been our Chairman and Chief
    Executive Officer since January 2000, and as our President since
    March 2003. During the preceding four month period prior to
    January 2000, 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.                                                                                                             
|Craig G. Goodman |  |     | 53 |          |  |                                            | 2000 |  |  | 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  |  |     | 59 |          |  |                                            | 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.

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|                      |  |     |    |          |  |                                            |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------- |  | --- | -- | -------- |  | ------------------------------------------ | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |     |    | Director |  |                                           
|Name                  |  | Age |    | Since    |  | Principal Occupation and Other Information
|                      |  |     |    |          |  |                                           
|Mark S. Juergensen    |  |     | 43 |          |  |                                            | 2003 |  |  | Mr. Juergensen has served as Vice President of
    Sales and Marketing for PredictPower, an energy solutions
    software company he co-founded, since May 2000. From February
    1995 to June 2000, he served in multiple leadership positions,
    including as a Commercial Manager, for Solar Turbines,
    Caterpillars gas turbine division. From February 1992 to
    February 1995, he served as Director of Management Services for
    Sterling Energy International, a power generation management
    consulting firm he co-founded. Mr. Juergensen received a
    Bachelor of Science degree in electrical engineering from the
    University of Southern California.
|Robert C. Perkins     |  |     | 64 |          |  |                                            | 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.                                                                                                                                                                                                                                                                                                                                                  
|Joseph P. Saline, Jr. |  |     | 62 |          |  |                                            | 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.                                                                                                                                                                                                                                                                                                                                       

Audit Committee Financial Expert

Our Board of Directors has determined that Robert
C. Perkins, who serves as Chairman of the Audit Committee of our
Board of Directors, is an Audit Committee Financial Expert.
Mr. Perkins is independent, as the term is defined in
Section 121(A) of the listing standards of the American
Stock Exchange.

Information with Respect to Our Executive
Officers

Information regarding our executive officers is
included in Item 1A of Part I of this annual report on
Form 10-K under the caption Executive Officers of the
Registrant, and is incorporated herein by reference.

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 Securities and Exchange
Commission, or 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.

To our knowledge, based solely on review of the
copies of such reports furnished to us and written
representations that no other reports were required during
fiscal 2003, and except as disclosed in the following paragraph,
our officers, directors and greater-than-ten-percent beneficial
owners complied with all Section 16(a) filing requirements
during fiscal 2003.

The following persons made late filings of
reports under Section 16(a) of the Exchange Act that
related to transactions that occurred during fiscal 2003:
(a) Mark S. Juergensen, one of our directors, filed a late
Form 3 in connection with his initial appointment as a
director; (b) Linda Guckert, one of our executive officers,
filed a late Form 3 in connection with her initial
appointment as a director; and (c) Michael G. Nelson, one
of our executive officers, filed a late Form 3 in
connection with his initial appointment as an executive officer.
In addition, to our knowledge, Joseph P. Saline, Jr., one
of our

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##### Table of Contents



directors, has yet to file a Form 3 in
connection with his initial appointment as a director and has
not filed any Forms 4 with respect to any purchases or
sales of our securities.


Code of Ethics

We have adopted a code of ethics, entitled the
Commonwealth Energy Corporation Code of Business
Conduct, which applies to, among others, our senior
officers, including our Chief Executive Officer, our Chief
Financial Officer, and our Corporate Controller. A copy of the
Commonwealth Energy Corporation Code of Business Conduct is
filed as an exhibit to this annual report on Form 10-K. We
intend to disclose amendments to or waivers from a required
provision of the Commonwealth Energy Corporation Code of
Business Conduct by including such information as an exhibit in
future filings.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Compensation of Our 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.During fiscal 2003, each non-employee
director was 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 served on Board committees (other than
the chairman of such committee) were paid $300 for each
committee meeting the Board member attends. Committee
chairpersons were paid $500 for each committee meeting the
chairperson attended.

For fiscal 2004, each non-employee director will
be paid a quarterly retainer in the amount of $8,000, a fee of
$1,000 for each Board meeting which the Board member attends in
person and a fee of $750 for each Board meeting which the Board
member attends telephonically. Directors who served on Board
committees (other than the chairman of such committee) will be
paid $750 for each committee meeting the Board member attends in
person and a fee of $500 for each Committee meeting which the
Board member attends telephonically. Committee chairpersons will
be paid $1,000 for each committee meeting the chairperson
attends, whether in person or telephonically. In addition, each
non-employee director who resides outside the Southern
California area, as defined in the policy, will be entitled to
receive reimbursement for reasonable travel expenses in
accordance with our travel expense policy.

Stock Options.Each
non-employee director is eligible to receive awards under our
1999 Equity Incentive Plan, which we refer to as the Plan, a
discretionary stock option plan. We did not grant any stock
options to our directors under the Plan in fiscal 2003.

In connection with their service on our Board, we
agreed to issue certain stock options to Mr. Perkins,
Ms. Jonas, Mr. Goodman and Mr. Juergensen. In
August 2003, in fulfillment of these agreements, we granted the
following stock options to these directors:

|                |  |            |         |                |  |            |      |  |  |  |           | 
|--------------- |  | ---------- | ------- | -------------- |  | ---------- | ---- |  |  |  | --------- | 
|                |  | Number of  |         |                |  |           
|                |  | Shares     |         |                |  |           
|                |  | Underlying |         |                |  |           
|                |  | Options    |         |                |  | Expiration
|Name            |  | Granted    |         | Exercise Price |  | Date      
|                |  |            |         |                |  |           
|Robert Perkins  |  |            | 100,000 |                |  | $          | 2.75 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 2.75 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 1.86 |  |  |  | 8/29/2013 | 
|Craig Goodman   |  |            | 50,000  |                |  | $          | 2.50 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 2.75 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 1.86 |  |  |  | 8/29/2013 | 
|Junona Jonas    |  |            | 50,000  |                |  | $          | 2.50 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 2.75 |  |  |  | 8/29/2013 | 
|                |  |            | 50,000  |                |  | $          | 1.86 |  |  |  | 8/29/2013 | 
|Mark Juergensen |  |            | 37,250  |                |  | $          | 1.86 |  |  |  | 8/29/2013 | 

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Beginning in fiscal 2004, each non-employee
director who first becomes a member of the Board will be granted
an option to purchase 50,000 shares of our common stock
pursuant to the Plan upon appointment or election to the Board,
with the following terms and conditions: (a) the options
shall be subject to all terms and conditions of the Plan;
(b) the options shall vest quarterly at a rate of
12,500 shares on each three-month anniversary of the date
of grant, with any unvested shares being forfeited to us if the
Board members service is terminated; (c) the options
shall have a term of 10 years from the date of grant; and
(d) the exercise price shall be the fair market value (as
defined in the Plan) of the our common stock on the date of
grant.

In addition, each non-employee member of the
Board will be granted an option purchase 50,000 shares of our
common stock pursuant to the Plan, effective as of the close of
business on the date of each annual meeting of shareholders at
which such non-employee Director is elected a non-employee
Director, with the following terms and conditions: (a) the
options shall be subject to all terms and conditions of the
Plan; (b) the options shall vest quarterly at a rate of
12,500 shares on each three-month anniversary of the date
of grant, with any unvested shares being forfeited to us if the
Board members service is terminated; (c) the options
shall have a term of 10 years from the date of grant; and
(d) the exercise price shall be the fair market value (as
defined in the Plan) of our common stock on the date of grant.

No stock option grants were made to Joseph P.
Saline, Jr., one of our non-employee directors, and no
stock option grants will be made to Mr. Saline with respect
to the above-referenced fiscal 2004 stock option resolution by
the Board, in accordance with the order of the Honorable James
M. Brooks of the Superior Court of the State of California for
the County of Orange.

We recently entered into a Settlement Agreement
and Release with Robert C. Perkins, one of our directors, with
respect to a dispute between us and Perkins as to the number and
terms of certain options to purchase shares of our common stock
that had been promised to Mr. Perkins in 1999, 2001 and
2002. Pursuant to the settlement agreement and release, we
granted Mr. Perkins (a) an option to purchase
80,000 shares of our common stock at an exercise price of
$1.00 per share; and (b) an option to purchase 20,000
shares of our common stock at an exercise price of $1.86 per
share. In exchange, Mr. Perkins released all claims he may
have had against us with respect to the past promises to grant
options.

Compensation of Our Executive
Officers

We are required by the SEC to disclose
compensation paid by us during the last three fiscal years to
(a) our Chief Executive Officer; (b) our four most
highly compensated executive officers, other than the Chief
Executive Officer, who were serving as executive officers at the
end of fiscal 2003; 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 us at the
end of fiscal 2003; 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, we are disclosing information
regarding compensation paid by us during the last three fiscal
years to (a) Ian B. Carter, our Chief Executive Officer;
and (b) Richard L. Paulsen, James L. Oliver, John A.
Barthrop and Linda Guckert, the four most highly-compensated
executive officers, other than the Chief Executive Officer, who
were serving as executive officers at the end of fiscal 2003 and
whose salary and bonus exceeded $100,000. All of these officers
are referred to in this Annual Report as the Named
Executive Officers.

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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   
|                            |                               |                     |      |        |  |           
|                            |                               |                     |      | Other  |  |            |         | Securities |  |                        |         | All    
|                            |                               |                     |      | Annual |  | Restricted |         | Underlying |  |                        |         | Other  
|                            |                               | Fiscal              |      |        |  | Compen-    |         | Stock      |  | Options/               |         | LTIP    |  | Compen-
|Name and Principal Position |                               | Year                |      | Salary |  | Bonus(1)   |         | sation     |  | Award(s)               |         | SARs    |  | Payouts |        | sation
|                            |                               |                     |      |        |  |            |         |            |  |                        |         |         |  |         |        |       
|Ian B. Carter               |                               |                     | 2003 |        |  | $          | 402,062 |            |  | $                      | 100,000 |         |  | $       | 31,102 | (2)    |     |  |  |   |  |  |  |           |  |  |  |   |  |   |       |    
|                            | Chief Executive Officer,      |                     |      | 2002   |  |            |         | 314,988    |  |                        |         | 495,000 |  |         |        | 62,553 | (2) |  |   |  |  |  |   | 3,800,000 |  |  |   |  |  |   |        |    | 
|                            | President and Chairman        |                     |      | 2001   |  |            |         | 297,975    |  |                        |         | 100,000 |  |         |        | 36,241 | (2) |  |   |  |  |  |   | 400,000   |  |  |   |  |  |   |        |    | 
|                            | of the Board                  |                     |      |        |  |            |         |            |  |                        |         |         |  |         |        |        |     |  |   |   |  |  |   |           |  |  |   |   |  |   |        |     | 
|Richard L. Paulsen          |                               |                     | 2003 |        |  |            | 360,066 |            |  |                        | 75,000  |         |  |         | 23,823 | (3)    |     |  |  |   |  |  |  |           |  |  |  |   |  |   |       |    
|                            | Chief Operating Officer       |                     |      | 2002   |  |            |         | 310,000    |  |                        |         | 140,000 |  |         |        | 22,046 | (3) |  |   |  |  |  |   | 900,000   |  |  |   |  |  |   |        |    | 
|                            |                               |                     | 2001 |        |  |            | 245,534 |            |  |                        | 50,000  |         |  |         | 5,647  | (3)    |     |  |  |   |  |  |  |           |  |  |  |   |  |   |       |    
|John A. Barthrop            |                               |                     | 2003 |        |  |            | 202,527 |            |  |                        | 55,500  |         |  |         | 18,132 | (4)    |     |  |  |   |  |  |  |           |  |  |  |   |  | $ | 86,880 | (5)
|                            | General Counsel and Secretary |                     |      | 2002   |  |            |         | 182,016    |  |                        |         | 55,500  |  |         |        | 16,203 | (4) |  |   |  |  |  |   | 500,000   |  |  |   |  |  |   |        |    | 
|                            |                               |                     |      | 2001   |  |            |         | 145,366    |  |                        |         | 40,000  |  |         |        | 10,406 | (4) |  |   |  |  |  |   |          |  |  |   |  |  |   |        |    | 
|James L. Oliver             |                               |                     | 2003 |        |  |            | 201,088 |            |  |                        | 55,500  |         |  |         | 18,124 | (6)    |     |  |  |   |  |  |  |           |  |  |  |   |  |   |       |    
|                            | Chief Financial Officer       |                     |      | 2002   |  |            |         | 171,000    |  |                        |         | 89,813  |  |         |        | 19,996 | (6) |  |   |  |  |  |   | 500,000   |  |  |   |  |  |   |        |    | 
|                            |                               |                     |      | 2001   |  |            |         | 138,208    |  |                        |         | 40,000  |  |         |        | 12,166 | (6) |  |   |  |  |  |   |          |  |  |   |  |  |   |        |    | 
|Linda L. Guckert            |                               |                     | 2003 |        |  |            | 153,642 |            |  |                        | 20,000  |         |  |         | 10,878 | (7)    |     |  |  |   |  |  |  |           |  |  |  |   |  |   |       |    
|                            | Vice President of Information |                     |      | 2002   |  |            |         | 89,410     |  |                        |         |        |  |         |        | 3,331  | (7) |  |   |  |  |  |   |          |  |  |   |  |  |   |        |    | 
|                            | Technology                    |                     |      | 2001   |  |            |         |           |  |                        |         |        |  |         |        |       |     |  |   |  |  |  |   |          |  |  |   |  |  |   |        |    | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Bonus compensation is determined pursuant to
    employment agreements 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 2003 consists of an automobile allowance
    of $15,600, and reimbursement for medical expenses of $15,502.
    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.               
|   
|(3) | For Mr. Paulsen, the amount attributable to
    perquisites in fiscal 2003 consists of an automobile allowance
    of $8,800, and reimbursement for medical expenses of $15,023.
    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 2003 consists of an automobile allowance
    of $7,200, and reimbursement for medical expenses of $10,932.
    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.
|   
|(5) | Represents the positive difference between the
    valuation of our common stock as of the date stock options were
    exercised by Mr. Barthrop and the exercise price of the
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



(Footnotes continued on the next
page.)


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##### Table of Contents



(Footnotes continued from the preceding
page.)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | For Mr. Oliver, the amount attributable to
    perquisites in fiscal 2003 consists of an automobile allowance
    of $7,200, and reimbursement for medical expenses of $10,924.
    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 to pay income taxes on reimbursements) of
    $7,366.
|   
|(7) | For Ms. Guckert, the amount attributable to
    perquisites in fiscal 2003 consists of reimbursement for medical
    expenses of $10,878. 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 $3,331.


Stock Option Grants.

No stock options were granted to the Named
Executive Officers during fiscal 2003.

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 2003.

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($)(2)
|                   |  | Shares Acquired |        | Realized |  |                        |        |                      
|Name               |  | on Exercise(#)  |        | ($)(1)   |  | Exercisable            |        | Unexercisable         |  | Exercisable |           | Unexercisable
|                   |  |                 |        |          |  |                        |        |                       |  |             |           |              
|Ian B. Carter      |  |                 |       |          |  |                        |       |                       |  |             | 2,750,000 |               |  |  | 1,450,000 |  |  | $ | 142,000 |  |  |  |  | 
|Richard L. Paulsen |  |                 |       |          |  |                        |       |                       |  |             | 675,000   |               |  |  | 225,000   |  |  |   |        |  |  |  |  | 
|John A. Barthrop   |  |                 | 48,000 |          |  | $                      | 86,880 |                       |  |             | 375,000   |               |  |  | 125,000   |  |  |   |        |  |  |  |  | 
|James L. Oliver    |  |                 |       |          |  |                        |       |                       |  |             | 375,000   |               |  |  | 125,000   |  |  |   |        |  |  |  |  | 
|Linda Guckert      |  |                 |       |          |  |                        |       |                       |  |             |          |               |  |  |          |  |  |   |        |  |  |  |  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the positive difference between the
    valuation of $1.86 per share of common stock as of the date the
    options were exercised and the exercise price of the options.
    There is no market value for the common stock. This valuation
    was made by our board of directors for accounting and financial
    reporting purposes and does not reflect actual transactions.
|   
|(2) | Represents the positive difference between the
    valuation of $1.92 per share of common stock as of July 31,
    2003 and the exercise price of the options. There is no market
    value for the common stock. This valuation was made by our board
    of directors for accounting and financial reporting purposes and
    does not reflect actual transactions.                      

Employment agreements

Ian B. Carter.Mr. Carter serves as our
Chairman, Chief Executive Officer and President. We entered into
an employment agreement with Mr. Carter on January 1,
2000. Mr. Carters employment agreement was amended 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

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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 our results of
operation. Mr. Carters base salary may be increased
from time-to-time by the Board of Directors. Pursuant to his
employment agreement, we granted to Mr. Carter an option to
purchase 700,000 shares of Common Stock at an exercise
price of $2.50 per share, expiring on January 1, 2010, with
300,000 options vested immediately and an additional 100,000
options vesting on January 1 annually through 2004. The
employment agreement also provides that we will grant
Mr. Carter additional options to purchase up to
2,300,000 shares of Common Stock upon the occurrence of the
following events (a) completion of the audit of our
July 31, 2000 consolidated financial statements 
500,000; (b) settlement of the California Department of
Corporations investigation  250,000;
(c) settlement of the California Public Utilities
Commission investigation  500,000;
(d) completion of liquidity event  750,000; and
(e) completion of a successful initial public
offering  300,000. Mr. Carters employment
agreement also provides for the granting of up to 300,000
additional options each January through 2004 if we meet or
exceeds financial performance objectives.


If during the term of the employment agreement,
Mr. Carter is terminated, leaves, or is replaced as a
result of: (a) all or substantially all of our assets or
more than fifty percent (50%) of our issued and outstanding
voting shares is acquired by any one person or entity not then
affiliated with us; (b) a group of shareholders takes
control of us 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 us, we
must pay Mr. Carter an amount equal to eight times
Mr. Carters then-current base salary plus the amount
of taxes payable by Mr. Carter. In such events,
Mr. Carter has the right to require us to repurchase all of
his stock and all stock options referenced in his employment
agreement, whether earned or unearned, at a value two times the
then aggregate price value of our common stock.

We may terminate Mr. Carters
employment upon Mr. Carters death, total disability,
or for cause. Upon a termination for death or total disability,
we will continue to pay Mr. Carter for a period of one year
thereafter or until expiration of the term of the employment
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 our assets
to a person unaffiliated with us or the occurrence of a change
of control without Mr. Carters consent or
(b) our material breach of the employment agreement. In the
case of termination due to our 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, we have met or
exceeded the projections set forth in the business plan, and we
do not offer to extend Mr. Carters employment on
terms no less favorable than those stated in the then current
employment agreement, we must pay Mr. Carter a sum of
$100,000 for a period of ten years. Mr. Carter will consult
to us during that period and be Vice-Chairman of the Board.

Richard L. Paulsen.Mr. Paulsen serves as our Chief
Operating Officer. We entered into an employment agreement with
Mr. Paulsen 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 employment agreement
there is a change of control as defined in the employment
agreement, then we will pay Mr. Paulsen a cash bonus equal
to the sum of eight times his

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then annual base salary plus the amount of
certain applicable taxes payable by him. Mr. Paulsen has
the right to require us to repurchase all of his stock and all
stock options referenced in his employment agreement, whether
earned or unearned, at a value two times the then aggregate
price value of our common 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 employment 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 for any of the
reasons noted in this paragraph, he will be entitled to receive
the base salary and benefits earned pursuant to his employment
agreement through the date of termination. If
Mr. Paulsens employment is terminated for any other
reason, then he will be entitled to receive his base salary and
benefits earned pursuant to his employment agreement through the
date of termination and an amount equal to one and one-half
times his then current annual base salary.

James L. Oliver.Mr. Oliver serves as our Chief
Financial Officer. We entered into an employment agreement with
Mr. Oliver 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 we have met or exceeded
the projections in our annual business plan or as the board of
directors deems appropriate.

If during the term of the employment agreement
there is a change of control as defined in the employment
agreement, then we 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 in the employment agreement,
Mr. Oliver shall have the right to require us to repurchase
all of his stock and stock options, then earned or to be earned,
at two times the then aggregate price value of our common 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 employment 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 for any of the
reasons noted in this paragraph, he will be entitled to receive
the base salary and benefits earned pursuant to his employment
agreement through the date of termination. If
Mr. Olivers employment is terminated for any other
reason, then he will be entitled to receive his base salary and
benefits earned through the date of termination and an amount
equal to one and one-half times his then current annual base
salary.

John A. Barthrop.Mr. Barthrop serves as our
General Counsel and Secretary. We entered into to an employment
agreement with Mr. Barthrop 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 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 we have
met or exceeded the projections in our annual business plan or
as the Board of Directors deems appropriate.

If during the term of the employment agreement
there is a change as defined in the employment agreement, then
we 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.

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The agreement will terminate upon the occurrence
of any of the following: Mr. Barthrops death, total
disability, material breach of the employment 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 for any of
the reasons noted in this paragraph, 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 the base salary and benefits earned through the date of
termination and 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 our 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.

Linda Guckert.Ms. Guckert serves as our Vice President of Information
Technology. Ms. Guckert is employed on an at-will basis
pursuant to a letter agreement dated December 7, 2001. The
letter agreement provides that, if Ms. Guckerts
employment with us is terminated within six months of the date
that another company acquires 50% or more of our capital stock
or control of the Company is taken over by a group of
shareholders when no significant change of ownership has taken
place, we will pay Ms. Guckert a severance bonus equivalent
to six months of her then current base salary.

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 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 the
Company. None of our executive officers serve as members of the
board of directors or compensation committee of any entity that
has one or more executive officers who serve on our Board of
Directors or the Compensation Committee.

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

The following table contains certain information
as of October 15, 2003 regarding all persons who were the
beneficial owners of more than 5% of the outstanding shares of
Common Stock, each of our directors, each nominee for election
to become a director, each of 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 our actual knowledge.

|                                                                 |                       |                         |         |                                         |  |                         |           |           |     |          |      |            |   |  |        |        |  |  |   |   |  |  |     |     |  
|---------------------------------------------------------------- | --------------------- | ----------------------- | ------- | --------------------------------------- |  | ----------------------- | --------- | --------- | --- | -------- | ---- | ---------- | - |  | ------ | ------ |  |  | - | - |  |  | --- | --- | -
|                                                                 |                       |                         |         |                                        
|                                                                 |                       | Common Stock            |         | Series A Convertible Preferred Stock(1)
|                                                                 |                       |                         |         |                                        
|                                                                 |                       |                         |         |                                         |  |                         |           |          
|                                                                 |                       | Amount and Nature of    |         |                                         |  | Amount and Nature of    |           |          
|                                                                 |                       | Beneficial Ownership(2) |         |                                         |  | Beneficial Ownership(2) |           |          
|                                                                 |                       |                         |         |                                         |  |                         |           |          
|                                                                 |                       | Number of               |         |                                         |  |                         |           | Number of |     |          |      |           
|                                                                 |                       | Shares                  |         | Right to                                |  | Percent of              |           | Shares    |     | Right to |      | Percent of
|Name                                                             |                       | Owned(3)                |         | Acquire(4)                              |  | Class                   |           | Owned(3)  |     | Acquire  |      | Class     
|                                                                 |                       |                         |         |                                         |  |                         |           |           |     |          |      |           
|Principal Stockholders:                                          |                       |                         |         |                                         |  |                         |           |           |     |          |      |            |   |  |        |        |  |  |   |   |  |  |     |    
|                                                                 | Ian B. Carter         |                         |         | 50,000                                  |  |                         |           | 2,750,000 |     |          |      | 9.2        | % |  |        |       |  |  |   |  |  |  |     |    |  
|Directors and Named Executive
    Officers:                      |                       |                         |         |                                         |  |                         |           |           |     |          |      |            |   |  |        |        |  |  |   |   |  |  |     |    
|                                                                 | Ian B. Carter         |                         |         | 50,000                                  |  |                         |           | 2,750,000 |     |          |      | 9.2        | % |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Craig G. Goodman      |                         |         |                                        |  |                         |           | 137,500   |     |          |      | *          |   |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Junona A. Jonas       |                         |         |                                        |  |                         |           | 137,500   |     |          |      | *          |   |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Robert C. Perkins     |                         |         | 177,000                                 |  |                         |           | 337,500   | (5) |          |      | 1.8        | % |  |        | 25,000 |  |  |   |  |  |  |     | 4.1 | %
|                                                                 | Joseph P. Saline, Jr. |                         |         |                                        |  |                         |           | 704,000   | (6) |          |      | 2.5        | % |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Mark S. Juergensen    |                         |         |                                        |  |                         |           | 25,000    |     |          |      | *          |   |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Richard L. Paulsen    |                         |         |                                        |  |                         |           | 675,000   |     |          |      | 2.4        | % |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | John A. Barthrop      |                         |         | 50,000                                  |  |                         |           | 375,000   |     |          |      | 1.5        | % |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | James L. Oliver       |                         |         |                                        |  |                         |           | 375,000   |     |          |      | 1.3        | % |  |        |       |  |  |   |  |  |  |     |    |  
|                                                                 | Linda Guckert         |                         |         | 5,000                                   |  |                         |           | 25,000    |     |          |      | *          |   |  |        |       |  |  |   |  |  |  |     |    |  
|All Directors and Executive Officers as a group
    (13 persons) |                       |                         | 282,000 |                                         |  |                         | 5,829,000 | (7)       |     |          | 18.3 | %          |   |  | 25,000 |        |  |  |  |   |  |  | 4.1 | %  




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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include disputed shares of preferred
    stock that Mr. Saline claims to own, none of which is
    currently reflected as outstanding on our shareholder list. The
    Superior Court for the County of Orange has issued an order
    requiring Commonwealth to recognize Mr. Salines
    ownership of 352,000 shares of preferred stock with the
    following rights and privileges: (a) each share would be
    convertible into two shares of common stock; (b) each share
    would be entitled to two votes; (c) 252,000 of the shares
    would be entitled to 12% cumulative annual dividends and 100,000
    of the shares would be entitled to 14% cumulative annual
    dividends; (d) we would be required to pay dividends to
    Mr. Saline before paying dividends to any other
    shareholders; and each share would have a priority in
    liquidation to common stock. Mr. Saline would own 100% of
    the outstanding shares of each of these respective series of
    preferred stock. We intend to appeal the courts order. See
    Item 3. Legal Proceedings. Under the rules of
    the Securities and Exchange Commission, Mr. Saline may be
    deemed to be the beneficial owner of these shares because,
    pursuant to the court order, he may have the power to vote these
    shares.
|   
|(2) | Subject to applicable community property and
    similar statutes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | Includes shares beneficially owned, whether
    directly or indirectly, individually or together with associates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



(Footnotes continued on the next
page.)


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##### Table of Contents



(Footnotes continued from the preceding
page.)




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Represents shares of our 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 15, 2003.                                                                                                                                                                                                     
|   
|(5) | Includes 25,000 shares of common stock issuable
    upon conversion of shares of Series A Convertible Preferred
    Stock held by Mr. Perkins at a conversion ratio of
    one-for-one.                                                                                                                                                                                                                                        
|   
|(6) | Represents shares of our 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 (1) above. Under the rules of Securities and
    Exchange Commission, Mr. Saline may be deemed to be the
    beneficial owner of these shares because, pursuant to the court
    order, he may have the power to vote these shares.
|   
|(7) | 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 (6) above.                                                                                                                                                                                                             

Equity Compensation Plan Information

Our 1999 Equity Incentive Plan, or the 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 2003.

|                                                               |  |                      |           |                      |  |                           |      |  |  |  |           |    
|-------------------------------------------------------------- |  | -------------------- | --------- | -------------------- |  | ------------------------- | ---- |  |  |  | --------- | ---
|                                                               |  | (a)                  |           | (b)                  |  | (c)                      
|                                                               |  |                      |           |                      |  |                          
|                                                               |  | Number of            |           |                      |  | Number of Securities     
|                                                               |  | Securities to be     |           |                      |  | Remaining Available for  
|                                                               |  | Issued Upon Exercise |           | Weighted-Average     |  | Future Issuance Under    
|                                                               |  | of Outstanding       |           | Exercise Price of    |  | Equity Compensation Plans
|                                                               |  | Options, Warrants    |           | Outstanding Options, |  | (Excluding Securities    
|Plan category                                                  |  | and Rights           |           | Warrants and Rights  |  | Reflected in Column (a)) 
|                                                               |  |                      |           |                      |  |                          
|Equity compensation plans approved by security
    holders     |  |                      | 2,927,000 | (1)                  |  | $                         | 2.65 |  |  |  | 4,073,000 | (2)
|Equity compensation plans not approved by
    security holders |  |                      | 4,562,000 | (3)                  |  | $                         | 2.48 |  |  |  |          |    
|                                                               |  |                      |           |                      |  |                           |      |  |  |  |           |    
|Total                                                          |  |                      | 7,489,000 |                      |  | $                         | 2.55 |  |  |  | 4,073,000 |    




|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents shares of common stock that may be
    issued pursuant to outstanding options granted under the 1999
    Equity Incentive Plan.                                         
|   
|(2) | Represents shares of common stock that may be
    issued pursuant to options available for future grant under 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.




Item 13. Certain Relationships and
Related Transactions.

We utilize Technical Service Group, Inc., doing
business as Symcas-TSG (Symcas) on a limited basis
for our IT maintenance. We paid Symcas $577,000 in fiscal 2003
for such services. Linda Guckert, our Vice President of
Information Technology, and her husband together own 50% of
Symcas.

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Item 14. Principal Accounting Fees and
Services.

The following table sets forth the fees billed to
us by Ernst & Young LLP, our independent auditor for each of
the last two fiscal years.

|                   |  |             |         |      |  |   |         | 
|------------------ |  | ----------- | ------- | ---- |  | - | ------- | 
|                   |  |            
|                   |  | Fiscal Year
|                   |  |            
|                   |  | 2002        |         | 2003
|                   |  |             |         |     
|Audit Fees         |  | $           | 300,420 |      |  | $ | 326,898 | 
|Audit-Related Fees |  |             |        |      |  |   |        | 
|Tax Fees           |  |             | 93,900  |      |  |   | 130,263 | 
|All Other Fees     |  |             |        |      |  |   | 22,594  | 
|                   |  |             |         |      |  |   |         | 
|                   |  | $           | 394,320 |      |  | $ | 479,755 | 
|                   |  |             |         |      |  |   |         | 

Audit Fees:This
category includes the audit of our annual consolidated financial
statements, the review of financial statements included in our
quarterly reports on Form 10-Q and services that are
normally provided by the independent auditors in connection with
statutory and regulatory filings or engagements for those fiscal
years.

Audit Related Fees:This category consists of assurance and related services
provided by Ernst & Young LLP that were reasonably related
to the performance of the audit or review of our financial
statements and which are not reported above under Audit
Fees. Ernst & Young LLP did not bill the Company
for any audit-related services for fiscal 2002 or 2003.

Tax Fees.This
category consists of professional services rendered by
Ernst & Young LLP for tax services, including tax
compliance, tax advice and tax planning.

All Other Fees.This
category consists of fees for advisory services in relation to
the Companys billing system.

The Audit Committee of our Board of Directors has
established a practice that requires the committee to
pre-approve any audit or permitted non-audit services to be
provided to us by our independent auditor, Ernst &
Young LLP, in advance of such services being provided to us.

In fiscal 2002, none of the tax fees were
pre-approved by the Audit Committee. In fiscal 2003, all of the
tax related fees and the fees included in the category All
Other Fees were pre-approved by the Audit Committee. Under
the SEC rules, subject to certain de minimis criteria,
pre-approval is required for all professional services rendered
by our principal accountant for all services rendered on or
after May 6, 2003. We are in compliance with these SEC
rules.

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PART IV






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

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

|                                                                                                          |  |    
|--------------------------------------------------------------------------------------------------------- |  | ---
|Report of Ernst & Young LLP, independent
    auditors                                                     |  | F-1
|Consolidated statements of income for the three
    years in the period ended July 31, 2003               |  | F-2
|Consolidated balance sheets at July 31, 2002
    and 2003                                                 |  | F-3
|Consolidated statements of shareholders
    equity for the three years in the period ended July 31, 2003 |  | F-4
|Consolidated statements of cash flows for the
    three years in the period ended July 31, 2003           |  | F-5
|Notes to consolidated financial statements                                                                |  | F-6

(a)(2) Financial Statement Schedules

All schedules are omitted as the required
information is inapplicable or the information is presented in
the consolidated financial statements or related notes.

(b) Reports on Form 8-K.

We filed a Current Report on Form 8-K on
June 17, 2003, reporting our operating results for the
three and nine months ended April 30, 2003.

(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(3)                                                                                                                                                         
|Material Contracts Relating to Management
    Compensation Plans or Arrangements
|                                                                                 | 10.1 |                  |  | Employment Agreement dated January 1, 2000,
    between Commonwealth Energy Corporation and Ian B. Carter, as
    modified by an Addendum to Employment Agreement dated as of
    November 1, 2000(1)                
|                                                                                 | 10.2 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and Richard L. Paulsen(2)                                                                                                   
|                                                                                 | 10.3 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and James L. Oliver(2)                                                                                                      
|                                                                                 | 10.4 |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and John A. Barthrop(2)                                                                                                     
|                                                                                 | 10.5 |                  |  | Commonwealth Energy Corporation 1999 Equity
    Incentive Plan(4)                                                                                                                                                    
|                                                                                 | 10.6 |                  |  | Employment Letter dated December 7, 2001 for
    Linda Guckert                                                                                                                                                       
|                                                                                 | 10.7 |                  |  | Employment Agreement dated between Commonwealth
    Energy Corporation and Michael G. Nelson                                                                                                                         

43



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|                         |       |                  |  |                                                                                                                                                                                                                   
|------------------------ | ----- | ---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                  |       |                 
|Number                   |       | Title of Exhibit
|                         |       |                 
|Other Material Contracts
|                         | 10.8  |                  |  | 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) 
|                         | 10.9  |                  |  | PECO Energy Company Confirmation Agreement dated
    January 30, 2001(1)                                                                                                                                          
|                         | 10.10 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated May 13, 2001(1)                                                                                                                                   
|                         | 10.11 |                  |  | 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)
|                         | 10.12 |                  |  | 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)                     
|                         | 10.13 |                  |  | Amendment Number 6 to lease by and between
    Warner/ Redhill Associates and Frederick Michael Bloom(2)                                                                                                          
|                         | 10.14 |                  |  | Second Amendment to the Limited Liability Company
    Agreement of Summit Energy Ventures, LLC(6)                                                                                                                 
|                         | 10.15 |                  |  | Commonwealth Energy Corporation Summary of Rights
    to Purchase Preferred Stock(6)                                                                                                                              
|                         | 10.16 |                  |  | Master Power Purchase Agreement dated
    May 16, 2002 between Commonwealth Energy Corporation and
    Reliant Energy Services, Inc.(7)                                                                           
|                         | 10.17 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Energy Trading, Inc. dated
    July 25, 2002(7)                                                                                   
|                         | 10.18 |                  |  | Confirmation of Multi-Block Electric Power
    Transaction between Commonwealth Energy Corporation and
    TransAlta Energy Marketing (U.S.) Inc. dated March 1,
    2002(7)                                      
|                         | 10.19 |                  |  | Lease Agreement dated August 9, 2002,
    between Commonwealth Energy Corporation and Cherry Tree
    Investors, L.P.(7)                                                                                          
|                         | 10.20 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated July 22, 2003                                                                                                                                     
|                         | 10.21 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated July 22, 2003                                                                                                                                     
|                         | 10.22 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Trading, Inc. dated March 24,
    2003                                                                                            
|                         | 10.23 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Trading, Inc. dated July 24, 2003                                                                                                 
|                         | 14.1  |                  |  | Commonwealth Energy Corporation Code of Business
    Conduct                                                                                                                                                      
|                         | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                                                                                                                                                 
|                         | 23.1  |                  |  | Consent of Ernst & Young, LLP,
    independent auditors                                                                                                                                                           
|                         | 31.1  |                  |  | Certification of Chief Executive Officer of
    Commonwealth Energy Corporation pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934                                                          
|                         | 31.2  |                  |  | Certification of Chief Financial Officer of
    Commonwealth Energy Corporation pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934                                                          
|                         | 32.1  |                  |  | 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                 
|                         | 32.2  |                  |  | 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 Form 10/ A filed with the
    Securities and Exchange Commission on November 14, 2001
    (File No. 000-33069).               

44



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|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | This exhibit is incorporated herein by reference
    to Commonwealth Energy Corporations form 10-Q for the
    quarterly period ended January 31, 2003.                                                                 
|   
|(4) | This exhibit is incorporated by reference to
    Commonwealth Energy Corporations Registration Statement on
    Form S-8 (File No. 333-109552) filed with the
    Securities and Exchange Commission on October 8, 2003.
|   
|(5) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Form 10-Q filed with the
    Securities and Exchange Commission on December 17, 2001
    (File No. 000-33069).                            
|   
|(6) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Form 10/ A filed with the
    Securities and Exchange Commission on April 3, 2002 (File
    No. 000-33069).                               
|   
|(7) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Corporations
    Form 10-K for the year ended July 31, 2002 filed with
    the Securities and Exchange Commission on October 29, 2002.   

45



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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 29, 2003 |  | COMMONWEALTH ENERGY CORPORATION
|                        |  | By:                             |  | /s/ IAN B. CARTER                                               
|                        |  |                                 |  |                                                                 
|                        |  |                                 |  | Ian B. Carter                                                   
|                        |  |                                 |  | Chairman of the Board, President
    and Chief Executive Officer

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, President, Chief Executive
    Officer and a Director (Principal Executive Officer) |  | October 29, 2003
|                                          
|                                          
|/s/ JAMES L. OLIVERJames L. Oliver         |  | Chief Financial Officer (Principal Financial
    Officer)                                                  |  | October 29, 2003
|                                          
|                                          
|/s/ KENNETH L. ROBINSONKenneth L. Robinson |  | Vice President  Finance and Controller
    (Principal Accounting Officer)                                 |  | October 29, 2003
|                                          
|/s/ CRAIG G. GOODMANCraig G. Goodman       |  | Director                                                                                                   |  | October 29, 2003
|                                          
|/s/ MARK S. JUERGENSENMark S. Juergensen   |  | Director                                                                                                   |  | October 29, 2003
|                                          
|/s/ JUNONA A. JONASJunona A. Jonas         |  | Director                                                                                                   |  | October 29, 2003
|                                          
|/s/ ROBERT C. PERKINSRobert C. Perkins     |  | Director                                                                                                   |  | October 29, 2003
|                                          
|Joseph P. Saline,
    Jr.                  |  | Director                                                                                                   |  |                 

46



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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

To the Board of Directors and Shareholders of
Commonwealth Energy Corporation

We have audited the accompanying consolidated
balance sheets of Commonwealth Energy Corporation as of
July 31, 2002 and 2003, and the related consolidated
statements of income, shareholders equity and cash flows
for each of the three years in the period ended July 31,
2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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, 2002 and 2003, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended July 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.

/s/ Ernst & Young LLP

Orange County, California

October 24, 2003


F-1



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COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts and
per kWh)


|                                         |         |                            |         |      |  |      |         |      |  |   |         |      | 
|---------------------------------------- | ------- | -------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                                         |         |                           
|                                         |         | Fiscal Year Ended July 31,
|                                         |         |                           
|                                         |         | 2001                       |         | 2002 |  | 2003
|                                         |         |                            |         |      |  |     
|Net revenue                              |         | $                          | 183,264 |      |  | $    | 117,768 |      |  | $ | 165,526 |     
|Direct energy costs                      |         |                            | 77,281  |      |  |      | 87,340  |      |  |   | 128,179 |     
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|Gross profit                             |         |                            | 105,983 |      |  |      | 30,428  |      |  |   | 37,347  |     
|Selling and marketing expenses           |         |                            | 3,597   |      |  |      | 3,510   |      |  |   | 4,240   |     
|General and administrative expenses      |         |                            | 21,598  |      |  |      | 18,408  |      |  |   | 20,707  |     
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|Income from operations                   |         |                            | 80,788  |      |  |      | 8,510   |      |  |   | 12,400  |     
|Loss on litigation award                 |         |                            |        |      |  |      |        |      |  |   | (2,200  | )   
|Loss on equity investments               |         |                            |        |      |  |      | (160    | )    |  |   | (567    | )   
|Minority interest                        |         |                            |        |      |  |      |        |      |  |   | 187     |     
|Interest income, net                     |         |                            | 1,593   |      |  |      | 939     |      |  |   | 715     |     
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|Income before provision for income taxes |         |                            | 82,381  |      |  |      | 9,289   |      |  |   | 10,535  |     
|Provision for income taxes               |         |                            | 21,852  |      |  |      | 4,125   |      |  |   | 5,113   |     
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|Net income                               |         | $                          | 60,529  |      |  | $    | 5,164   |      |  | $ | 5,422   |     
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|Earnings per common share:               |         |                            |         |      |  |      |         |      |  |   |         |     
|                                         | Basic   |                            | $       | 2.06 |  |      | $       | 0.19 |  |   | $       | 0.19 | 
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     
|                                         | Diluted |                            | $       | 1.77 |  |      | $       | 0.16 |  |   | $       | 0.18 | 
|                                         |         |                            |         |      |  |      |         |      |  |   |         |     

The accompanying notes are an integral part of
these consolidated financial statements.

F-2



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COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)


ASSETS

|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |        |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | ------- |  | ------ | ------ | ------- | 
|                                     |                                                                                                                                                                         |                                           
|                                     |                                                                                                                                                                         | July 31,                                  
|                                     |                                                                                                                                                                         |                                           
|                                     |                                                                                                                                                                         | 2002                                       |        | 2003  
|                                     |                                                                                                                                                                         |                                            |        |       
|Current assets:                      |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     | Cash and cash equivalents                                                                                                                                               |                                            | $      | 43,042 |         |  | $      | 40,921 |        
|                                     | Accounts receivable, net                                                                                                                                                |                                            |        | 21,340 |         |  |        | 37,861 |        
|                                     | Prepaid income taxes                                                                                                                                                    |                                            |        | 1,921  |         |  |        |       |        
|                                     | Deferred income tax asset                                                                                                                                               |                                            |        | 1,850  |         |  |        | 2,772  |        
|                                     | Prepaid expenses and other current assets                                                                                                                               |                                            |        | 3,965  |         |  |        | 6,920  |        
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total current assets                       |        |        | 72,118  |  |        |        | 88,474  | 
|Restricted cash and cash equivalents |                                                                                                                                                                         |                                            | 14,186 |        |         |  | 20,773 |       
|Investments                          |                                                                                                                                                                         |                                            | 7,453  |        |         |  | 5,362  |       
|Deposits                             |                                                                                                                                                                         |                                            | 371    |        |         |  | 4,207  |       
|Property and equipment, net          |                                                                                                                                                                         |                                            | 3,912  |        |         |  | 2,984  |       
|Goodwill                             |                                                                                                                                                                         |                                            |       |        |         |  | 3,007  |       
|Intangible assets                    |                                                                                                                                                                         |                                            | 1,070  |        |         |  | 1,063  |       
|Deferred income tax assets           |                                                                                                                                                                         |                                            | 2,119  |        |         |  |       |       
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total assets                               |        | $      | 101,229 |  |        | $      | 125,870 | 
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     | Accounts payable                                                                                                                                                        |                                            | $      | 8,969  |         |  | $      | 24,936 |        
|                                     | Accrued liabilities                                                                                                                                                     |                                            |        | 4,308  |         |  |        | 7,127  |        
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total current liabilities                  |        |        | 13,277  |  |        |        | 32,063  | 
|Deferred income tax liabilities      |                                                                                                                                                                         |                                            |       |        |         |  | 187    |       
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total liabilities                          |        |        | 13,277  |  |        |        | 32,250  | 
|Minority interest                    |                                                                                                                                                                         |                                            |       |        |         |  | 603    |       
|Shareholders equity:                |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     | Series A convertible preferred
    stock  10,000 shares authorized with no par value;
    775 and 609 shares issued and outstanding in 2002 and 2003,
    respectively |                                            |        | 820    |         |  |        | 700    |        
|                                     | Other convertible preferred stock  352
    shares reflected as outstanding in 2003                                                                                     |                                            |        |       |         |  |        | 155    |        
|                                     | Common stock  50,000 shares authorized
    with no par value; 27,334 and 27,645 shares issued and
    outstanding in 2002 and 2003, respectively                       |                                            |        | 57,148 |         |  |        | 56,853 |        
|                                     | Retained earnings                                                                                                                                                       |                                            |        | 29,984 |         |  |        | 35,309 |        
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total shareholders equity                 |        |        | 87,952  |  |        |        | 93,017  | 
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       
|                                     |                                                                                                                                                                         | Total liabilities and shareholders equity |        | $      | 101,229 |  |        | $      | 125,870 | 
|                                     |                                                                                                                                                                         |                                            |        |        |         |  |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(in thousands)


|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |       |  |  |     |  |  |   |     |  |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ------------ | ------ | --------------- |  | --------------- | ------ | ------------ |  | ------ | ---- | ------ |  | -------- | ----- | ----- |  |  | --- |  |  | - | --- |  |  | - | ------- | - |  | - | ------ | -
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |       
|                                                                                |  |              |        |                 |  | Series A        |        | Other        |  |        |      |       
|                                                                                |  |              |        | Convertible     |  | Convertible     |        | Retained     |  |       
|                                                                                |  | Common Stock |        | Preferred Stock |  | Preferred Stock |        | Earnings     |  |       
|                                                                                |  |              |        |                 |  |                 |        | (Accumulated |  |       
|                                                                                |  | Shares       |        | Amount          |  | Shares          |        | Amount       |  | Shares |      | Amount |  | Deficit) |       | Total
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |      
|Balance at July 31, 2000                                                        |  |              | 29,333 |                 |  | $               | 58,740 |              |  |        | 939  |        |  | $        | 1,054 |       |  |  |    |  |  |   |    |  |  | $ | (35,558 | ) |  | $ | 24,236 |  
|Exercise of stock options                                                       |  |              | 103    |                 |  |                 | 6      |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 6      |  
|Compensation charge related to settlement of
    employee stock option disputes |  |              |       |                 |  |                 | 140    |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 140    |  
|Compensation charge related to performance-based
    stock options              |  |              |       |                 |  |                 | 1,080  |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 1,080  |  
|Income tax benefits arising from exercise of
    stock options                  |  |              |       |                 |  |                 | 339    |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 339    |  
|Cumulative unpaid dividends on convertible
    preferred stock                  |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | 81    |       |  |  |    |  |  |   |    |  |  |   | (81     | ) |  |   |       |  
|Payment of dividends on preferred stock                                         |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | (217  | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (217   | )
|Repurchase of preferred stock                                                   |  |              | (76    | )               |  |                 |       |              |  |        | (76  | )      |  |          | (76   | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (76    | )
|Net income and comprehensive income                                             |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   | 60,529  |   |  |   | 60,529 |  
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |       |  |  |     |  |  |   |     |  |  |   |         |   |  |   |        |  
|Balance at July 31, 2001                                                        |  |              | 29,360 |                 |  |                 | 60,305 |              |  |        | 863  |        |  |          | 842   |       |  |  |    |  |  |   |    |  |  |   | 24,890  |   |  |   | 86,037 |  
|Exercise of stock options                                                       |  |              | 65     |                 |  |                 | 27     |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 27     |  
|Compensation charge related to settlement of
    employee stock option disputes |  |              |       |                 |  |                 | 2      |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 2      |  
|Compensation charge related to performance-based
    stock options              |  |              |       |                 |  |                 | (743   | )            |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (743   | )
|Repurchase of founders shares                                                  |  |              | (1,175 | )               |  |                 | (2,400 | )            |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (2,400 | )
|Cancellation and return of founders
    accommodation shares                   |  |              | (828   | )               |  |                 |       |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   |       |  
|Income tax benefits arising from exercise of
    stock options                  |  |              |       |                 |  |                 | (43    | )            |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (43    | )
|Cumulative unpaid dividends on convertible
    preferred stock                  |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | 70    |       |  |  |    |  |  |   |    |  |  |   | (70     | ) |  |   |       |  
|Payment of dividends on preferred stock                                         |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | (30   | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (30    | )
|Repurchase of preferred stock                                                   |  |              | (88    | )               |  |                 |       |              |  |        | (88  | )      |  |          | (62   | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (62    | )
|Net income and comprehensive income                                             |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   | 5,164   |   |  |   | 5,164  |  
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |       |  |  |     |  |  |   |     |  |  |   |         |   |  |   |        |  
|Balance at July 31, 2002                                                        |  |              | 27,334 |                 |  |                 | 57,148 |              |  |        | 775  |        |  |          | 820   |       |  |  |    |  |  |   |    |  |  |   | 29,984  |   |  |   | 87,952 |  
|Exercise of stock options                                                       |  |              | 483    |                 |  |                 | 15     |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 15     |  
|Cancellation of common shares                                                   |  |              | (6     | )               |  |                 | (14    | )            |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (14    | )
|Income tax benefits arising from exercise of
    stock options                  |  |              |       |                 |  |                 | 363    |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | 363    |  
|Reversal of income tax benefit due to expiration
    of stock options           |  |              |       |                 |  |                 | (659   | )            |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (659   | )
|Cumulative unpaid dividends on convertible
    preferred stock                  |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | 55    |       |  |  |    |  |  |   | 42  |  |  |   | (97     | ) |  |   |       |  
|Payment of dividends on Series A convertible
    preferred stock                |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          | (92   | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (92    | )
|Reflection of  Other convertible
    preferred stock(a)                        |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          |      |       |  |  | 352 |  |  |   | 113 |  |  |   |        |   |  |   | 113    |  
|Cancellation of Series A convertible
    preferred stock                        |  |              | (166   | )               |  |                 |       |              |  |        | (166 | )      |  |          | (83   | )     |  |  |    |  |  |   |    |  |  |   |        |   |  |   | (83    | )
|Net income and comprehensive income                                             |  |              |       |                 |  |                 |       |              |  |        |     |        |  |          |      |       |  |  |    |  |  |   |    |  |  |   | 5,422   |   |  |   | 5,422  |  
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |       |  |  |     |  |  |   |     |  |  |   |         |   |  |   |        |  
|Balance at July 31, 2003                                                        |  |              | 27,645 |                 |  | $               | 56,853 |              |  |        | 609  |        |  | $        | 700   |       |  |  | 352 |  |  | $ | 155 |  |  | $ | 35,309  |   |  | $ | 93,017 |  
|                                                                                |  |              |        |                 |  |                 |        |              |  |        |      |        |  |          |       |       |  |  |     |  |  |   |     |  |  |   |         |   |  |   |        |  






|    |                                                            
|--- | -----------------------------------------------------------
|(a) | Adjustment based on court action (see
    Notes 12 and 14).

The accompanying notes are an integral part of
these consolidated financial statements.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |       |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------- | ------- | ------ | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------- | -
|                                                                                      |                                                                       |                                  
|                                                                                      |                                                                       | Fiscal Year Ended July 31,       
|                                                                                      |                                                                       |                                  
|                                                                                      |                                                                       | 2001                              |         | 2002   |        | 2003
|                                                                                      |                                                                       |                                   |         |        |        |     
|Cash Flows From Operating Activities                                                  |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Net income                                                                            |                                                                       | $                                 | 60,529  |        |        | $    | 5,164  |       |        | $ | 5,422  |      
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|                                                                                      | Depreciation                                                          |                                   |         | 861    |        |      |        | 1,309 |        |   |        | 1,461 |        
|                                                                                      | Amortization                                                          |                                   |         | 53     |        |      |        | 53    |        |   |        | 238   |        
|                                                                                      | Provision for doubtful accounts                                       |                                   |         | 4,666  |        |      |        | 2,313 |        |   |        | 1,709 |        
|                                                                                      | Stock-based compensation charge (reversal)                            |                                   |         | 1,080  |        |      |        | (743  | )      |   |        |      |        
|                                                                                      | Tax benefit (provision) from exercise of
    stock options            |                                   |         | 339    |        |      |        | (43   | )      |   |        | 363   |        
|                                                                                      | Reversal of income tax benefit due to expiration
    of stock options |                                   |         |       |        |      |        |      |        |   |        | (659  | )      
|                                                                                      | Deferred income tax (benefit) provision                               |                                   |         | (9,279 | )      |      |        | 5,310 |        |   |        | 1,384 |        
|                                                                                      | Minority interest in loss of consolidated entity                      |                                   |         |       |        |      |        |      |        |   |        | 603   |        
|                                                                                      | Changes in operating assets and liabilities:                          |                                   |         |        |        |      |        |       |        |   |        |       |        
|                                                                                      |                                                                       | Accounts receivable, net          |         |        | 3,095  |      |        |       | (7,121 | ) |        |       | (18,231 | )
|                                                                                      |                                                                       | Prepaid expenses and other assets |         |        | (4,674 | )    |        |       | 185    |   |        |       | (4,368  | )
|                                                                                      |                                                                       | Accounts payable                  |         |        | 1,256  |      |        |       | 419    |   |        |       | 14,872  |  
|                                                                                      |                                                                       | Accrued liabilities and other     |         |        | 3,902  |      |        |       | (3,378 | ) |        |       | 2,820   |  
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Net cash provided by operating activities                                             |                                                                       |                                   | 61,828  |        |        |      | 3,468  |       |        |   | 5,614  |      
|Cash Flows From Investing Activities                                                  |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Purchase of property and equipment                                                    |                                                                       |                                   | (1,150  | )      |        |      | (1,615 | )     |        |   | (438   | )    
|Purchase of intangible assets                                                         |                                                                       |                                   |        |        |        |      | (178   | )     |        |   | (126   | )    
|Acquisition of majority ownership in PEC, net of
    cash                             |                                                                       |                                   |        |        |        |      |       |       |        |   | (580   | )    
|Summit Energy investments                                                             |                                                                       |                                   |        |        |        |      | (7,452 | )     |        |   | (335   | )    
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Net cash used in investing activities                                                 |                                                                       |                                   | (1,150  | )      |        |      | (9,245 | )     |        |   | (1,479 | )    
|Cash Flows From Financing Activities                                                  |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Repayments of line of credit                                                          |                                                                       |                                   | (1,393  | )      |        |      | (3,888 | )     |        |   |       |      
|Repurchase of common stock                                                            |                                                                       |                                   |        |        |        |      | (2,400 | )     |        |   | (14    | )    
|Repurchase or cancellation of Series A
    convertible preferred stock                |                                                                       |                                   | (76     | )      |        |      | (63    | )     |        |   | (83    | )    
|Dividends paid on Series A convertible
    preferred stock                            |                                                                       |                                   | (217    | )      |        |      | (30    | )     |        |   | (92    | )    
|Reflection of Other convertible preferred stock                                       |                                                                       |                                   |        |        |        |      |       |       |        |   | 113    |      
|Net cash used in settlement of employee stock
    option dispute                      |                                                                       |                                   |        |        |        |      | 2      |       |        |   |       |      
|Proceeds from exercises of stock options                                              |                                                                       |                                   | 6       |        |        |      | 27     |       |        |   | 15     |      
|Decrease (increase) in restricted cash                                                |                                                                       |                                   | (22,097 | )      |        |      | 14,057 |       |        |   | (6,195 | )    
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Net cash (used in) provided by financing
    activities                               |                                                                       |                                   | (23,777 | )      |        |      | 7,705  |       |        |   | (6,256 | )    
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Increase (decrease) in cash and cash equivalents                                      |                                                                       |                                   | 36,901  |        |        |      | 1,928  |       |        |   | (2,121 | )    
|Cash and cash equivalents at beginning of year                                        |                                                                       |                                   | 4,213   |        |        |      | 41,114 |       |        |   | 43,042 |      
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Cash and cash equivalents at end of year                                              |                                                                       | $                                 | 41,114  |        |        | $    | 43,042 |       |        | $ | 40,921 |      
|                                                                                      |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|Cash paid for:                                                                        |                                                                       |                                   |         |        |        |      |        |       |        |   |        |      
|                                                                                      | Interest                                                              |                                   | $       | 726    |        |      | $      | 370   |        |   | $      | 18    |        
|                                                                                      | Income taxes                                                          |                                   |         | 32,901 |        |      |        |      |        |   |        | 3,405 |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(in thousands, except per share and per kWh
amounts)


1. Nature of Business

Commonwealth Energy Corporation
(Commonwealth or the Company) is an
energy services company. The Company provides retail electric
power to its residential, commercial, industrial and
governmental customers in the deregulated California, Michigan
and Pennsylvania electricity markets. The Company is licensed by
the Federal Energy Regulatory Commission (FERC) as a
power marketer and is licensed to supply retail electric power
by applicable state agencies in California, Pennsylvania,
Michigan, New Jersey, New York, Texas and Ohio.

The Company does not have its own electricity
generation facilities. The power the Company sells to its
customers is purchased from third party power generators. The
electric power the Company sells to its retail customers is
delivered to its customers by incumbent electric utilities. The
incumbent electric utilities measure electric power usage by the
Companys customers and bill most of its customers on its
behalf. The Company plans to enter new deregulated electric
power markets and to offer a variety of energy-related products
and services in the future. The Company also sells surplus
electric power not needed to meet its retail customers
requirements in wholesale electricity markets. The Company only
sells this excess power to assist in balancing its energy supply
with the demand of its retail customers. The Company does not
trade in the wholesale electricity markets for speculative
purposes.

Commonwealth 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. The
Company also holds a majority interest in Summit Energy
Ventures, LLC (Summit), a joint venture that invests
in companies that manufacture or market energy efficiency
products. The consolidated financial statements of the Company
include the accounts of Summit and the Companys
wholly-owned subsidiaries.

2. Summary of Significant
Accounting Policies

Basis of Consolidation

The Companys consolidated financial
statements include its wholly-owned subsidiaries and the
accounts of its controlled investment in Summit Energy Ventures,
LLC (Summit) and its majority ownership in Power
Efficiency Corporation (PEC). All material
intercompany balances and transactions have been eliminated in
consolidation.

Use of Estimates and Assumptions

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make certain estimates and assumptions that affect the reported
amounts and timing of revenue and expenses, the reported amounts
and classification of assets and liabilities, and the disclosure
of contingent assets and liabilities. These estimates and
assumptions are based on the Companys historical
experience as well as managements future expectations. As
a result, actual results could differ from managements
estimates and assumptions. The Companys management
believes that its most significant estimates herein relate to
revenue and cost recognition, unbilled receivables, the
allowance for doubtful accounts and loss contingencies,
particularly those associated with litigation.

Reclassifications

The Company has reclassified certain prior fiscal
year amounts in the accompanying consolidated financial
statements to be consistent with the current fiscal years
presentation. During its fiscal 2003 fourth quarter, the Company
deemed it more appropriate to reclassify its Pennsylvania gross
receipts taxes

F-6



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


to direct energy costs from general and
administrative expenses. Prior year amounts reclassified from
general and administrative expenses were $666 and $1,143 for
fiscal 2001 and 2002, respectively.

Revenue and Cost Recognition

Energy sales are recognized as the electric power
is delivered to customers and green power credits are recognized
upon the fulfillment by the Company of all related obligations,
provided collection is deemed probable.

Direct energy costs, which are recognized
concurrent with related energy sales, include the cost of
purchased electric power, fees incurred from various
energy-related service providers and energy related taxes.
Independent system operator (ISO) fees are not
determinable until the ISO completes a settlement process for
each days activities. Pending such settlements, the
Company estimates and accrues for these ISO fees based on
preliminary settlement information.

The Companys net revenue is comprised of
the following:

|                    |                  |                            |        |         |  |      |        |         |  |   |         |         | 
|------------------- | ---------------- | -------------------------- | ------ | ------- |  | ---- | ------ | ------- |  | - | ------- | ------- | 
|                    |                  |                           
|                    |                  | Fiscal Year Ended July 31,
|                    |                  |                           
|                    |                  | 2001                       |        | 2002    |  | 2003
|                    |                  |                            |        |         |  |     
|Retail energy sales |                  | $                          | 99,981 |         |  | $    | 96,960 |         |  | $ | 153,430 |        
|Excess energy sold  |                  |                            | 79,304 |         |  |      | 18,757 |         |  |   | 6,496   |        
|                    |                  |                            |        |         |  |      |        |         |  |   |         |        
|                    | Net energy sales |                            |        | 179,285 |  |      |        | 115,717 |  |   |         | 159,926 | 
|Green power credits |                  |                            | 3,979  |         |  |      | 2,051  |         |  |   | 5,600   |        
|                    |                  |                            |        |         |  |      |        |         |  |   |         |        
|                    | Net revenue      |                            | $      | 183,264 |  |      | $      | 117,768 |  |   | $       | 165,526 | 
|                    |                  |                            |        |         |  |      |        |         |  |   |         |        

Major Customers

Two wholesale customers, the State of
Californias Department of Water Resources and the
California Power Exchange, individually accounted for 22.0% and
10.6% of the Companys consolidated net revenue in fiscal
2001. No individual customer accounted for ten percent or more
of the Companys consolidated net revenue in fiscal 2002 or
2003.

Operating Expenses

Selling and marketing expenses principally
consist of costs incurred for sales and marketing personnel and
promotional and advertising activities. Advertising costs are
expensed as incurred and were $253, $129 and $92 for fiscal
2001, 2002 and 2003, respectively.

General and administrative expenses principally
consist of costs incurred for all other corporate personnel,
rent, utilities, telecommunications, insurance, legal fees, and
other miscellaneous corporate costs, including provisions made
for uncollectible accounts receivable, and the depreciation and
amortization of tangible and intangible assets (see below for
details regarding stock-based compensation charges).

Net Income per Common Share

Net income per common share  Basic has
been computed by dividing net income available to common
shareholders, after any preferred stock dividends, by the
weighted average number of common shares outstanding during the
fiscal year. Net income per common share  Diluted has
been computed by giving additional effect in the denominator to
the dilution that would have occurred, under the treasury stock
and if-converted methods, as applicable, had outstanding stock
options, stock purchase warrants and convertible debt been
exercised or converted into additional common shares.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Stock-Based Compensation

As allowed by Statement of Financial Accounting
Standards (SFAS) No. 123 (SFAS
No. 123), Accounting for Stock-Based
Compensation, the Company has elected to retain the
compensation measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and its related
interpretations for stock options issued to employees and
outside directors. Under APB No. 25, compensation cost is
recognized at the measurement date for the amount, if any, that
the fair value of the Companys common stock exceeds the
option exercise price. The measurement date is the date at which
both the number of options and the exercise price for each
option are known. The Company recognized stock-based
compensation charges (credits) of $1,080, $(743) and $0
during fiscal 2001, 2002 and 2003, respectively.

On December 31, 2002, the Financial
Accounting Standards Board (FASB) amended the
transition and disclosure requirements of SFAS No. 123
through the issuance of SFAS No. 148 (SFAS
No. 148), Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends the existing disclosures to make more
frequent and prominent disclosure of stock-based compensation
expense beginning with financial statements for fiscal years
ending after December 15, 2002. The Company has adopted the
disclosure provisions of SFAS No. 148.

If the Company had accounted for its stock-based
employee and outside directors compensation under the minimum
fair value recognition and measurement principles of SFAS
No. 123, the Companys reported net income amounts
would have been adjusted to the pro forma net income amounts
presented below:

|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------------------------ | --------------------- | -------------------------- | ------ | ---- |  | ---- | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                                                           |                       |                           
|                                                                                                                                           |                       | Fiscal Year Ended July 31,
|                                                                                                                                           |                       |                           
|                                                                                                                                           |                       | 2001                       |        | 2002 |  | 2003
|                                                                                                                                           |                       |                            |        |      |  |     
|Net income as reported                                                                                                                     |                       | $                          | 60,529 |      |  | $    | 5,164 |      |  | $ | 5,422 |     
|Add: Stock-based employee compensation expense
    included in net income, net of related tax effects                                      |                       |                            | 648    |      |  |      | (445  | )    |  |   |      |     
|Deduct: Total stock-based compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                       |                            | (301   | )    |  |      | (382  | )    |  |   | (382  | )   
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     
|Pro forma net income                                                                                                                       |                       | $                          | 60,876 |      |  | $    | 4,337 |      |  | $ | 5,040 |     
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     
|Earnings per share:                                                                                                                        |                       |                            |        |      |  |      |       |      |  |   |       |     
|                                                                                                                                           | Basic  as reported   |                            | $      | 2.06 |  |      | $     | 0.19 |  |   | $     | 0.19 | 
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     
|                                                                                                                                           | Basic  pro forma     |                            | $      | 2.07 |  |      | $     | 0.16 |  |   | $     | 0.18 | 
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     
|                                                                                                                                           | Diluted  as reported |                            | $      | 1.77 |  |      | $     | 0.16 |  |   | $     | 0.18 | 
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     
|                                                                                                                                           | Diluted  pro forma   |                            | $      | 1.79 |  |      | $     | 0.14 |  |   | $     | 0.17 | 
|                                                                                                                                           |                       |                            |        |      |  |      |       |      |  |   |       |     

The fair value of each option grant was estimated
on the date of grant using the minimum value method with the
following weighted average assumptions:

|                                         |  |                            |      |      |  |      |      |   |  |  |      |  
|---------------------------------------- |  | -------------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                         |  |                           
|                                         |  | Fiscal Year Ended July 31,
|                                         |  |                           
|                                         |  | 2001                       |      | 2002 |  | 2003
|                                         |  |                            |      |      |  |     
|Weighted-average risk-free interest rate |  |                            | 6.0  | %    |  |      | 6.0  | % |  |  | 4.0  | %
|Average expected life in years           |  |                            | 5.0  |      |  |      | 4.1  |   |  |  | 4.7  |  
|Expected dividends                       |  |                            | None |      |  |      | None |   |  |  | None |  

The Company does not include volatility as there
is not an active market for the Companys stock.

F-8



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


The estimated fair values for stock options
granted during fiscal 2001, 2002 and 2003 were $3.05, $1.86 and
$1.86, respectively.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid debt
instruments with a maturity date of three months or less at the
date of purchase. The Company maintains its cash and cash
equivalents with highly rated financial institutions, thereby
minimizing any associated credit risks.

Accounts Receivable

The Companys accounts receivable consist of
billed and unbilled receivables from customers and Green Power
credits receivable from the State of California. 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 the
period, but not yet billed. Unbilled receivables from customers
are estimated by the Company to be the number of kilowatt-hours
(kWh) delivered times the current customer average
sales price per kWh.

Credit Risk and Allowance for Doubtful
Accounts

The Companys exposure to credit risk
concentration is substantially limited to those incumbent
utility companies that collect and remit receivables, on a daily
basis, from the Companys individually insignificant and
geographically dispersed customers within the states of
California, Pennsylvania and Michigan. The Company regularly
monitors the financial condition of each such incumbent utility
company and currently believes that its susceptibility to any
individually significant write-offs as a result of
concentrations of customer accounts receivable with incumbent
utility companies is remote.

The Company maintains an allowance for doubtful
accounts, which represents managements best estimate of
probable losses inherent in the accounts receivable balance.
Management determines the allowance based on known troubled
accounts, historical experience, and other currently available
evidence (see Note 7).

Deferred Income Taxes

Deferred income tax assets and liabilities are
recognized for the expected future income tax benefits or
consequences, based on enacted laws, of temporary timing
differences between tax and financial statement reporting. If
appropriate, deferred tax assets are reduced by a valuation
allowance for the amount of any tax benefits that more likely
than not, based on current circumstances, are not expected to be
realized.

Restricted Cash and Cash Equivalents

Cash and cash equivalents which the Company
currently can not access, as they are pledged as collateral or
invested in and held by Summit, are reported as restricted.

Property and Equipment

Property and equipment are recorded at cost.
Maintenance and repairs which do not extend the useful life of
the related property or equipment are charged to operations as
incurred. Depreciation of property and equipment has been
computed using the straight-line method over estimated economic
useful lives of five to ten years.

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COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Certain software development costs incurred on
significant projects for internal use, primarily consisting of
third-party system development costs incurred during the
application development stage, are capitalized. These
capitalized costs, once placed in service, are amortized using
the straight-line method over estimated economic useful lives of
three to five years.

Goodwill

Goodwill resulting from Summits majority
ownership in PEC is not amortized into results of operations but
instead is reviewed for impairment, written down, and charged as
expense to results of operations in fiscal periods in which the
recorded value of goodwill is more than its implied fair value.
Estimates of fair value are primarily determined using
discounted cash flows and are based on the Companys best
estimate of future revenue and operating costs and general
market conditions. This approach uses significant assumptions,
including projected amounts and timing of future cash flows, the
discount rate reflecting the risk inherent in future cash flows,
and the terminal growth rate.

Intangible Assets

Direct costs incurred in acquiring intangible
assets, primarily consisting of the Companys
1-800-Electric telephone number, rights to eight internet domain
names and a covenant not to compete, have been capitalized. Each
intangible asset is being subsequently amortized over the
shorter of its statutory, contractual or estimated economic
useful life, which collectively range from 2 to 20 years.
Aggregate amortization expense for these intangible assets was
$53, $53 and $238 for fiscal 2001, 2002 and 2003, respectively.

Impairment of Long-Lived Assets

Management, on at least a quarterly basis,
evaluates each of the Companys long-lived assets for
impairment by comparing the related estimated future cash flows,
on an undiscounted basis, to its net book value. If impairment
is indicated, the net book value is reduced to an amount equal
to the estimated future cash flows, on an appropriately
discounted basis.

Fair Value of Financial Instruments

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

Recently Adopted Accounting
Standards

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS
No. 142), which revises the accounting for purchased
goodwill and other intangible assets. Under SFAS No. 142,
goodwill and other intangible assets with indefinite lives will
no longer be systematically amortized into operating results.
Instead, each of these assets will be tested, in the absence of
an indicator of possible impairment, at least annually, and upon
an indicator of possible impairment, immediately.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS
No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in
which it is a cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized

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COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


cost is depreciated over the useful life of the
related obligation for its recorded amount or incurs a gain or
loss upon settlement.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets (SFAS No. 144). SFAS
No. 144 was issued to resolve certain implementation issues
that had arisen under SFAS No. 121. Under SFAS
No. 144, a single uniform accounting model is required to
be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and certain
additional disclosures are required.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145). SFAS
No. 145 updates, clarifies and simplifies existing
accounting pronouncements, by rescinding SFAS No. 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board Opinion No. 30
(APBO No. 30) will now be used to classify
those gains and losses. Additionally, SFAS No. 145 amends
SFAS No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also
makes technical corrections to existing pronouncements. While
those corrections are not substantive in nature, in some
instances, they may change accounting practice.

The Company adopted the provisions of SFAS
No. 145 that amended SFAS No. 13, as required, on
May 15, 2002, for transactions occurring after such date
with no material impact on its consolidated financial
statements. The Company adopted SFAS Nos. 142, 143 and 144, as
well as the remaining provisions of SFAS No. 145, as
required, on August 1, 2002, with no material impact on its
accompanying consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS No. 146). SFAS
No. 146 was issued to address the financial accounting and
reporting for costs associated with exit or disposal activities,
unless specifically excluded. SFAS No. 146 requires that a
liability for a cost associated with a covered exit or disposal
activity be recognized and measured initially at its fair value
in the period in which the liability is incurred, except for a
liability for one-time termination benefits that is incurred
over time. If employees are not required to render service until
they are terminated in order to receive the one-time termination
benefits or if employees will not be retained to render service
beyond the minimum retention period (as dictated by existing
law, statute or contract, or in the absence thereof,
60 days), a liability for the termination benefits shall be
recognized and measured at its fair value at the communication
date. If employees are required to render service until they are
terminated in order to receive the one-time termination benefits
and will be retained to render service beyond the minimum
retention period, a liability for the termination benefits shall
be measured initially at the communication date based on the
fair value of the liability as of the termination date. The
liability shall be recognized ratably over the future service
period. SFAS No. 146 also dictates that a liability for
costs to terminate an operating lease or other contract before
the end of its term shall be recognized and measured at its fair
value when the entity terminates the contract in accordance with
the contract terms. A liability for costs that will continue to
be incurred under a contract for its remaining term without
economic benefit to the entity is to be recognized and measured
at its fair value when the entity ceases using the right
conveyed by the contract. SFAS No. 146 further dictates
that a liability for other covered costs associated with an exit
or disposal activity be recognized and measured at its fair
value in the period in which the liability is incurred. The
Company adopted SFAS No. 146, as required, on
January 1, 2003, with no material impact on its
accompanying consolidated financial statements.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


45). FIN 45 requires that a liability be
recorded in the guarantors balance sheet upon issuance of
a guarantee. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation
of changes in the entitys product warranty liabilities.
The initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. The Company adopted FIN 45, as
required, on January 1, 2003, with no material impact on
its accompanying consolidated financial statements.

In December 2002, the FASB issued SFAS
No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment
of FASB Statement No. 123 (SFAS No. 148).
SFAS No. 148 amended SFAS No. 123 Accounting for
Stock-Based Compensation (SFAS No. 123)
to provide for alternative methods of transition for an entity
that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. SFAS
No. 148 further amends the disclosure provisions of SFAS
No. 123 and APBO No. 28 to require prominent annual
and interim disclosures about the effects on reported net income
or loss of an entitys accounting policy decisions with
respect to stock-based employee compensation. As the Company
continues to account for stock-based employee compensation under
the intrinsic value based method allowed by APBO No. 25,
the Companys adoption of the disclosure provisions of SFAS
No. 148, as required, on August 1, 2002 had no impact
on its accompanying consolidated financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). This
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities that possess certain characteristics. FIN 46 requires
that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities,
and results of the activities of the variable interest entity
must be included in the consolidated financial statements with
those of the business enterprise. FIN 46 applies immediately to
variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains
an interest after that date. As the Company has not had, and
continues not to have, any ownership in variable interest
entities, the Companys adoption of FIN 46, as required, on
February 1, 2003, had no impact on its accompanying
consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities (SFAS No. 149). SFAS
No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly and
clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003, except in certain circumstances, and
for hedging relationships designated after June 30, 2003.
The Company adopted SFAS No. 149, as required, on
July 1, 2003 with no impact on its accompanying
consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS
No. 150 established standards for how an issuer classifies
and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities
and equity. The Company adopted SFAS No. 150, as required, on
May 31, 2003 for financial instruments entered into or
modified after such date, with no impact on its accompanying
consolidated financial statements. The remaining provisions of
SFAS No. 150 are effective beginning with the
Companys fiscal 2004 first quarter ending October 31,
2003 and must be applied prospectively by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS
No. 150 and still existing at July 1, 2003. The

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Company adopted these remaining provisions of
SFAS No. 150, as required, on August 1, 2003, with no
impact on its accompanying consolidated financial statements.

Segment Reporting

The Companys chief operating decision
makers consist of members of senior management that work
together to allocate resources to, and assess the performance
of, the Companys business. These members of senior
management currently manage the Companys business,
assesses its performance, and allocates its resources as a
single operating segment.

3. Market and Regulatory Risks

California Deregulated Electric Power
Markets

Due in part to historically extreme highs in
electrical prices, on September 20, 2001, the California
Public Utilities Commission (CPUC) issued a ruling
suspending direct access (DA) pursuant to
legislation by the California state legislature. The suspension
of DA means that this ruling permits the Company to keep its
current customer base and continue to solicit business from
other DA customers served by other providers, but prohibits the
Company from signing up new non-direct access customers for an
undetermined period of time. The Company is actively seeking
relief from this ruling.

Under a settlement agreement with the CPUC,
Southern California Edison (SCE) was authorized to
recoup $3,600,000 in debt incurred during the energy crisis of
2000-2001 from all customers. This debt was to be collected
under the Procurement Related Obligations Account
(PROACT) from bundled (non DA) customers and
under the Historical Procurement Charge (HPC) from
DA customers.

In July 2002, the CPUC issued an interim order
implementing the HPC sought by SCE to collect $391,000 in HPC
charges from all DA customers by reducing their Procured Energy
Credit (PE Credit) by $0.027 per kWh beginning
July 27, 2002. The lowered PE Credit continued until an
exit fee for DA customers was approved by the CPUC. Effective
January 1, 2003, it was reduced to $0.01 per kWh. For the
fiscal year ended July 31, 2003, the Company estimates that
HPC charges have impacted the Companys sales and pretax
earnings by a range of $4,800 to $6,000. The Company is unable
to precisely determine the actual HPC charges applied to its
customers by SCE because there are different charges by customer
type, and this charge is only on the electricity usage above the
monthly baseline usage allocation.

On September 5, 2003 the CPUC issued a
decision granting SCEs request to recover additional
shortfall and authorizing the HPC balance to be revised to
$473,000; however, the $0.01 per kWh monthly charge remained in
place. As of August 1, 2003, SCE revised its billing
methodology to a bottoms-up design effectively doing
away with the PE Credit and the net effect of the HPC on the
Companys rates. While the HPC no longer impacts the
Companys rate calculations going forward, a recent SCE
rate reduction includes the impact of the HPC. This rate
reduction will impact sales and pretax profit in the SCE
district. The rate reduction will be place in 2004 and will
approximate the effect of the HPC dollar impact of 2003.

Recently, SCE acknowledged that the PROACT debt
was paid in full by bundled customers at the end of July 2003.
As a result, on August 1, 2003, all SCE rates were lowered.
As a direct result, to retain the Companys customers in
the SCE utility district, the Company lowered its customer rates
proportionately. The Companys estimates of the annual
financial impact of this rate reduction is a decline in sales
and pretax profit during fiscal 2004, in the range of $3,000 to
$3,500. This reduction is separate from, but in addition to, the
HPC reduction seen in 2003.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


These changes on the Companys customers in
the SCE district will continue to cause a significant impact on
the Companys revenue and cash flow; however, the Company
does not expect that it will preclude the Company from
participating in the California market.

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 affect gross profit
margins.

California Green Power Credits

The State of California enacted a Public Purpose
Program (Program) to provide incentives to suppliers
of renewable power (produced with at least 50% renewable energy
resources), to reduce the cost of such power to certain
consumers by $0.01 per kWh ($0.015 per kWh prior to
January 1, 2002). The Company received regular green power
credit payments totaling $2,051 during fiscal 2002, which were
included in the Companys net revenue during that period.
The benefit of these anticipated credits was reflected in the
form of discounted electricity rates charged to the
Companys customers. This phase of the Program expired for
service periods ending December 31, 2001. The Company
continued to sell electricity to these customers at discounted
rates. The Program was then subsequently extended for service
periods from January 1, 2002 through March 30, 2003.
The credits of approximately $5,600 received by the Company for
this period is reflected in the three month period ended
July 31, 2003, when it became apparent that the funds would
be received. Recognition was previously deferred because of the
uncertainty of receipt caused by both the State budget turmoil
in California, and the indecisive progress this Program made to
reach final enactment and settlement as follows: in September
2002, a State law was passed that required the Energy Commission
to report to the Governor on whether the Program should be
extended. The submitted report was approved on April 2,
2003, and only recommended extending the Program
through service periods ending on March 31, 2003. The
recommendations were eventually accepted, and payment was
received in October 2003, and as a result the anticipated
payment was shown as a receivable at July 31, 2003.

4. Interest Income, net

Interest income, net, is comprised of the
following:

|                 |                      |                            |       |       |  |      |       |     |  |   |     |     | 
|---------------- | -------------------- | -------------------------- | ----- | ----- |  | ---- | ----- | --- |  | - | --- | --- | 
|                 |                      |                           
|                 |                      | Fiscal Year Ended July 31,
|                 |                      |                           
|                 |                      | 2001                       |       | 2002  |  | 2003
|                 |                      |                            |       |       |  |     
|Interest income  |                      | $                          | 2,319 |       |  | $    | 1,309 |     |  | $ | 733 |    
|Interest expense |                      |                            | (726  | )     |  |      | (370  | )   |  |   | (18 | )  
|                 |                      |                            |       |       |  |      |       |     |  |   |     |    
|                 | Interest income, net |                            | $     | 1,593 |  |      | $     | 939 |  |   | $   | 715 | 
|                 |                      |                            |       |       |  |      |       |     |  |   |     |    

F-14



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


5. Income Taxes

The provision for income taxes consist of the
following:

|                           |         |                            |        |        |        |      |       |        |        |   |       |       |       | 
|-------------------------- | ------- | -------------------------- | ------ | ------ | ------ | ---- | ----- | ------ | ------ | - | ----- | ----- | ----- | 
|                           |         |                           
|                           |         | Fiscal Year Ended July 31,
|                           |         |                           
|                           |         | 2001                       |        | 2002   |        | 2003
|                           |         |                            |        |        |        |     
|Current income taxes:      |         |                            |        |        |        |      |       |        |        |   |       |      
|                           | Federal |                            | $      | 24,953 |        |      | $     | (1,768 | )      |   | $     | 2,900 |      
|                           | State   |                            |        | 6,178  |        |      |       | 583    |        |   |       | 829   |      
|                           |         |                            |        |        |        |      |       |        |        |   |       |      
|                           |         | Total                      |        |        | 31,131 |      |       |        | (1,185 | ) |       |       | 3,729 | 
|                           |         |                            |        |        |        |      |       |        |        |   |       |      
|Deferred income taxes:     |         |                            |        |        |        |      |       |        |        |   |       |      
|                           | Federal |                            | $      | (7,728 | )      |      | $     | 4,610  |        |   | $     | 1,155 |      
|                           | State   |                            |        | (1,551 | )      |      |       | 700    |        |   |       | 229   |      
|                           |         |                            |        |        |        |      |       |        |        |   |       |      
|                           |         | Total                      |        |        | (9,279 | )    |       |        | 5,310  |   |       |       | 1,384 | 
|                           |         |                            |        |        |        |      |       |        |        |   |       |      
|Provision for income taxes |         | $                          | 21,852 |        |        | $    | 4,125 |        |        | $ | 5,113 |      
|                           |         |                            |        |        |        |      |       |        |        |   |       |      

A reconciliation of the federal statutory income
tax rates to the Companys effective income tax rates
follows:

|                                           |  |                            |       |      |  |      |      |   |  |  |      |  
|------------------------------------------ |  | -------------------------- | ----- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                           |  |                           
|                                           |  | Fiscal Year Ended July 31,
|                                           |  |                           
|                                           |  | 2001                       |       | 2002 |  | 2003
|                                           |  |                            |       |      |  |     
|Federal statutory income tax rate          |  |                            | 35.0  | %    |  |      | 35.0 | % |  |  | 35.0 | %
|Reversal of federal valuation allowance    |  |                            | (13.1 | )    |  |      |     |   |  |  | (1.7 | )
|State income taxes, net of federal benefit |  |                            | 3.6   |      |  |      | 9.0  |   |  |  | 6.4  |  
|Expiration of stock options                |  |                            |      |      |  |      |     |   |  |  | 8.3  |  
|Other                                      |  |                            | 1.1   |      |  |      | 0.4  |   |  |  | 0.5  |  
|                                           |  |                            |       |      |  |      |      |   |  |  |      |  
|Effective income tax rate                  |  |                            | 26.6  | %    |  |      | 44.4 | % |  |  | 48.5 | %
|                                           |  |                            |       |      |  |      |      |   |  |  |      |  

Deferred income taxes were as follows:

|                              |                                  |                                       |       |       |       |   |       |       |        |  
|----------------------------- | -------------------------------- | ------------------------------------- | ----- | ----- | ----- | - | ----- | ----- | ------ | -
|                              |                                  |                                      
|                              |                                  | July 31,                             
|                              |                                  |                                      
|                              |                                  | 2002                                  |       | 2003 
|                              |                                  |                                       |       |      
|Deferred income tax assets:   |                                  |                                       |       |       |       |   |       |      
|                              | Stock options                    |                                       | $     | 2,429 |       |   | $     | 521   |       
|                              | Reserves and accruals            |                                       |       | 1,695 |       |   |       | 2,371 |       
|                              | Net operating loss carryforwards |                                       |       | 998   |       |   |       | 843   |       
|                              | Allowance for doubtful accounts  |                                       |       | 410   |       |   |       | 620   |       
|                              | Investment in Summit             |                                       |       |      |       |   |       | 158   |       
|                              |                                  |                                       |       |       |       |   |       |      
|                              |                                  | Total deferred income tax assets      |       |       | 5,532 |   |       |       | 4,513  |  
|                              | Less valuation allowance         |                                       |       | (998  | )     |   |       | (843  | )     
|                              |                                  |                                       |       |       |       |   |       |      
|                              |                                  | Total deferred income tax assets, net |       |       | 4,534 |   |       |       | 3,670  |  
|                              |                                  |                                       |       |       |       |   |       |      
|Deferred tax liabilities:     |                                  |                                       |       |       |       |   |       |      
|                              | Depreciation and amortization    |                                       |       | (311  | )     |   |       | (867  | )     
|                              | State income taxes               |                                       |       | (254  | )     |   |       | (218  | )     
|                              |                                  |                                       |       |       |       |   |       |      
|                              |                                  | Total deferred income tax liabilities |       |       | (565  | ) |       |       | (1,085 | )
|                              |                                  |                                       |       |       |       |   |       |      
|Net deferred income tax asset |                                  | $                                     | 3,969 |       |       | $ | 2,585 |      
|                              |                                  |                                       |       |       |       |   |       |      

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


During fiscal 2001, the valuation allowance
increased by $362 as a result of an increase in the federal
statutory income tax rate being applied to the Companys
temporary differences and decreased by $13,595 for the release
of a portion of the valuation allowance due to the
Companys profitable operations for the year. During fiscal
2002, the valuation allowance decreased by $23 which reflected
the uncertainty of the deferred tax asset related to the net
operating loss carryforward, the use of which became limited as
described below. During 2003, the valuation allowance decreased
by $155 and reflected the utilization of net operating loss
carryforwards for federal income tax purposes.

At July 31, 2003, the Company had net
operating loss carryforwards of approximately $1,818 and $2,072
for federal and state income tax purposes, respectively, that
begin to expire in years 2018 and 2008, 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 this 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 suspended
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 fiscal year ending
July 31, 2004, it may not look to California net operating
losses generated in prior fiscal years to offset taxable income.
This suspension will not apply to tax years beginning on or
after 2004.

6. Earnings Per Common
Share

Earnings per common share have been computed as
follows:

|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |       | 
|------------------------------------------------------------ | ------------------------------------ | -------------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                                             |                                      |                           
|                                                             |                                      | Fiscal Year Ended July 31,
|                                                             |                                      |                           
|                                                             |                                      | 2001                       |        | 2002  |  | 2003
|                                                             |                                      |                            |        |       |  |     
|Numerator:                                                   |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Net income                                                   |                                      | $                          | 60,529 |       |  | $    | 5,164  |       |  | $ | 5,422  |      
|Less: Preferred stock dividends                              |                                      |                            | (81    | )     |  |      | (70    | )     |  |   | (97    | )    
|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Income applicable to common stock 
    Basic                |                                      |                            | 60,448 |       |  |      | 5,094  |       |  |   | 5,325  |      
|Income impact from assumed conversion of
    preferred stock |                                      |                            | 81     |       |  |      | 70     |       |  |   | 97     |      
|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Net income  Diluted                                         |                                      | $                          | 60,529 |       |  | $    | 5,164  |       |  | $ | 5,422  |      
|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Denominator:                                                 |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Weighted-average outstanding common
    shares  Basic       |                                      |                            | 29,385 |       |  |      | 27,482 |       |  |   | 27,424 |      
|Incremental common shares from assumed
    conversions:      |                                      |                            |        |       |  |      |        |       |  |   |        |      
|                                                             | Stock options                        |                            |        | 3,843 |  |      |        | 3,258 |  |   |        | 1,499 | 
|                                                             | Series A convertible preferred stock |                            |        | 924   |  |      |        | 796   |  |   |        | 609   | 
|                                                             | Other convertible preferred stock(a) |                            |        |      |  |      |        |      |  |   |        | 704   | 
|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |      
|Adjusted weighted-average common shares 
    Diluted        |                                      |                            | 34,152 |       |  |      | 31,536 |       |  |   | 30,236 |      
|                                                             |                                      |                            |        |       |  |      |        |       |  |   |        |      




|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(a) | Reflects 352 shares of Other convertible
    preferred stock recognized pursuant to court order. See
    Notes 12 and 14.

For fiscal 2001, 2002 and 2003, 243, 6,943, and
6,860 common shares attributable to outstanding stock options
and warrants were excluded from the calculation of diluted
earnings per share because the effect of their inclusion would
be anti-dilutive.

F-16



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


7. Accounts Receivable,
net

Accounts receivable, net, is comprised of the
following:

|                                     |                          |          |        |        |  |   |        |        | 
|------------------------------------ | ------------------------ | -------- | ------ | ------ |  | - | ------ | ------ | 
|                                     |                          |         
|                                     |                          | July 31,
|                                     |                          |         
|                                     |                          | 2002     |        | 2003  
|                                     |                          |          |        |       
|Billed                               |                          | $        | 15,365 |        |  | $ | 22,244 |       
|Unbilled                             |                          |          | 8,513  |        |  |   | 12,998 |       
|Green power credits                  |                          |          |       |        |  |   | 5,600  |       
|                                     |                          |          |        |        |  |   |        |       
|                                     |                          |          | 23,878 |        |  |   | 40,842 |       
|Less allowance for doubtful accounts |                          |          | (2,538 | )      |  |   | (2,981 | )     
|                                     |                          |          |        |        |  |   |        |       
|                                     | Accounts receivable, net |          | $      | 21,340 |  |   | $      | 37,861 | 
|                                     |                          |          |        |        |  |   |        |       

The following schedules set forth the activity in
the Companys allowance for doubtful accounts for the
reported periods:

|                                 |  |                            |        |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | -------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  |                           
|                                 |  | Fiscal Year Ended July 31,
|                                 |  |                           
|                                 |  | 2001                       |        | 2002 |  | 2003
|                                 |  |                            |        |      |  |     
|Balance, beginning of year       |  | $                          | 1,459  |      |  | $    | 3,946  |   |  | $ | 2,538  |  
|Provisions charged to operations |  |                            | 4,666  |      |  |      | 2,313  |   |  |   | 1,709  |  
|Write-offs                       |  |                            | (2,179 | )    |  |      | (3,721 | ) |  |   | (1,266 | )
|                                 |  |                            |        |      |  |      |        |   |  |   |        |  
|Balance, end of year             |  | $                          | 3,946  |      |  | $    | 2,538  |   |  | $ | 2,981  |  
|                                 |  |                            |        |      |  |      |        |   |  |   |        |  

The Companys fiscal 2001 provision for
doubtful accounts includes $1,604 to fully reserve for withheld
customer remittances due from Pacific Gas and Electric
(PG&E) which filed for bankruptcy protection in
April 2001. The Company views PG&Es filing for
bankruptcy protection as the result of an unforeseeable
convergence of a number of unusual events that gave rise to the
then California energy crisis. The Company has filed a Proof of
Claim with the bankruptcy court but any recovery remains
uncertain.

8. Restricted Cash and Cash
Equivalents

Restricted cash and cash equivalents consist of
the following:

|                                                                                                                                            |  |          |        |      |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | ---- |  | - | ------ | 
|                                                                                                                                            |  |         
|                                                                                                                                            |  | July 31,
|                                                                                                                                            |  |         
|                                                                                                                                            |  | 2002     |        | 2003
|                                                                                                                                            |  |          |        |     
|Short-term investments pledged as collateral for
    letters of credit in connection with agreements for the purchase
    of electric power |  | $        | 7,775  |      |  | $ | 11,687 | 
|Short-term investments pledged as collateral for
    an appeals bond in connection with a litigation award                                  |  |          |       |      |  |   | 4,107  | 
|Cash and cash equivalents of Summit                                                                                                         |  |          | 6,411  |      |  |   | 4,979  | 
|                                                                                                                                            |  |          |        |      |  |   |        | 
|                                                                                                                                            |  | $        | 14,186 |      |  | $ | 20,773 | 
|                                                                                                                                            |  |          |        |      |  |   |        | 

The Company had $15,471 in outstanding letters of
credit at July 31, 2003.

9. Investments

In July 2001, the Company formed Summit as a
vehicle through which it could invest in entities that develop
and market products that conserve or manage electricity. The
Companys initial $15,000 capital contribution in Summit,
which constitutes its entire investment to date, entitled it to
a 100% preferred

F-17



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


membership interest and a 60% common membership
interest. The Company has the right to invest additional amounts
under certain conditions. Additionally, should Summit propose to
issue additional ownership interests or to sell any investment
held by it, the Company has first rights of refusal at
equivalent terms.

All investments made by Summit must be approved
by its investment committee, which is comprised of three
individuals appointed by the Company. Summits investment
committee has appointed Northwest Power Management
(NPM) as its investment manager, for which it
receives a $700 annual fee.

Any investment returns realized by Summit are
allocated initially to the repayment of all capital
contributions by the Company, and a 10% annual preferred return
thereon, with any remaining profits allocated 60% to the Company
and 40% to NPM. Any cumulative net losses incurred by Summit are
allocated 100% to the Company as the sole contributor of
capital. Summits Limited Liability Company
(LLC) agreement sets forth that it will cease to
exist as a legal entity in June 2006, although its life may be
extended for up to two additional one year periods if so chosen
by NPM. Upon its legal dissolution, Summit will make
distributions in accordance with the terms of the LLC agreement
as stated above.

At July 31, 2003, Summit had investments in
three energy related companies as follows:

|                             |                   |              |  |            |       |            |  |  |       |  | 
|---------------------------- | ----------------- | ------------ |  | ---------- | ----- | ---------- |  |  | ----- |  | 
|                             |                   | Date of      |  | Current    |       | Current   
|                             |                   | Initial      |  | Investment |       | Ownership 
|Investee                     |                   | Investment   |  | Basis      |       | Percentage
|                             |                   |              |  |            |       |           
|Envenergy, Inc.              |                   | October 2001 |  | $          | 2,030 |            |  |  | 8.68% | 
|Turbocor, BV                 |                   | January 2002 |  |            | 3,332 |            |  |  | 8.76% | 
|Power Efficiency Corporation |                   | June 2002    |  |            |      |            |  |  | 52.8% | 
|                             |                   |              |  |            |       |            |  |  |       | 
|                             | Total investments |              |  |            | $     | 5,362      |  |  |       |  | 
|                             |                   |              |  |            |       |            |  |  |       | 

On May 8, 2003, Summit provided a $1,000
revolving line of credit to PEC. Any advances are secured by all
of PECs tangible and intangible assets and accrue interest
at a rate of 15% per annum. The line of credit expires on
December 31, 2003 with any outstanding advances and accrued
interest becoming due and payable. Prior to extending this
revolving line of credit, Summits convertible preferred
stock holding in PEC entitled it to cast shareholder votes not
to exceed 28% of PECs outstanding common shares. Upon
providing PEC with the revolving line of credit, Summit became
entitled to cast shareholder votes equivalent to that number of
common shares in PEC into which its convertible preferred shares
was convertible. Subsequently, as a result of periodic issuances
of additional common shares by PEC and an anti-dilution
guarantee held by Summit, the number of common shares that
Summit was entitled to convert its convertible preferred stock
holding into and vote increased to as much as 56%. Subsequent
PEC stock sales have reduced Summits investment to 52.8%
at July 31, 2003.

Summit has consistently accounted for its
investment in Envenergy, Inc. under the cost method of
accounting. The Company accounted for its investment in
Turbocor, LLC under the equity method of accounting whereby it
recognized its proportionate share of income and losses until
January 31, 2003, when its ownership percentage was
reduced. Summit then accounted for its investment in Turbocor,
BV (Turbocor, LLC was collapsed, and Summits equivalent
investment in Turbocor, Inc., the operating entity, is now held
directly through Turbocor BV) under the cost method of
accounting. Prior to May 8, 2003, Summit accounted for its
investment in PEC using the equity method of accounting, but
based on Summits recently increased ownership percentage,
after May 8, 2003, Summit is consolidating its investment
in PEC.

F-18



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Condensed balance sheet information for Summit at
July 31, 2002 and 2003 is as follows:

|                               |                                          |                   |        |       |        |   |        |       |        | 
|------------------------------ | ---------------------------------------- | ----------------- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                               |                                          |                  
|                               |                                          | July 31,         
|                               |                                          |                  
|                               |                                          | 2002              |        | 2003 
|                               |                                          |                   |        |      
|Assets:                        |                                          |                   |        |       |        |   |        |      
|                               | Cash and cash equivalents                |                   | $      | 6,411 |        |   | $      | 4,979 |       
|                               | Prepaid expenses                         |                   |        | 350   |        |   |        | 403   |       
|                               | Inventory                                |                   |        |      |        |   |        | 407   |       
|                               | Investments                              |                   |        | 7,453 |        |   |        | 5,362 |       
|                               | Property and equipment, net              |                   |        |      |        |   |        | 95    |       
|                               | Goodwill                                 |                   |        |      |        |   |        | 3,007 |       
|                               | Other assets                             |                   |        |      |        |   |        | 186   |       
|                               |                                          |                   |        |       |        |   |        |      
|                               |                                          | Total assets      |        | $     | 14,214 |   |        | $     | 14,439 | 
|                               |                                          |                   |        |       |        |   |        |      
|Liabilities:                   |                                          |                   |        |       |        |   |        |      
|                               | Accounts payable and accrued liabilities |                   | $      |      |        |   | $      | 665   |       
|                               | Notes payable  short-term               |                   |        |      |        |   |        | 431   |       
|                               |                                          |                   |        |       |        |   |        |      
|                               |                                          | Total liabilities |        |       |       |   |        |       | 1,096  | 
|Minority Interest              |                                          |                   |       |       |        |   | 603    |      
|Owners Equity                 |                                          |                   | 14,214 |       |        |   | 12,740 |      
|                               |                                          |                   |        |       |        |   |        |      
|Liabilities and Owners Equity |                                          | $                 | 14,214 |       |        | $ | 14,439 |      
|                               |                                          |                   |        |       |        |   |        |      

Summit, since its inception in fiscal 2001, has
been consolidated into the Companys financial statements
as the Company exercises, or has the ability to exercise,
directly or indirectly, legal, financial and operational
control. The effects of Summits results of operations on
the Companys consolidated results of operations were net
losses of $803 and $1,472 for fiscal 2002 and 2003, respectively.

10. Property and Equipment, net

Property and equipment, net, is comprised of the
following:

|                                                |                         |          |        |       |  |   |        |       | 
|----------------------------------------------- | ----------------------- | -------- | ------ | ----- |  | - | ------ | ----- | 
|                                                |                         |         
|                                                |                         | July 31,
|                                                |                         |         
|                                                |                         | 2002     |        | 2003 
|                                                |                         |          |        |      
|Information technology equipment and systems    |                         | $        | 5,606  |       |  | $ | 5,924  |      
|Office furniture and equipment                  |                         |          | 1,325  |       |  |   | 1,667  |      
|Leasehold improvements                          |                         |          | 125    |       |  |   | 144    |      
|                                                |                         |          |        |       |  |   |        |      
|                                                |                         |          | 7,056  |       |  |   | 7,735  |      
|Less: accumulated depreciation and amortization |                         |          | (3,144 | )     |  |   | (4,751 | )    
|                                                |                         |          |        |       |  |   |        |      
|                                                | Property and equipment, |          | $      | 3,912 |  |   | $      | 2,984 | 
|                                                |                         |          |        |       |  |   |        |      

F-19



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


11. Other Current Liabilities

Other current liabilities are comprised of the
following:

|                             |                           |          |       |       |  |   |       |       | 
|---------------------------- | ------------------------- | -------- | ----- | ----- |  | - | ----- | ----- | 
|                             |                           |         
|                             |                           | July 31,
|                             |                           |         
|                             |                           | 2002     |       | 2003 
|                             |                           |          |       |      
|Litigation damages payable   |                           | $        |      |       |  | $ | 2,738 |      
|Energy taxes payable         |                           |          | 438   |       |  |   | 1,330 |      
|Accrued energy payable       |                           |          | 795   |       |  |   | 618   |      
|Accrued payroll and benefits |                           |          | 589   |       |  |   | 786   |      
|Accrued bonuses              |                           |          | 410   |       |  |   | 495   |      
|Accrued legal expenses       |                           |          | 1,572 |       |  |   | 318   |      
|Notes payable                |                           |          |      |       |  |   | 431   |      
|Other                        |                           |          | 504   |       |  |   | 411   |      
|                             |                           |          |       |       |  |   |       |      
|                             | Total accrued liabilities |          | $     | 4,308 |  |   | $     | 7,127 | 
|                             |                           |          |       |       |  |   |       |      

12. Shareholders Equity

Series A Convertible Preferred
Stock

Each share of the Companys outstanding
Series A convertible preferred stock (i) has the same
voting rights as one share of the Companys common stock
into which it is convertible at the shareholders
discretion, (ii) accrues cumulative dividends at an annual
rate of 10% which are payable at the Companys discretion,
and (iii) has a preferential liquidation right in the
amount of $1 per share plus any declared but unpaid dividends.
On December 20, 2002, the Company paid a cash dividend of
$0.15 per share to holders of record as of December 16,
2002. Cumulative unpaid dividends were $91 as of July 31,
2003.

During fiscal 2001, the Company offered all
Series A preferred shareholders the option to rescind their
purchase at the initial offering price of $1 per share. Pursuant
to this offer, the Company subsequently repurchased 164
preferred shares in fiscal 2001 and 2002.

Other Convertible Preferred Stock

Pursuant to a September 2003 court ruling (see
Note 14), the Company has reflected shares of Other
convertible preferred stock in the accompanying financial
statements. If the courts ruling were to stand, each share
of this Other convertible preferred stock would (i) have
the same voting rights as two shares of the Companys
common stock into which it is convertible at the
shareholders discretion, (ii) accrue cumulative
dividends at an annual rate of 12% to 14%, and (iii) have a
preferential liquidation right to the Companys common
stock. No dividends have been declared on these shares as of
July 31, 2003. Cumulative unpaid dividends were $42 at
July 31, 2003.

Common Stock

All sales of the Companys common stock to
date have been through private placements.

At July 31, 2003, the Company has reserved
the following shares of its common stock:

|                                                                                              |  |  |       | 
|--------------------------------------------------------------------------------------------- |  |  | ----- | 
|Reserved for potential conversion of outstanding
    Series A convertible preferred stock     |  |  | 609   | 
|Reserved for potential conversion of deemed
    outstanding other convertible preferred stock |  |  | 704   | 
|Reserved for potential exercise of outstanding
    stock options                              |  |  | 7,489 | 
|                                                                                              |  |  |       | 
|                                                                                              |  |  | 8,802 | 
|                                                                                              |  |  |       | 

F-20



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Adjustment of Number of Outstanding shares of
Series A Preferred and Common Stock

In December 2002, the Company determined that 166
shares of Series A Convertible Preferred Stock and 166
shares of Common Stock that had previously been treated as
outstanding had not been validly issued. As a result, these
shares were removed from the records of the Company and the
Company has determined that such shares shall no longer be
treated as issued and outstanding for any purpose. Accordingly,
the Company has corrected its current years financial
statements to reflect the cancellation of these shares. The
correction did not impact the Companys reported earnings
per common share amounts.

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 (i) 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 (ii) 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 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.

13. Stock Options and Warrants

All unexercised stock options granted prior to
December 1999 expired in December 2002. Stock options granted
after December 1999 will expire in December 2004 through 2010.
As of July 31, 2003, 7,489 stock options remained
unexercised and outstanding.

The Companys 1999 Equity Incentive Plan
(Plan), which was approved by the Companys
shareholders, provides for the granting of up to an aggregate of
7,000 common shares. In addition, the Companys Board of
Directors has from time to time made individual grants of
warrants or options outside the Plan. At July 31, 2003, the
Company had 2,927 and 4,562 stock options unexercised and
outstanding that were granted under and outside the Plan,
respectively.

F-21



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Stock option activity is set forth below:

|                          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |      | 
|------------------------- | ----------------------------- | ------------------- | ------ | -------------- |  | -------------- | ------------- | ----------- |  | - | ---- | ---- |  |  | - | ---- | 
|                          |                               |                    
|                          |                               | Options Outstanding
|                          |                               |                    
|                          |                               |                     |        | Weighted-     
|                          |                               |                     |        | Average       
|                          |                               |                     |        | Weighted-      |  | Fair Value    
|                          |                               | Number of           |        | Exercise Price |  | Average        |               | of Common  
|                          |                               | Shares              |        | Per Share      |  | Exercise Price |               | Stock      
|                          |                               |                     |        |                |  |                |               |            
|Balance at July 31, 2000. |                               |                     | 9,250  |                |  |                | $0.01 - $3.75 |             |  | $ | 1.47 |      |  |  |   |     
|Options granted:          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|                          | Employee performance-based(1) |                     |        | 300            |  |                |               | 2.50        |  |   |      | 2.50 |  |  | $ | 2.75 | 
|                          | Other employees(2)            |                     |        | 2,500          |  |                |               | 2.75        |  |   |      | 2.75 |  |  | $ | 2.75 | 
|                          | Outside directors(2)          |                     |        | 150            |  |                |               | 2.75        |  |   |      | 2.75 |  |  | $ | 2.75 | 
|Options exercised         |                               |                     | (67    | )              |  |                | 0.01 - 1.00   |             |  |   | 0.07 |      |  |  |   |     
|Options cancelled         |                               |                     | (1,850 | )              |  |                | 0.01 - 3.75   |             |  |   | 1.72 |      |  |  |   |     
|                          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|Balance at July 31, 2001. |                               |                     | 10,283 |                |  |                | 0.01 - 3.75   |             |  |   | 1.79 |      |  |  |   |     
|Options granted:          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|                          | Other employees(1)            |                     |        | 5              |  |                |               | 1.00 - 3.75 |  |   |      | 2.22 |  |  | $ | 3.13 | 
|                          | Employee performance-based(2) |                     |        | 300            |  |                |               | 2.50        |  |   |      | 2.50 |  |  | $ | 2.38 | 
|Options exercised         |                               |                     | (52    | )              |  |                | 0.01 - 1.00   |             |  |   | 0.50 |      |  |  |   |     
|Options cancelled         |                               |                     | (46    | )              |  |                | 0.05 - 3.75   |             |  |   | 1.04 |      |  |  |   |     
|                          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|Balance at July 31, 2002. |                               |                     | 10,490 |                |  |                | 0.01 - 3.75   |             |  |   | 1.82 |      |  |  |   |     
|Options granted:          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|                          | Employee performance-based    |                     |        | 300            |  |                |               | 2.50        |  |   |      | 2.50 |  |  | $ | 2.50 | 
|                          | Other employees(2)            |                     |        | 325            |  |                |               | 1.86 - 3.05 |  |   |      | 1.93 |  |  | $ | 1.86 | 
|Options exercised         |                               |                     | (482   | )              |  |                | 0.01 - 1.00   |             |  |   | 0.03 |      |  |  |   |     
|Options cancelled         |                               |                     | (403   | )              |  |                | 2.50 - 2.75   |             |  |   | 2.50 |      |  |  |   |     
|Options expired           |                               |                     | (2,741 | )              |  |                | 0.01 - 1.00   |             |  |   | 0.22 |      |  |  |   |     
|                          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     
|Balance at July 31, 2003. |                               |                     | 7,489  |                |  |                | $0.50 - $3.75 |             |  | $ | 2.55 |      |  |  |   |     
|                          |                               |                     |        |                |  |                |               |             |  |   |      |      |  |  |   |     






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Options with exercise prices less than the fair
    value of the Companys common stock at respective dates of
    grant.
|   
|(2) | Options with exercise prices equal to the fair
    value of the Companys common stock at respective dates of
    grant. 

The weighted average characteristics of stock
options outstanding as of July 31, 2003 were as follows:

|             |  |             |         |              |  |             |     |                |  |  |       |  |  |   |      | 
|------------ |  | ----------- | ------- | ------------ |  | ----------- | --- | -------------- |  |  | ----- |  |  | - | ---- | 
|             |  |             |         | Average      |  |             |     |               
|Range of     |  | Number of   |         | Remaining    |  |             |     | Weighted      
|Exercise     |  | Shares      |         | Contractual  |  | Shares      |     | Average       
|Prices       |  | Outstanding |         | Life (Years) |  | Exercisable |     | Exercise Price
|             |  |             |         |              |  |             |     |               
|$0.01 - $0.5 |  |             | 0 100   |              |  |             | 0.4 |                |  |  | 100   |  |  | $ | 0.50 | 
|$1.00 - $1.8 |  |             | 6 429   |              |  |             | 7.1 |                |  |  | 279   |  |  |   | 1.48 | 
|$2.50 - $3.7 |  |             | 5 6,960 |              |  |             | 4.7 |                |  |  | 4,865 |  |  |   | 2.66 | 
|             |  |             |         |              |  |             |     |                |  |  |       |  |  |   |      | 
|Total        |  |             | 7,489   |              |  |             | 4.8 |                |  |  | 5,244 |  |  | $ | 2.55 | 
|             |  |             |         |              |  |             |     |                |  |  |       |  |  |   |      | 

F-22



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


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

As part of an employment agreement with a term
expiring January 31, 2005, the Company has granted 4,200
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
of the options were vested and 100 options vest annually on
January 1 of each year from 2001 through 2004, for a total of
700. The remaining 3,500 options are performance-based and vest
upon the occurrence of certain events as detailed below.

Performance criteria which were met as of
July 31, 2003, the number of related stock options vested
and those not earned, and stock-based compensation recognized
during the years ended July 31, 2002 and 2001 are as
follows (no stock-based compensation was recognized in the year
ended July 31, 2003, as the exercise price of the stock
options was above the current fair market value of the
Companys common stock):

|                                                                                             |  |                   |       |                          |  |               |       |               |  |   |       |  |  |   |      |  
|-------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ------------------------ |  | ------------- | ----- | ------------- |  | - | ----- |  |  | - | ---- | -
|                                                                                             |  |                   |       |                          |  |              
|                                                                                             |  | Number of Options |       |                         
|                                                                                             |  |                   |       | Stock-based Compensation
|                                                                                             |  | Earned            |       |                          |  |              
|                                                                                             |  | and               |       | Not Earned               |  | Recognized in |       | Recognized in
|                                                                                             |  | vested            |       | and unvested             |  | Fiscal 2001   |       | Fiscal 2002  
|                                                                                             |  |                   |       |                          |  |               |       |              
|Completion of the audit of the Companys
    July 31, 2000 consolidated financial statements |  |                   | 500   |                          |  |               |      |               |  | $ | 125   |  |  | $ |     |  
|Settlement of the California Department of
    Corporations investigation                    |  |                   | 250   |                          |  |               |      |               |  |   | 62    |  |  |   |     |  
|Settlement of the California Public Utilities
    Commission investigation                   |  |                   | 500   |                          |  |               |      |               |  |   | 125   |  |  |   |     |  
|Completion of liquidity event, as defined in
    related agreement                           |  |                   |      |                          |  |               | 750   |               |  |   | 413   |  |  |   | (413 | )
|Completion of a successful initial public offering                                           |  |                   |      |                          |  |               | 300   |               |  |   | 165   |  |  |   | (165 | )
|Meeting the Companys business plans for
    2000.                                           |  |                   | 100   |                          |  |               | 200   |               |  |   | 25    |  |  |   |     |  
|Exceeding the Companys business plans by
    10% or more for 2001                           |  |                   | 300   |                          |  |               |      |               |  |   | 165   |  |  |   | (165 | )
|Exceeding the Companys business plans by
    10% or more for 2002                           |  |                   | 300   |                          |  |               |      |               |  |   |      |  |  |   |     |  
|Exceeding the Companys business plans by
    10% or more for 2003                           |  |                   |      |                          |  |               | 300   |               |  |   |      |  |  |   |     |  
|                                                                                             |  |                   |       |                          |  |               |       |               |  |   |       |  |  |   |      |  
|                                                                                             |  |                   | 1,950 |                          |  |               | 1,550 |               |  | $ | 1,080 |  |  | $ | (743 | )
|                                                                                             |  |                   |       |                          |  |               |       |               |  |   |       |  |  |   |      |  

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 concurrent 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 of his capital stock and stock options, then
earned or to be earned, at a repurchase price equal to two times
the then value of the Companys common stock.

F-23



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Stock Purchase Warrants

In June 2000, the Company granted a lender in
connection with a line of credit agreement, which subsequently
expired in June 2002, stock purchase warrants enabling the
lender to purchase 100 shares of the Companys common
stock at an exercise price of $5.50 per share. These warrants,
which had a nominal value as of the grant date, expired
unexercised in June 2003.

14. Commitments and
Contingencies

Commitments

Purchase Commitments

The Company has entered into a series of
electricity supply contracts to purchase electricity energy
covering approximately 81% of the current load servicing
requirements.

The following is a summary of the Companys
commitments to purchase electric power by state as of
July 31, 2003:

|             |       |                     |        |        |  |      |        |        |  |   |        |        |  |   |         |         | 
|------------ | ----- | ------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|             |       |                    
|             |       | Fiscal years ending
|             |       |                    
|             |       | 2004                |        | 2005   |  | 2006 |        | Total 
|             |       |                     |        |        |  |      |        |       
|California   |       | $                   | 40,255 |        |  | $    | 12,963 |        |  | $ |       |        |  | $ | 53,218  |        
|Pennsylvania |       |                     | 49,767 |        |  |      | 32,365 |        |  |   | 18,729 |        |  |   | 100,861 |        
|             |       |                     |        |        |  |      |        |        |  |   |        |        |  |   |         |        
|             | Total |                     | $      | 90,022 |  |      | $      | 45,328 |  |   | $      | 18,729 |  |   | $       | 154,079 | 
|             |       |                     |        |        |  |      |        |        |  |   |        |        |  |   |         |        

For the Michigan market, the Company has entered
into several forward energy supply contracts with a major energy
generator to purchase the full requirements service product to
service the Companys customer load. These full requirement
service contracts include energy and all scheduling costs. These
contracts require the generator to sell the Company power,
however, the Company is not required to take delivery.

Since the price at which the Company can purchase
electric power is 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.

Operating Leases

The Company leases its corporate facilities as
well as certain equipment under operating leases. Certain of
these operating leases are noncancellable and contain rent
escalation clauses relating to any increases to real property
taxes and maintenance costs. The Company incurred aggregate rent
expense under operating leases of $697, $704 and $742 in fiscal
2001, 2002 and 2003, respectively.

The future aggregate minimum lease payments under
operating lease agreements in existence at July 31, 2003
are as follows:

|                            |  |   |     | 
|--------------------------- |  | - | --- | 
|Fiscal Year Ending July 31, |  |  
|                            |  |  
|2004.                       |  | $ | 693 | 
|2005.                       |  |   | 158 | 
|2006.                       |  |   | 11  | 
|                            |  |   |     | 
|                            |  | $ | 862 | 
|                            |  |   |     | 

F-24



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


Employment agreements

The Company has five executive employment
agreements in existence at July 31, 2003 that provide for future
aggregate base salaries as follows:

|                            |  |   |       | 
|--------------------------- |  | - | ----- | 
|Fiscal Year Ending July 31, |  |  
|                            |  |  
|2004.                       |  | $ | 1,491 | 
|2005.                       |  |   | 917   | 
|                            |  |   |       | 
|                            |  | $ | 2,408 | 
|                            |  |   |       | 

Under these agreements, the Company may also be
required to pay bonuses in the event of a change in control
and/or upon early termination of employment.

Contingencies

Litigation with Companys
Founder

The Companys corporate records state 8,000
shares of the Companys common stock were issued to its
founder on August 15, 1997 in exchange for $140 in the form
of cash payments totaling $90 and personal property having a
fair value of $50; 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, the founder and the
Company entered into an Accommodation Agreement pursuant to
which 1,200 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. In
August 2001, a settlement was reached with the founder and
approved by the court having jurisdiction over the case. The
material terms of the settlement provided that the Company pay
the founder $4,790 in damages and an additional $2,400 to
purchase 1,175 shares of the Companys common stock claimed
to be held by the founder. The settlement agreement also
provided that the remaining 4,720 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, which is net of the previously accrued
severance payable to the founder of $928, was recorded as of
July 31, 2001 and is included in general and administrative
expenses for the year then ended.

Litigation

In August 2001, Joseph P. Saline, one of the
Companys directors, filed a suit seeking access to all of
the Companys documents and records. The Company filed a
cross-petition alleging that Mr. Saline unlawfully
disseminated confidential information belonging to the Company,
breached his confidentiality agreement with the Company,
breached his fiduciary duty to the Company, and illegally tape
recorded meetings and seeking, among other things, to limit
Mr. Salines ability to distribute the corporate
documents he was seeking. The trial court issued an order
granting Mr. Saline access to certain documents, but
prohibited Mr. Saline from disclosing or discussing the
documents he requested with

F-25



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


anyone other than his attorney and other members
of the Companys Board of Directors. The Company 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 and to
reverse the trial courts limits on his inspection rights.
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. The
Court of Appeals further granted Mr. Saline with access to
all of the Companys documents and records. The Court of
Appeals also ordered that Mr. Saline shall recover the
costs of his appeal from the Company. In March 2003, the court
denied the Companys motion for summary judgment with
respect to the Companys counter claims. In September 2003,
the Company amended its cross-petition to add claims alleging
that Mr. Saline committed libel and committed unfair
business practices. These claims are based upon certain alleged
actions by Mr. Saline in connection with certain purchases
of the Companys securities and statements Mr. Saline
made regarding the proxy contest with respect to the
Companys 2001 annual meeting of shareholders. This case is
currently pending.

In October 2001, Mr. Saline filed a civil
claim against the Company alleging that the Company breached its
contract to sell Mr. Saline preferred shares, is estopped
to deny the rights and privileges of his preferred stock,
unlawfully denied him his voting rights and committed unfair
business practices. In his complaint, Mr. Saline alleged
that he is the holder of 352 shares of preferred stock, with
two-for-one conversion and voting rights that differ from the
rights set forth in the Certificate of Determination for the
Companys Series A Preferred Stock filed with the
California Secretary of State. Mr. Saline also has made
claims for damages, including punitive damages. The Company
filed an answer disputing Mr. Salines claims and
filed a cross-complaint for declaratory relief. A trial was held
in June 2003. On September 24, 2003, the court issued an
order prohibiting the Company from refusing to recognize that
Mr. Saline owns 352 of preferred stock, convertible into
common stock and entitled to vote on a two-for-one basis. As a
result, all such shares have been reflected in these financial
statements as Other convertible preferred stock. The
Company intends to appeal the courts ruling. A second
phase of the trial to consider Mr. Salines claims for
damages is pending.

In February 2001, several former employees filed
a lawsuit against the Company. The complaint was filed by David
James and twelve other former employees who worked with David
James in raising investment capital. The plaintiffs
complaint had alleged claims for unfair business practices,
breach of contract, and 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 by former
Officers of Company in the course of their employment. The
Company filed a cross-complaint asserting claims for breach of
contract; unfair business practices; misappropriation of trade
secrets; intentional interference with prospective economic
advantage; negligent interference with prospective economic
advantage; conversion; slander; prohibitory injunctive relief;
mandatory injunctive relief; and declaratory relief which the
Company dismissed without prejudice. In addition, the Company
filed a first amended cross-complaint that asserted additional
cross-claims against plaintiff David James for rescission and
restitution, fraud, money had and received, unjust enrichment
and declaratory relief. The plaintiffs sought, among other
relief, damages in the amount of up to $10,000, plus costs and
attorney fees. A jury trial was held in this matter beginning in
October 2002. On December 10, 2002, the jury returned a
verdict finding for the plaintiffs in the amount of $2,700
(accrued as of July 31, 2003) of compensatory damages.
During trial, the Company voluntarily dismissed the
Companys cross-complaint without prejudice. In January
2003, the Company filed post-trial motions in the lawsuit filed
against the Company by several former employees for a new trial
and for a judgment notwithstanding the verdict, seeking to have
the $2,700 verdict for the plaintiffs set aside. In March 2003,
the court denied the Companys post-trial motions for a new
trial and for a judgment notwithstanding the verdict in the
lawsuit filed against the Company by

F-26



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


several former employees. The Company filed a
notice of appeal in March 2003, seeking reversal of the judgment
in favor of the plaintiffs. On June 26, 2003, the court
ruled that the Company was the prevailing party on the contract
claims brought by the plaintiffs and that the Company was
entitled to recover attorneys fees and costs from the
plaintiffs totaling approximately $1,100. The Companys
appeal is currently pending. The plaintiffs have also appealed
the Courts ruling awarding the Company attorneys
fees. In order to stay the enforcement of the judgment pending
appeal, the Company posted an appellate bond of approximately
$4,100. This bond was outstanding at July 31, 2003. In
September 2003, a court ruling permitted the reduction of
the bond to $2,600.

The Company currently is, and from time to time
may become, involved in other litigation concerning claims
arising out of the Companys operations in the normal
course of business. While the Company cannot predict the
ultimate outcome of its pending matters or how they will affect
the Companys results of operations or financial position,
the Companys management currently does not expect any of
the legal proceedings to which the Company is currently a party,
including the legal proceedings described above, individually or
in the aggregate, to have a material adverse effect on our
results of operations or financial position beyond the accruals
provided as of July 31, 2003.

15. Related Party Transactions

On November 9, 2001, the Company purchased
certain rights to hire employees and contractors of their
primary information technology vendor, 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
purchase agreement contained a covenant not to compete
prohibiting the principals of Symcas from competing with the
Companys software product or directly or indirectly
assisting others to develop a software product similar to the
Companys software product 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. 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. Ms. Guckert and her
husband continue to own a significant interest in Symcas. The
Company continues to utilize Symcas on a limited basis for its
information technology maintenance. The Company paid Symcas
$2,091 and $577 in fiscal 2002 and 2003, respectively.

F-27



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(in thousands, except per share and per kWh
amounts)


16. 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, 2002:           |         |                                             |        |            |   |          |        |         |  |   |        |      |  |   |        |     
|Net revenue                         |         | $                                           | 28,161 |            |   | $        | 26,217 |         |  | $ | 28,065 |      |  | $ | 35,326 |     
|Gross profit(1)                     |         |                                             | 3,254  |            |   |          | 7,694  |         |  |   | 7,804  |      |  |   | 11,676 |     
|Net income (loss)                   |         |                                             | (667   | )          |   |          | 1,103  |         |  |   | 1,382  |      |  |   | 3,346  |     
|Net income (loss) per common share: |         |                                             |        |            |   |          |        |         |  |   |        |      |  |   |        |     
|                                    | Basic   |                                             |        | (0.02      | ) |          |        | 0.04    |  |   |        | 0.05 |  |   |        | 0.12 | 
|                                    | Diluted |                                             |        | (0.02      | ) |          |        | 0.03    |  |   |        | 0.04 |  |   |        | 0.11 | 
|Year ended July 31, 2003:           |         |                                             |        |            |   |          |        |         |  |   |        |      |  |   |        |     
|Net revenue                         |         | $                                           | 33,682 |            |   | $        | 31,759 |         |  | $ | 37,841 |      |  | $ | 62,244 |     
|Gross profit(1)                     |         |                                             | 7,476  |            |   |          | 7,190  |         |  |   | 7,986  |      |  |   | 14,695 |     
|Net income (loss)                   |         |                                             | (526   | )          |   |          | 587    |         |  |   | 1,096  |      |  |   | 4,265  |     
|Net income (loss) per common share: |         |                                             |        |            |   |          |        |         |  |   |        |      |  |   |        |     
|                                    | Basic   |                                             |        | (0.02      | ) |          |        | 0.02    |  |   |        | 0.04 |  |   |        | 0.15 | 
|                                    | Diluted |                                             |        | (0.02      | ) |          |        | 0.02    |  |   |        | 0.04 |  |   |        | 0.15 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the fourth quarter of fiscal 2003, the Company
    reclassified costs associated with the Pennsylvania gross
    receipts taxes which the Company deemed appropriate to
    reclassify to direct energy costs from general and
    administrative expenses. For the four quarters of fiscal 2002,
    the reclassifications were $105, $256, $328 and $454,
    respectively and in the first three quarters of fiscal 2003, the
    reclassifications were $726, $628 and $530, respectively.

F-28



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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(3)                                                                                                                                                         
|Material Contracts Relating to Management
    Compensation Plans or Arrangements
|                                                                                 | 10.1  |                  |  | Employment Agreement dated January 1, 2000,
    between Commonwealth Energy Corporation and Ian B. Carter, as
    modified by an Addendum to Employment Agreement dated as of
    November 1, 2000(1)                
|                                                                                 | 10.2  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and Richard L. Paulsen(2)                                                                                                   
|                                                                                 | 10.3  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and James L. Oliver(2)                                                                                                      
|                                                                                 | 10.4  |                  |  | Employment Agreement dated November 1, 2000,
    between Commonwealth Energy Corporation and John A. Barthrop(2)                                                                                                     
|                                                                                 | 10.5  |                  |  | Commonwealth Energy Corporation 1999 Equity
    Incentive Plan(4)                                                                                                                                                    
|                                                                                 | 10.6  |                  |  | Employment Letter dated December 7, 2001 for
    Linda Guckert                                                                                                                                                       
|                                                                                 | 10.7  |                  |  | Employment Agreement dated between Commonwealth
    Energy Corporation and Michael G. Nelson                                                                                                                         
|Other Material Contracts                                                        
|                                                                                 | 10.8  |                  |  | 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)    
|                                                                                 | 10.9  |                  |  | PECO Energy Company Confirmation Agreement dated
    January 30, 2001(1)                                                                                                                                             
|                                                                                 | 10.10 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated May 13, 2001(1)                                                                                                                                      
|                                                                                 | 10.11 |                  |  | 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)   
|                                                                                 | 10.12 |                  |  | 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)                        
|                                                                                 | 10.13 |                  |  | Amendment Number 6 to lease by and between
    Warner/ Redhill Associates and Frederick Michael Bloom(2)                                                                                                             
|                                                                                 | 10.14 |                  |  | Second Amendment to the Limited Liability Company
    Agreement of Summit Energy Ventures, LLC(6)                                                                                                                    
|                                                                                 | 10.15 |                  |  | Commonwealth Energy Corporation Summary of Rights
    to Purchase Preferred Stock(6)                                                                                                                                 
|                                                                                 | 10.16 |                  |  | Master Power Purchase Agreement dated
    May 16, 2002 between Commonwealth Energy Corporation and
    Reliant Energy Services, Inc.(7)                                                                              
|                                                                                 | 10.17 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Energy Trading, Inc. dated
    July 25, 2002(7)                                                                                      
|                                                                                 | 10.18 |                  |  | Confirmation of Multi-Block Electric Power
    Transaction between Commonwealth Energy Corporation and
    TransAlta Energy Marketing (U.S.) Inc. dated March 1,
    2002(7)                                         



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##### Table of Contents



|        |       |                  |  |                                                                                                                                                                                                  
|------- | ----- | ---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                 
|Number  |       | Title of Exhibit
|        |       |                 
|        | 10.19 |                  |  | Lease Agreement dated August 9, 2002,
    between Commonwealth Energy Corporation and Cherry Tree
    Investors, L.P.(7)                                                                         
|        | 10.20 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated July 22, 2003                                                                                                                    
|        | 10.21 |                  |  | Exelon Generation Company, LLC Confirmation
    Agreement dated July 22, 2003                                                                                                                    
|        | 10.22 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Trading, Inc. dated March 24,
    2003                                                                           
|        | 10.23 |                  |  | Confirmation of Transaction between Commonwealth
    Energy Corporation and DTE Trading, Inc. dated July 24, 2003                                                                                
|        | 14.1  |                  |  | Commonwealth Energy Corporation Code of Business
    Conduct                                                                                                                                     
|        | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                                                                                                                                
|        | 23.1  |                  |  | Consent of Ernst & Young, LLP,
    independent auditors                                                                                                                                          
|        | 31.1  |                  |  | Certification of Chief Executive Officer of
    Commonwealth Energy Corporation pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934                                         
|        | 31.2  |                  |  | Certification of Chief Financial Officer of
    Commonwealth Energy Corporation pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934                                         
|        | 32.1  |                  |  | 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
|        | 32.2  |                  |  | 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 Form 10/ A filed with the
    Securities and Exchange Commission on November 14, 2001
    (File No. 000-33069).                           
|   
|(3) | This exhibit is incorporated herein by reference
    to Commonwealth Energy Corporations form 10-Q for the
    quarterly period ended January 31, 2003.                                                                 
|   
|(4) | This exhibit is incorporated by reference to
    Commonwealth Energy Corporations Registration Statement on
    Form S-8 (File No. 333-109552) filed with the
    Securities and Exchange Commission on October 8, 2003.
|   
|(5) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Form 10-Q filed with the
    Securities and Exchange Commission on December 17, 2001
    (File No. 000-33069).                            
|   
|(6) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Form 10/ A filed with the
    Securities and Exchange Commission on April 3, 2002 (File
    No. 000-33069).                               
|   
|(7) | Each of these exhibits is incorporated by
    reference to Commonwealth Energy Corporations
    Form 10-K for the year ended July 31, 2002 filed with
    the Securities and Exchange Commission on October 29, 2002.