##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K/A



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended July 31,
2001

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 o     No x

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




As
of January 31, 2002, 27,311,703 shares of the
registrants common stock were outstanding. There was no
market for the registrants shares at such date.












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TABLE OF CONTENTS



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



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TABLE OF CONTENTS




|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|Item 1.  |  | Business                                                                               |  |      | 1  | 
|Item 2.  |  | Properties                                                                             |  |      | 8  | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 8  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 10 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 10 | 
|Item 6.  |  | Selected Financial Data                                                                |  |      | 11 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 13 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 19 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 19 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosures |  |      | 19 | 
|PART III
|Item 10. |  | Directors and Executive Officers                                                       |  |      | 20 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 22 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 27 | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 28 | 
|PART IV 
|Item 14. |  | Exhibits, Financial Statements and Reports on
	Form 8-K                                |  |      | 29 | 




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PART I




Item 1. Business

A. Background and Overview.

We were incorporated on August 15, 1997.
Since then, our primary business has been the sale of retail
electric power to residential and small commercial customers in
the newly deregulated California electricity market. We began
providing electric service as one of more than 300 licensed
Electric Service Providers (ESPs) in the state and
aggregated customers via an internal call center. As our
customer base grew, we began developing software 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. Once we had established a foothold in California, we
expanded our retail electricity services to end users in
Pennsylvania, specifically into the Pennsylvania Electric
Company territory (PECO). We established a new
tradename, electricAmerica, in Pennsylvania and
began aggregating residential, commercial, industrial and
governmental customers via our call center. Currently, we sell
electric power to approximately 56,000 retail end-use customers
in California and approximately 32,000 retail end-use customers
in Pennsylvania.

A portion of the electric power we sell is
delivered to our retail and commercial end-user customers by the
incumbent utility distribution companies (UDCs) and
electric distribution companies (EDCs). All of these
companies serve as the incumbent utility in their jurisdiction
and measure electric power usage and bill customers on our
behalf but have different names depending upon their respective
jurisdiction. Three UDCs in California and one EDC in
Pennsylvania conduct these activities on our behalf. The
remaining portion of our electric power is sold to large
wholesale customers by our own energy trading department.

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

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

Most electricity markets function in a similar
manner in that the incumbent utility is the entity that owns the
physical wires that transport electricity to each users
location. The utility company is paid a fee for use of its
wires. In addition to this basic service, some states allow the
utility company to take on additional responsibilities, such as
reading meters, generating bills to customers, collecting bills,
taking requests for service changes or problems, etc., while in
other jurisdictions the utility is not allowed to, or chooses
not to, perform these services. In California and Pennsylvania,
the utility companies currently assist us with 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 associated with those services as well as the
right to use the distribution network.

The California marketplace has evolved from a
market driven, minute by minute trading forum, (operated by the
now bankrupt California Power Exchange), to a system which
requires parties to obtain more of their power through the use
of forward contracts, or advance purchases and to clear those
transactions through the market oversight body called the
California Independent System Operator (CAISO). The
CAISO is responsible for ensuring system reliability and that
all electricity put into the grid has a

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corresponding exit from the grid. This matching
of power transactions is done in a constant sequence of 15
minute increments. The Pennsylvania marketplace is governed by a
similar structure called the PJM interconnection
(PJM). The PJM is responsible for matching all power
transactions among market participants and ensuring system
reliability.





California has recently passed legislation that
requires the California State Public Utilities Commission to
suspend direct access. On March 21, 2002, the CPUC ruled to
hold the effective date for suspension of direct access as
September 20, 2001. The suspension of direct access means
that retail electric suppliers, such as our company, will not be
allowed to actively seek new customers to enroll for our
services. The ruling came in connection with legislation
entitled ABX-1, which amended the California Water Code section
801110, to allow for this suspension. This ruling allows us to
keep our current customer base intact and only impacts our ESP
business in California, not other states. The ruling does,
however, prohibit us from signing up new customers for an, as
yet, undetermined amount of time. This may affect our ability to
continue to increase revenues in the State of California
relating to our ESP business operations in this jurisdiction.




Prior to the inception of electricity
deregulation in 1998, the retail electric service industry was
controlled almost exclusively by utilities. Presently, eight
states and Washington, D.C. offer deregulated retail electric
service, while fourteen states are transitioning to deregulated
status. Our opportunities for expansion may increase as more
states and territories deregulate.

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 majority of our operating margins have come
from the resale of electricity purchased under a contract with
Calpine Power Services Company that expires in June 2002. This
contract may not be renewed on terms as favorable to us as those
contained in the current contract. During fiscal 2001, this
contract accounted for 60% of the total energy supplied by us
and from which 83% of our revenue was derived. To mitigate the
risk of relying solely on our ESP business, we have expended a
great deal of effort to diversify our business activities during
the past twelve months. In this report we have attempted to
describe the changes we are making to be able to have a
diversified energy company that allows us to take advantage of
other opportunities afforded by the energy marketplace in all of
North America. However, none of these activities have yet
contributed materially to our income or losses.

As an electric service provider, we are dependent
on serving and expanding into deregulated electric service
markets. We also have been pursuing other business opportunities
in regulated and deregulated electric service markets. Our
experience in the energy markets has led us to increase our
breadth of service offerings, leverage our existing energy
expertise and pursue a diversification strategy that includes:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establishment of a trading desk to better manage
	and schedule our energy load, and our wholesale power purchases
	and sales;                                                               
|
| |  | Sale of energy-efficient products and services to
	retail customers through our own call center and direct sales
	force;                                                                    
|
| |  | Management and fulfillment of utility back office
	functions for energy retailers, generators, utilities,
	municipalities and cooperatives;                                                 
|
| |  | Energy management programs, including energy
	curtailment, distributed generation and alternative power
	generation for commercial, industrial and governmental electric
	service customers;
|
| |  | Procurement of government sponsored
	energy-related grants to augment our research and development
	efforts;                                                                                
|
| |  | Creation of separate, energy-focused profit
	centers, such as our call center; and                                                                                                          
|
| |  | Investments in energy-related ventures synergetic
	with our plans.                                                                                                                          

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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.

B. Products and Services.

To date our business activities are comprised
primarily of providing retail electricity services and,
beginning in fiscal 2001, wholesale power procurement and sales.
We are broadening the scope of the energy related services we
provide to include energy efficient products, managed back
office services, energy management programs, energy research and
development and load aggregation. However, none of these
services have yet begun to contribute materially to our income
or losses or developed to the point of being a separate business
segment.

1. Retail
Electricity

We offer electric product and service
to customers on month-to-month or longer-term service contracts.
The difference between the customers list price for energy
and the sum of our wholesale electricity purchase cost and
ancillary costs provide us a gross profit/loss margin. We
provide a value proposition to customers by pricing electric
products below, or delivering a more environmentally friendly
(not derived from fossil-fuel sources) product than, our
competitors.

We are licensed in California by the California
Public Utilities Commission as an Electric Service Provider
(License #1092); in Pennsylvania by the Pennsylvania Public
Utility Commission as an Electric Generation Supplier
(License #A-110117); in New Jersey by the New Jersey Board
of Public Utilities as an Electric Generation Supplier
(License #ESL-0046); in Ohio by the Public Utilities
Commission of Ohio as a Certified Electric Supplier
(License #01-074); and in Texas as a Retail Energy Provider
(RE Certificate #10029) and we are in the license
approval process in Michigan as an Alternative Electric
Supplier. We are also licensed as a Power Marketer by the
Federal Energy Regulatory Commission (FERC). These
licenses permit us to sell electrical power to commercial,
industrial, governmental and residential customers.




To procure commodity supply for our retail
electric service sales, we purchase electricity under a mix of
long-term and short-term wholesale contracts and, prior to
fiscal 2001, by spot purchases in regional power exchanges. The
mix of energy purchased under contracts and energy purchased on
the spot market was 15.6% and 84.3%, respectively, for fiscal
1999 and 51.6% and 48.4%, respectively, for fiscal 2000. Our
spot purchases during fiscal 2001 and the current year are
minimal in markets in which we participate. In California, we
currently provide customers with environmentally friendly power
purchased under our contract with Calpine Power Services
Company. In Pennsylvania, we provide customers with a 50%
environmentally friendly power product derived from multiple
sources, purchased via two long-term bilateral contracts and a
variety of short-term contracts with wholesale power providers.
Electricity sales to retail and commercial end-users in fiscal
2001 contributed $103.5 million in revenues, or 56.5% of
total sales.




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. We use this established electricity
network for the delivery of energy to our customers. We do not
own or operate these lines, but we and our customers pay the
utility companies that own the lines ancillary fees for use of
this distribution network. These fees are collected by the
respective independent system operator (ISO) or
regional transmission organization (RTO) for a
specific region or state, and typically run 5% to 10% of
prevailing retail electricity market prices. The ISO or RTO
insure 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.

2. Wholesale
Power Procurement and Sales

Due to the variable electricity usage patterns of
our customers, frequently we are left with excess electricity
which we are committed to purchase and which must be resold,
since it cannot be stored. We use our best efforts to sell this
excess electricity in the wholesale electricity market.
Conversely, increased usage by our customers may require us to
purchase additional electricity to cover increased demand.

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We have established a trading desk that buys and
sells our electricity in various regional markets. Excess energy
is sold to wholesale entities short on supply, while additional
energy is procured from time to time when required to supply our
customers usage. These purchases and sales 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  that is, when demand and usage are
highest. Weather, generation capacity, transmission,
distribution and other market issues 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 can not be stored,
effective management of our electricity supply and demand is
crucial to wholesale and retail market profitability. Wholesale
power sales, which commenced in fiscal 2001, contributed
$79.3 million in revenues, or 43.3% of total sales.

The following segments have not yet materially
contributed to our revenue:

3. Energy
Efficient and Emergency Preparedness Products

We developed and utilize our own inside sales
force to sell energy efficient and emergency preparedness
products to customers by telephone. Energy conservation and home
safety are important issues to customers and selling them energy
management controllers, compact fluorescent lamps, natural gas
shut-off valves and other such devices has been a natural
extension of our business, although sales of these products
account for less than one percent of our total revenues. These
products are targeted to residential, commercial, industrial and
governmental customers. We fulfill orders for products and ship
most of these products through our warehouse, but some are
fulfilled and delivered from the manufacturers or distributors.
In either case, we collect payment from our customers and are
compensated for order processing and procurement, but in the
case of orders fulfilled and shipped by the manufacturers or
distributors, we do not retain payment for shipping costs. All
deliveries of products are made only after payment by check or
credit card from our customers. Energy Efficient and Emergency
Preparedness Products sales in fiscal 2001 contributed
$.5 million in revenues, or 0.2% of total sales in fiscal
2001.

4. Managed
Back Office Services




We established a wholly-owned subsidiary,
UtiliHost, Inc., which was organized to manage the
customer-related back office processes for commodity trading
partners. The core technology which will support UtiliHost is
software that originally was developed by us to better manage
electric service customers internally. TACT (Trans-Action
Control Technology) and TRIUMPH (Total Resource Internet
Utility Management Power Host) are proprietary software products
which are available for use by UtiliHost to provide services and
manage back office processes for clients. TACT acts as a data
translator between trading partner transactions, while TRIUMPH
is a comprehensive, modular software package that calculates and
manages back office processes such as customer enrollment,
forecasting, metering, ancillary products, billing, accounts
receivable, customer service and settlement. We have commenced
our marketing efforts for UtiliHost through a mix of
direct mail, print media and Internet advertising, primarily in
deregulated energy markets. On August 30, 2001, we signed a
two-year joint venture agreement with a generator to service the
electricity needs of a large California commercial account. This
agreement provides for approximately $50,000 in revenues per
month for UtiliHost services beginning in September 2001. Prior
to this contract, UtiliHost had not generated any revenues.




5. Energy
Management Programs

Energy management programs consist of energy
curtailment programs and distributed generation programs.

Energy curtailment programs permit short-term
curtailment or cessation of electric service at the discretion
of the distributing company under certain circumstances, as
specified in the service contract. These programs provide a
financial benefit as an incentive to our customers to lower
electrical usage, while we benefit by avoiding the purchase of
expensive power from other suppliers. The resulting savings are
ultimately shared between the customer and us. Our sales
department markets these programs to commercial, industrial and

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governmental entities seeking to save energy
costs by decreasing their energy usage during peak periods. The
availability of curtailment programs is dependent upon the
initiatives set by the ISO and/or the local distribution
company. We are presently not involved in any energy curtailment
programs; however, we plan to offer this service in the future
if ISOs and/or local distribution companies continue these
programs.


Distributed generation programs provide customers
with on site electrical power generation, which improves
reliability while also equipping them with a cost-effective
source for seasonal or peak demand power. When certain
industrial manufacturing processes are interrupted by a power
outage, the results can be disastrous. Millions of dollars in
materials, labor and time may be lost. Our sales department,
along with outside consultants and associated vendors, formulate
a custom energy solution for clients that have uninterruptable
power requirements.

6. Energy
Research and Development

We were recently selected by the California
Energy Commission to manage more than $11 million in
research and development funds for development of renewable
energy technologies. Launched in 1998, PIER (Public Interest
Energy Research) funds various electricity-related research,
development and demonstration projects. Our proposal, entitled
Biogas/ PV Micro-Grid Renewable Resource Program,
was the only private company proposal selected for the award.
This project commences December 1, 2001, and runs for four
years. Phase One of this project will include assessing regional
electricity needs, renewable resources and power grid
capabilities in at least two areas in California. Our focus will
be on developing a method of blending biogas and solar resources
to meet Californias energy needs. Phase Two of this
project will include a waste collection and generation option
addressing ground water contamination developed for the
California Dairy Industry and various Photovoltaic
(solar) systems. We are committed to invest
$3.5 million in matching funds in the development project
if Phase Two is implemented. We have not incurred any
significant costs related to this program.

7. Load
Aggregation

We are currently discussing with several
generators and utilities a comprehensive solution for cities and
major commercial and industrial customers to meet their energy
demand. We will assist cities to become municipal utilities by
providing them all required energy procurement, energy
management, customer service and back-room services. We will do
the same for major commercial and industrial customers to meet
their electricity demand requirements. This program allows us a
diversified approach to aggregating customers. To date, we have
not entered into any contracts to provide load aggregation
services.

8. ACT

As we diversify our business and revenue streams,
we have decided to establish separate divisions within our
company that have profit and loss responsibility. Our call
center, now called Advanced Client Technologies
(ACT), outsources services to third party
energy-related firms, and provides us with inbound, outbound and
customer service functions for electricAmerica. A new division
of our company, ACT specializes in aggregating electric service
residential and small commercial customers, selling energy
efficient and emergency preparedness products and handling
inbound customer service inquiries. Call monitoring, third party
verification and call reporting are also provided. In addition
to maintaining our own customer aggregation and service needs,
ACTs market focus has been on clients seeking to aggregate
energy customers in deregulated markets. We currently have no
third party contracts for ACTs services.

9. Summit
Energy Ventures, L.L.C.

In July 2001 Commonwealth made the initial
capital contribution of $15 million into Summit Energy
Ventures, LLC (Summit). To date this represents our
entire capital contribution to Summit. When the Board approved
this investment it did so to be able to have our funds work on
our behalf and to gain access to the merger and acquisition and
financial skills of Mr. Strasser. This decision was made to
bring value to

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Commonwealth and to our shareholders while
insuring Commonwealth had total control of the funds and the
decisions to invest.





Commonwealth owns 100% of the Preferred
Membership Interest of Summit and as of February 27, 2002,
60% of the Common Membership Interest. Steven Strasser owns the
other 40% of the Common Membership Interest. Summit was
established at the request of Commonwealth solely to act on
behalf of Commonwealth to gain ownership in and develop
significant business relationships with companies in the Energy
Efficient Products and Services market. Commonwealth was
introduced to Mr. Strasser by the senior partners at a major
energy law firm.







The rights and privileges of the Commonwealth
Preferred Membership and Interest are as follows. Our Company
receives in priority the following distribution, if any, of
funds distributed by Summit: (1st) all amounts equal to the
capital invested by Commonwealth in Summit, (2nd) an amount
equal to 10% annual return on all funds invested by
Commonwealth, and (3rd) the balance, if any, is split 60/40
between Commonwealth and Mr. Strasser. Commonwealth as the
preferred member has other rights that the common members do
not, including; (i) Commonwealth has the right of first
refusal in the event of any issuances of new members
interests, (ii) 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 the Investment Manager and
us, and (iii) we have the right of first refusal for any
sale of an investment by Summit.




We receive all of our initial invested capital
and an annual 10% preferred return before Mr. Strasser
participates in any of the profits. Commonwealth through the
Investment Committee, approves any of the investment criteria,
and we make all of the investment decisions. No investment may
be considered and no capital may be invested without the
explicit written consent of Commonwealth Investment Committee.

Steven Strasser is the president and sole
shareholder in Northwest Power Management (NPM), the Investment
Manager of Summit. NPM has the responsibility of identifying
suitable companies. They then present individual companies that
they have selected to the Commonwealth Investment Committee that
provides their approval/ disapproval. If approval is received,
NPM then begins the due diligence investigation process. Once
the preliminary due diligence is completed the findings are
again presented to the Investment Committee. At that time, the
Investment Committee provides its approval or disapproval to
enter into formal negotiations with the company on the specific
terms established by the Investment Committee. If these terms
are met, the Investment Committee will provide their final
approval to fund the investment. Once the investment is
complete, it is the responsibility of NPM to manage the
investment until such time as a disposition decision is made. At
that time if we choose to do so, we may buy out Summits
interest in a specific investment.




We pay to NPM, as the Investment Manager, an
initial and semi-annual management fee. In August 2001, we paid
NPM the initial management fee of $450,000 based on three
percent (3%) of the initial capital contribution. In February
2002, we paid NPM a semi-annual management of $350,000 in
accordance with the terms of the amended LLC agreement.




C. Marketing.

Our business prospects depend upon our ability to
identify and enter 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.electric.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.                                                                                                                          

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| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Developing strategic marketing alliances with
	established power suppliers to offer competitive electric
	products and services to, and management of, aggregations of
	customers.
|
| |  | Cross-selling additional products and services to
	our customers, such as energy efficiency and
	emergency-preparedness products.                                                 
|
| |  | Positioning UtiliHost as a means for clients to
	outsource their electricity customer service management.                                                                         

D. Competition.

We face competition in the electricity service
business from a small number of energy retailers vying for
residential and commercial customers, and from the incumbent
utilities. According to the California Public Utilities
Commission (CPUC), over 300 companies were
licensed to market electricity on a retail basis at the
beginning of the deregulated California electricity market.
According to the CPUC, we are one of approximately sixteen
companies that remains in the business in California. We face
similar competition in Pennsylvania.

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.

E. Employees.

We currently employ approximately
160 people; 156 at our Tustin, California offices, and four
at our Cherry Hill, New Jersey office. We are not a party to any
collective bargaining agreement or labor union contract, nor
have we been subjected to any strikes or employment disruptions
in our brief history. Management believes that we enjoy a good
relationship with our employees.

F. Governmental Regulation.

To market electric power in a given area, we are
required to register with the appropriate state public utilities
commission, maintain a Power Marketer certificate from FERC, and
comply with applicable and regulatory requirements. The
regulatory requirements with which we must comply relate to the
complex inter-relationship of the regulatory framework of
deregulation of the electric industry in each of the
jurisdictions in which we conduct business. This
inter-relationship is between the state statutes and regulations
which implement the structure of deregulation in any given state
with the regulatory oversight agency, typically the State Public
Utility Commission, which enforces the state statutes and
regulations. Both of these regulatory agencies have the ability
in their separate capacity to make orders, rulings or initiate
proceedings which may alter or change the regulatory structure
which impacts the applicable rule structure for any given
jurisdiction. States will require that we be registered with,
and comply with, the protocols of an ISO or RTO for scheduling
and moving electricity on the transmission system. Some states
require that power marketers must also meet a renewable energy
portfolio standard where a portion of the electricity they sell
must be generated by renewable energy resources. In some states,
registration as a retail electric provider simply requires that
we obtain and maintain a certificate or license to do business
in the state. We have been granted the necessary FERC permit,
and have applied for all relevant state license and certificates
required in our initial target markets.

G. Forward-Looking Statements.

This report includes forward-looking statements.
All statements other than statements of historical facts
contained in this documents are forward-looking statements.
Forward-looking statements include, but are not limited to,
statements relating to expansion opportunities for the
subsidiary companies, extension of Commonwealths business
model to new markets and industries, demand in the market for
UtiliHost services, completion of acquisitions of certain
assets, and growth or retail energy operations and demand for
retail energy outsourcing and back office solutions. When used
in this document, the words anticipate,
believe,

7



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estimate, expects,
intend, may, project,
plan, should, and similar expressions
are intended to be among the statements that identify
forward-looking statements. Although Commonwealth believes that
its expectations reflected in these forward-looking statements
are based on reasonable assumptions, such statements involve
risks and uncertainties and no assurances can be given that
actual results will be consistent with these forward looking
statements. In particular, the following items may affect our
future:




| |   |                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The California State Legislature, the
	Governors Office and the California Public Utilities
	Commission may enact and enforce legislation that could
	adversely affect our operations in California.                                                                                                                                        
|
| |  | We are required to obtain and maintain licenses
	from the states in which we sell electricity.                                                                                                                                                                                                                                               
|
| |  | In certain states, competitive restructuring of
	retail marketing may prevent us from selling electricity.                                                                                                                                                                                                                                   
|
| |  | We are completely dependent upon a limited number
	of third parties that we do not control to generate and supply
	to us electricity and their failure or delay in entering into or
	performing their contracts with us will have a material adverse
	effect on our operations and financial condition.                                      
|
| |  | We are completely dependent upon a limited number
	of utilities that we do not control for the transmission and
	distribution of the electricity we sell to our customers and
	their failure or delay in entering into or performing their
	contracts with us will have a material adverse effect on our
	operations and financial condition.




Item 2. Properties

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

We lease additional office space for our
operations in Cherry Hill, New Jersey. This additional space
consists of 1,210 square feet pursuant to a three-year lease
executed on August 25, 1999.

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

From time to time, we have been and may be
involved in litigation relating to claims arising out of our
operations in the normal course of business. As of the date of
this report, we are not a party to any legal proceedings, the
adverse outcome of which, in managements opinion,
individually or in the aggregate, would have a material adverse
effect on our results of operations or financial position.




We had sued Frederick M. Bloom, the founder
and former Chairman and Chief Executive Officer of our company,
in an action entitled Commonwealth Energy Corporation, et al. v.
Bloom in Orange County Superior Court case number 00CC15507. The
causes of actions included, inter alia, on behalf of both the
Company and its subsidiary electricAmerica, Inc. against
Mr. Bloom, fraud regarding issuance of Commonwealth shares,
(the complaint specifies Mr. Bloom failed to pay the amount
he stated he paid for the founders shares), fraud in
obtaining an employment agreement, fraud in obtaining severance
agreement, corporate waste based on breach of fiduciary duty to
us by his failure to exercise the due care and loyalty, and
breach of fiduciary duty regarding signing and submitting
information to the CPUC. Mr. Bloom filed a counterclaim
against the Company alleging breach of fiduciary duty,
declaratory relief, breach of contract, rescission of
Accommodation Agreement, and for specific recovery of personal
property. On August 10, 2001, we settled the claims and
related counterclaims filed in the litigation. The material
terms of the settlement provided that we pay Mr. Bloom
$4,790,000 in unspecified damages, and an additional $2,400,000
to purchase 1,175,160 shares of our common stock claimed to be
held by Mr. Bloom and his affiliates. The settlement
agreement also confirmed the fact that the remaining 4,720,000
shares of our common stock claimed to be held by Mr. Bloom
and his affiliates were void. As a material part of the
settlement, Mr. Bloom also confirmed that his record
ownership of and voting rights to a separate 1,200,000 shares
had been forfeited and he agreed to release any claims under an
Accommodation Agreement dated May 31, 2000 and agreed that
he would have no future




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##### Table of Contents



ownership in Commonwealth Energy Corporation.
Finally, Mr. Bloom agreed not to compete with our business
for two years in certain specified energy-related areas.


Joseph P. Saline, a member of our Board, has
filed two lawsuits. On August 16, 2001, Mr. Saline
filed a civil suit against us seeking the production of certain
corporate records. We have provided Mr. Saline with
documents he requested under the protection of a court order
which prohibits him from disclosing those documents to other
persons outside of our Board of Directors. On October 29,
2001, Mr. Saline filed a claim for certain preferred shareholder
rights which differ from the rights set forth in the Certificate
of Determination concerning preferred shares filed with the
California State Department of Corporations. The Company has
answered and filed a cross-action for declaratory relief.
Mr. Saline obtained an interim court order allowing him to
claim the right, as a preferred shareholder, to vote 704,000
shares at the Companys November 2001 annual shareholder
meeting. The interim court order is being aggressively contested
by the Company. Mr. Salines claim is based in part on
a contract he made with Mr. Bloom on behalf of Commonwealth
that does not conform to the recorded Certificate of
Determination regarding the rights, privileges and restrictions
of the preferred shares. This litigation is ongoing.

We settled a contested matter with the CPUC
relating to Mr. Blooms failure to disclose in the
CPUCs updated Energy Service Provider application signed
by Mr. Bloom in 1998, of seven regulatory actions resulting
in cease and desist sanctions filed against Mr. Bloom. For
Mr. Blooms failure to disclose these sanctions, the
CPUC imposed a fine of $140,000. The CPUC also alleged that we,
under the direction of Mr. Bloom, illegally supplemental
billed approximately 20,200 customers in early 1999. While
we contested this claim, we agreed, as part of the settlement,
to return funds received from those customers who were billed,
to pay an audit fee and to pay fines for 159 violations related
to supplemental billing complaints that were documented by the
Consumer Services Division (CSD) of the CPUC. The
total settlement amount of $256,500 was recorded as expense of
$100,000 in fiscal 2000 and $156,500 in fiscal 2001, in our
consolidated financial statements. We have agreed to cooperate
fully with any state or federal regulatory or law enforcement
agency, in any investigation of the activities of Mr. Bloom
during the period he served as an officer of our company. The
settlement terms require that if Mr. Bloom returns in any
capacity whatsoever as a director, officer, or employee, of
Commonwealth or any of its subsidiaries at any time, we must
immediately will file a formal application for re-registration
with the CPUC under Code #394.1(a), disclosing the resumed
relationship. The settlement was adopted by the CPUC on
July 15, 2001.

We settled a complaint filed by the Department of
Corporations (DOC) in an action entitled The
People of the State of California v. Commonwealth Energy
Corporation, Los Angeles Superior Court, case No. BC245014.The agreed judgment is in the form of an injunction and
ancillary relief and was filed on February 13, 2001. The
DOCs complaint was based upon activities that took place
from September 1997 to October 1999, a period during which
Mr. Bloom and other members of our former management were
in charge of operations. The investigation that led to the
complaint centered around the sale of our restricted securities.
As part of the settlement, we agreed to cooperate with the
Commissioner of Corporations and the DOC in connection with any
further investigation arising out of the events described in the
complaint, including any investigation of former officers,
directors, or employees. We paid $150,000 in civil penalties as
part of the DOC settlement in February, 2001. The Company has
agreed to cooperate with the DOC in any future investigation it
may conduct against Mr. Bloom or any other former members
of management.




On February 1, 2002, Joseph Saline, Kevin
Biswell, Joseph OGundiji and Michael Doak filed a
complaint in California Superior Court against us challenging
the election of one of the Companys directors at the 2001
annual meeting of shareholders. Plaintiffs contend that
Mr. Biswell should have been elected as the fifth member of
the five-member board. We are defending against the complaint
but have volunteered detailed information about the ballot
counting process and results, including verification by
PricewaterhouseCoopers, in order to speed the dispute process.
Trial on the matter is scheduled to commence on April 8,
2002. No monetary damages are sought in this action.




Thirteen former stock sales employees led by
Mr. David James commenced a lawsuit against us on
February 23, 2001 in Orange County Superior Court alleging
that former management had agreed to issue additional deeply
discounted stock options to them as additional compensation for
stock sales but that we had

9



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##### Table of Contents






not issued all of the stock options allegedly
earned. Our books and related records reflect the right to
issuance in the aggregate of stock options covering 1,221,000
shares of Common Stock to which we believe they are entitled.
The plaintiffs have not identified the basis for the number of
respective shares under option each believes he or she is owed
and we, therefore, cannot estimate the impact on our capital
structure should they succeed in whole or in part in their
lawsuit. In our cross-complaint against these individuals, we
have alleged that various plaintiffs committed breach of
conduct, unfair business practices, misappropriation of trade
secrets, intentional interference with prospective economic
advantage, unjust enrichment, slander and fraud.








There can be no assurance that there are no other
employees or former employees with similar claims and disputes
related to stock option grants.
















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







On January 18, 2002, the Company announced
the results of the elections from its Annual Meeting of
Shareholders held on November 27, 2001. Of the 28,576,203
shares of capital stock outstanding and entitled to vote at the
meeting (comprised of 27,763,703 shares of our common stock and
812,500 shares of preferred stock), there were present at the
meeting, in person or by proxy, the holders of 21,772,491 common
and preferred shares, representing 76% of the total number of
shares entitled to vote at the meeting. The following three
proposals were presented and voted on at the shareholder meeting:







Proposal One: Amendment of the Corporations
Bylaws to provide for a variable Board to be comprised of
between five and nine members. The voting results were: For
13,559,513; Against 7,113,411; Abstain 259,914. The proposal
failed to obtain the required 50% plus one vote of the total
shares entitled to vote.







Proposal Two: Appointment of Ernst &
Young LLP as auditors. The voting results were: For 20,716,359;
Against 50,652; Abstain 111,499. The proposal was approved.







Proposal Three: Election of five directors. The
following nominees to the Board of Directors were elected to
serve until the annual meeting of shareholders in 2002:
Ian B. Carter; Robert C. Perkins; Junona A.
Jonas; Craig C. Goodman and Joseph P. Saline, Jr.







PART II




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




There is currently no established public trading
market for any class of our equity securities. As of
January 31, 2002, 10,198,692 shares of our Common Stock are
reserved for the exercise of outstanding stock options, 100,000
shares of our Common Stock are reserved for the exercise of
outstanding warrants, and 775,000 shares of our Common Stock are
reserved for issuance upon conversion of currently outstanding
shares of our Series A Convertible Preferred Stock and
other than pursuant to an employee benefit plan or dividend
reinvestment plan, we are not currently offering or proposing to
offer any shares of our Common Stock for sale to the public.







As of January 31, 2002 there were
approximately 2,573 holders of our Common Stock and 61 holders
of our Series A Convertible Preferred Stock.




We have declared and paid cash dividends on our
Series A Convertible Preferred Stock. We currently intend
to retain future earnings for use in our business and do not
anticipate declaring or paying any dividends on shares of our
Common Stock in the foreseeable future.

As of January 7, 2002, all outstanding
shares may be sold pursuant to Rule 144 under the
Securities Act of 1933, as amended. We currently have no
outstanding obligations to register shares for sale by security
holders.

10



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##### Table of Contents






Item 6. Selected Financial
Data

The following table summarizes certain selected
financial data for Commonwealth Energy Corporation. Our
statement of operations data for the period August 15, 1997
(date of incorporation) through July 31, 1998 and each of
the three years in the period ended July 31, 2001 and our
balance sheet data at July 31, 1998, 1999, 2000 and 2001
set forth below are derived from audited Consolidated Financial
Statements of the Company. The consolidated financial statements
as of July 31, 2000 and 2001 and for each of the three
years in the period ended July 31, 2001 and the independent
auditors report thereon, are included elsewhere herein.

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

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




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

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



|    |                                                       
|--- | ------------------------------------------------------
|(2) | No cash dividends have been paid on our common
	stock.

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|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Our convertible preferred stock provides for
	cumulative dividends, which accrue at an annual rate of 10% and
	are payable at the discretion of our Board of Directors. Such
	dividends have been accrued as follows:

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



|    |                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Per share information and weighted average shares
	outstanding for the period from August 15, 1997 through
	July 31, 1998 and for the years ended July 31, 1999
	and 2000 have been restated to reflect the resolution of the
	status of our common stock issued to our founder as more fully
	disclosed in Notes 1 and 11 of the Notes to Consolidated
	Financial Statements included elsewhere herein.

12



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

Our primary business to date has been the sale of
electric power to retail and commercial end-users in California
and, beginning in January 2000, in Pennsylvania and the sale of
electric power to wholesale customers in California and
Pennsylvania. We are licensed by the FERC as a power marketer
and by the California, Pennsylvania, New Jersey, Texas and Ohio
Public Utilities Commissions as an electric services or electric
generation supplier. We plan to enter new deregulated electric
power markets in the future. We are in the licensing process in
Michigan.

As of July 31, 2001, we delivered
electricity to approximately 88,000 customers in California and
Pennsylvania. The growth of this business depends upon the
deregulated status of each state, the availability of
cost-effective energy purchases to us and the acquisition of
retail or commercial customers by us.

We do not have our own electricity generation
facilities. The power we sell to our customers is purchased from
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,
substantially all of our electricity was purchased under long
term contracts.




Critical Accounting Policies and
Estimates







The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant
estimates in the Companys consolidated financial
statements relate to independent system operator costs, the
allowance for doubtful accounts, unbilled receivables and legal
claims. Actual results could differ from those estimates.







Our net revenue from sales of electric power is
recognized as the power is delivered to the Companys
customers. Net revenue represents proceeds from energy sales to
the following class of customers: Retail and commercial end
users, and Wholesale.







Direct energy costs include electric power
purchased, independent system operator fees and scheduling
coordination fees. The actual independent system (ISO) operator
costs are not finalized until a settlement process by the ISO is
performed of each days activities of all grid participants.
Prior to the completion of settlement, we estimate and accrue
for these costs based on preliminary settlement information.







Selling and marketing expenses include salaries
of sales and marketing personnel and promotional and advertising
costs. General and administrative expenses include salaries for
corporate support personnel, rent expenses, insurance expenses,
bad debt expenses, depreciation expenses and other costs of the
corporate office.







As a result of market conditions in California
during fiscal 2001, the credit worthiness of several
participants in the marketplace with whom we conduct business
has deteriorated significantly. The resulting impact on the
Company has been a holdback of $3,696,854 in amounts due to us
from the Automated Power Exchange (APX) related to November
2000, January 2001 and August 2001 activity. The APX has
informed us that the holdbacks were made, in part because
PG&E and PX, which have declared bankruptcy, did not make
their scheduled payments to the APX. We have established an
allowance of $2,327,171 for doubtful accounts related to the APX
holdbacks based upon our estimates of the amounts that will
ultimately be collected from the APX. In addition, PG&E has
withheld payments of approximately $1,104,000 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. In addition to these specific
allowances, we provide for estimated doubtful accounts on our
energy sales.







The Companys customers are billed monthly
at various dates throughout the month. Unbilled receivables
represent the amount of electric power delivered to customers at
the end of a period, but not yet billed. Unbilled receivables
from sales in California are estimated by the Company as the
number of kilowatt hours delivered times 95% of the individual
Utility Purchased Energy cost as published by each individual




13



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##### Table of Contents






utility for residential customers. Unbilled
receivables from sales in Pennsylvania are estimated in the same
manner, except using the average current customer sales price
per kilowatt hour.








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 accrue for estimated losses on
such matters in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for
Contingencies.




Results of Operations

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

Retail
energy sales

Electricity sales to retail and commercial
end-users increased by $12.7 million, or 14.5%, from
$87.3 million for fiscal 2000 to $100.0 million for fiscal
2001. California electricity retail sales which decreased
$4.1 million were offset by an increase in Pennsylvania
electricity retail sales of $16.8 million. The average
retail price per kWh in California during fiscal 2001 was $.145
compared to $.0501 during fiscal 2000. Total kilowatt hours of
electricity billed in California during 2001 was
563.4 million compared to 1.7 billion billed in the
prior year. The year-to-year reduction in kilowatt hours billed
resulted from the termination of commercial and industrial
customers that were returned to incumbent utilities during June
and July 2000 because these customers were requiring us to
purchase large quantities of electricity on the spot market
which, in turn, gave us severe credit issues. The increased
Pennsylvania retail sales were attributable to having a full
year of electricity sales in fiscal 2001 compared to seven
months of sales in the comparable period of 2000. The average
retail price per kWh in Pennsylvania during fiscal 2001 was
$.052 compared to $.0475 during fiscal 2000. Total kilowatt
hours of electricity billed in Pennsylvania during 2001 was
378.6 million compared to 3.2 million in the prior year. At
July 31, 2001, we had approximately 88,000 customers
compared to approximately 81,000 customers at July 31,
2000.

Wholesale
energy sales

Wholesale electricity sales commenced during
fiscal 2001. The $79.3 million wholesale sales revenue
consisted of California sales of $70.7 million and
Pennsylvania sales of $8.6 million. Our major California
wholesales customer during 2001 was the State of California
Department of Water Resources and Power. Our other significant
wholesale customers included Sempra Energy and San Diego Gas and
Electric. The California supply and demand conditions that drove
up the wholesale electricity prices during fiscal 2001 began
moving toward equilibrium in the fourth quarter as wholesale
prices began to abate. We expect to see lower prices and
wholesale electricity sales as a percent of total sales much
lower during fiscal 2002 than existed in fiscal 2001.

Green
power credit

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

Direct
energy costs

Direct energy costs declined to
$76.6 million for fiscal 2001, a decrease of
$10.1 million, or 11.7%, from $86.7 million for fiscal
2000. This decrease is a result of $40.8 million lower
costs in California partially offset by increased costs in
Pennsylvania. Increased costs in Pennsylvania are due to having
only seven months of costs totaling $3.4 million for fiscal
2000 compared to a full year of costs totaling $34 million
for fiscal 2001. In Pennsylvania, for the seven months in fiscal
2000 that we operated there, our average monthly purchase of
electricity was 8.8 million kWh increasing to
55.3 million kWh monthly for fiscal 2001, as we established
our customer base. Decreased costs in California during fiscal
2001, as compared to the prior year, are due to reduced
requirements for the purchase of electricity due to the
customers we terminated in June and July

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##### Table of Contents



2000. Many of the customers that we terminated
used the majority of their energy during peak hours which
required us to purchase electricity in the spot market during
the portions of the day when it was most expensive, often at a
price in excess of our selling price. These customer
terminations brought our electricity supply requirements in
California to supply our customers at or below the quantity of
electricity that we had secured under our long-term purchase
contract and reduced the average amount we paid for electricity
by approximately $.01 per kWh in fiscal 2001 as compared to
fiscal 2000. Direct energy costs, as a percent of net revenues,
decreased from 87.1% fiscal 2000 to 41.8% for fiscal 2001.


Selling
and marketing expenses

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

General
and administrative expenses

General and administrative expenses increased
$5.8 million, or 37.7%, from $15.4 million for fiscal
2000 to $21.2 million for fiscal 2001. This is primarily
the result of increased legal expenses of $5.3 million and
bad debt expenses of $1.3 million compared to fiscal 2000.
The increase in legal expenses is primarily related to the
settlement with our founder of $4.8 million, and the
increase in bad debt expense is related to the Company providing
for amounts due from PG&E and PX, which have declared
bankruptcy. These increases were partially offset by a decrease
in customer termination cost of $.7 million incurred in
fiscal 2000, where no further expenses were required in fiscal
2001.

Stock-based
compensation charges

Stock-based compensation charges increased from
$.4 million for fiscal 2000 to $1.1 million for fiscal
2001. The stock-based compensation charges for fiscal 2001 all
resulted from performance-based stock options granted to our
Chairman and CEO.

Interest
income, net

Interest income grew to $1.6 million for
fiscal 2001, an increase of $1.1 million or 220%, from
$.5 million for fiscal 2000. The increase is attributable
to the increase in cash flow available for investments provided
from operations, offset in part by a $.6 million increase
in interest expense due to borrowings which were outstanding on
our line of credit during fiscal 2001.

Provision
for income taxes

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

Net
income

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

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##### Table of Contents



prices and our gross margin significantly
declined in California as compared to the first three quarters
of fiscal 2001. We expect to see in fiscal 2002 electricity
prices closer to historical levels than the prior year.


Year ended July 31, 2000 compared to
year ended July 31, 1999

Net
revenue

Net revenues increased by $60.5 million, or
154.6%, from $39.1 million in fiscal 1999 to
$99.6 million in fiscal 2000. California energy sales
represented $57.7 million of the increase, while
Pennsylvania sales, which commenced in January 2000, accounted
for $2.8 million of the increase. California electricity
price increases that began in May 2000 contributed to an
estimated $15.0 million of the increase in California
energy sales. The green power credits received increased
$8.8 million to $12.3 million for fiscal 2000 compared
to $3.5 million in fiscal 1999 due to increased electricity
sales subject to the credit. The remainder of the sales increase
resulted from new customers. At July 31, 2000, the Company
had approximately 81,000 customers compared to approximately
52,000 customers at July 31, 1999.

Direct
energy costs

Direct energy costs grew to $86.7 million in
fiscal 2000, an increase of $48.0 million, or 124.0%, from
$38.7 million in fiscal 1999. This increase was due to a
higher level of energy purchases in fiscal 2000 as compared to
fiscal 1999 due to our increased customer base. Direct energy
costs, as a percent of net revenues, decreased from 99.0% in
fiscal 1999 to 87.1% in fiscal 2000. This decrease in the energy
cost percentage was driven by the higher California retail
prices during the latter part of fiscal 2000, an increase of
higher margin residential customers and improved energy
procurement methods. These favorable components were partially
offset by higher costs of electricity purchases in the wholesale
market for quantities in excess of our fixed price contract.

Selling
and marketing expenses

Selling and marketing expenses increased
$4.2 million, or 205%, from $2.0 million for fiscal
1999 to $6.2 million for fiscal 2000. This increase is due
to higher costs associated with increased promotional and
telemarketing activities as we changed our customer base from
industrial to residential customers.

General
and administrative expenses

General and administrative expenses increased
$4.2 million, or 37.5%, from $11.2 million for fiscal
1999 to $15.4 million for fiscal 2000. Approximately
$1.9 million of the increase is due to development and
maintenance of our internal information technology systems. The
remaining increase is due primarily to $.7 million of
commercial and industrial customer termination costs and
$1.2 million in increased costs related to severance
arrangements with former officers.

Stock-based
compensation charges

Stock-based compensation charges decreased by
$5.3 million, or 92.2%, from $5.7 million for fiscal
1999 to $.4 million for fiscal 2000. The decrease was due
to fewer fully vested options being granted in fiscal 2000,
which also had a lower average difference between the fair value
of the our common stock at date of grant and the option exercise
prices.

Interest
income, net

Interest income, net, grew to $.5 million in
fiscal 2000, an increase of $.4 million, from fiscal 1999.
The increase is attributable to having a full years impact
on investment income of capital raised in fiscal 1999.

Net
loss

Net loss declined to $8.6 million in fiscal
2000, a decrease of $9.8 million, or 53.1%, from
$18.4 million in fiscal 1999. This decrease in net loss is
primarily attributable to a $12.5 million increase in gross
margin offset in part by a $3.1 million increase in other
costs and expenses.

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##### Table of Contents



Liquidity and Capital Resources




Through July 31, 2000, most of our capital
was raised through a series of private placements for the sale
of common stock which provided an aggregate of
$51.1 million of net proceeds, of which $41.3 million
was used to support our operating activities which were
unprofitable through July 31, 2000. We began profitable
operations during the three months ended October 31, 2000.




Cash flow from operations for fiscal 2001 was
$61.8 million an increase of $76.9 million compared
with cash used in operations in fiscal 2000 of
$15.0 million. Net profit for fiscal 2001 of
$60.5 million, compared to a net loss of $8.6 million
for fiscal 2000, was the primary reason for this increase.
Californias higher retail and wholesale prices were the
key influences on our profitability. Investing activities for
fiscal 2001 include only purchases of property and equipment of
$1.1 million, a decrease of $.6 million compared to
fiscal 2000.

Cash used in financing activities for fiscal 2001
was $23.8 million, compared to cash provided of
$14.7 million for fiscal 2000. The change of
$38.4 million is attributed to the following:
$15.0 million investment in Summit Energy Ventures which is
classified as restricted cash; absence of sales of common stock
during fiscal 2001, which provided $12.1 million during
fiscal 2000; an increase in restricted cash of $4.8 million
for letters of credit required by energy suppliers to support
increased purchases of electricity in fiscal 2001 and
$5.3 million provided in fiscal 2000 from borrowings under
our credit facility.

Cash flow used in operations for fiscal 2000 was
$15.0 million, a decrease in cash used of $5.2 million
compared to fiscal 1999. The major components of cash used in
operations in fiscal 2000 were the net loss of $8.6 million
and an increase in billed and unbilled accounts receivable of
$13.2 million. The higher California electricity prices in
the fourth quarter of fiscal 2000 drove sales higher resulting
in higher accounts receivables. During fiscal 2000, we used cash
of $1.8 million for investing activities, a decrease of
$.7 million compared with the prior year. Investing
activities during fiscal 2000 consisted only of purchases of
property and equipment.

Financing activities in fiscal 2000 were
comprised of three components. Net cash proceeds from the sale
of common stock were $12.1 million. This compares with
$28.3 million in net capital raised in fiscal 1999 from the
sale of common stock. We also borrowed $5.3 million under a
$15 million credit facility that was entered into with
Coast Business Credit in June 2000. The credit facility with
Coast Business Credit carried a loan origination fee of $300,000
and required the issuance to Coast Business Credit of a warrant
to purchase 100,000 shares of our common stock at an exercise
price of $5.50 per share. The loan has a maturity date of
June 30, 2002, subject to automatic renewal and early
termination, and bears interest at the prime rate plus 1.75% per
annum, calculated on the basis of a 360-day year. The borrowings
from the credit facility were used primarily to pay for
California electricity purchases, the price of which had
increased significantly during the fourth quarter of fiscal
2000. There was also an increase of $2.7 million in
restricted cash during fiscal 2000 required for additional
collateral to support additional energy purchases both in
California and Pennsylvania.




The most significant trend that has contributed
to the increase in our liquidity and capital resources during
fiscal 2001 was the significant increase in energy prices to
consumers and in the wholesale energy markets in California. We
believe that consumer energy prices have leveled off and will
remain at their current level for the foreseeable future. The
wholesale energy market has also stabilized after significant
fluctuations during fiscal 2000 and fiscal 2001. Based upon
current market conditions, we believe we should be able to enter
into new contracts to purchase electricity at approximately the
currently contracted rate upon the expiration of our current
contract in June 2002. Therefore, based on these factors, we
believe that our liquidity and capital resources will not be
adversely affected in the coming year.







As a result of market conditions in California
during fiscal 2001, the credit worthiness of several
participants in the marketplace with whom we conduct business
has deteriorated significantly. The resulting impact on the
Company has been a holdback of $2,226,630 in amounts due to us
from the Automated Power Exchange (APX) relating to November
2000 and January 2001 activity. The APX has informed us that the
holdbacks were made, in part, because PG&E and PX, which
have declared bankruptcy, did not make their scheduled payments
to the APX. We have established an allowance of $1,471,142 for
doubtful accounts related to the APX holdbacks based upon our
estimates of the amounts that will ultimately be collected from




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##### Table of Contents






the APX. In addition, PG&E has withheld
payments of approximately $1,104,000 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.








On September 20, 2001, the CPUC issued a
ruling suspending direct access pursuant to
legislation by the California state legislature requiring the
CPUC to suspend direct access in California. The
suspension of direct access means that retail
electricity suppliers, such as the Company, will not be allowed
to actively seek customers. This ruling permits the Company to
keep its current customer base, but prohibits the Company from
signing up new non direct access customers for an undetermined
period of time. During June through September 2001, we entered
into new long-term electric service agreements with several
large commercial and industrial customers in California. The
contracts were all completed prior to the September 20,
2001, CPUC ruling to suspend direct access. Based on
the historical consumption data of these commercial and
industrial customers, we expect these new contracts to add
approximately 600 million kWhs annually at sales contract
rates in the aggregate of $.089 per kWh. Delivery to these
customers began in October 2001 and all the new customer meters
were on-line by January 2002. In the event that the CPUC should
retroactively invoke the suspension of direct access, all of
these contracts would be void and the customers returned to
their respective UDC. Revenues related to these contracts was
$.7 million for the six months ended January 31, 2002.
We are actively seeking relief from this ruling. There is no
assurance that any legislative or legal appeal will give us
relief from the states suspension of direct access.







As of January 31, 2002, $15 million in
cash was invested in Summit Energy Ventures. Under certain
circumstances, we may, at our discretion, invest an additional
$10 million in Summit. If this additional cash were
invested with Summit, it would reduce the amount of cash that
would otherwise be used for our growth initiatives.




The initial $15 million credit facility that
the Company obtained on June 29, 2000 was restructured on
August 10, 2001. This restructuring provided the Company
with more flexibility than the original agreement. The new line
shortened the maturity date to June 30, 2002, compared to
June 30, 2003. If we decide to evaluate alternative lenders
and can find a lender with more favorable terms, we can make the
change twelve months earlier without incurring a one percent
pre-payment penalty. It also provides us with an opportunity to
eliminate the .5% renewal fee. We reduced the limit of the
credit facility from $15 million to $10 million to
decrease the minimum interest charges. By reducing the credit
facility limit, the minimum interest charge is calculated on
$3.5 million (35% of $10 million) compared with the
initial agreements $5.2 million (35% of
$15 million). The interest rate charged remains the same at
prime plus 1.75%. The cost to amend the original agreement was
$20,000.




On January 4, 2002, the Board of Directors of the
Company approved a $10 million stock repurchase program.
Under this program, the Company may purchase up to
$10 million of its common stock, options and warrants from
time to time over an 18 month period, in open market or
privately negotiated, subject to market conditions and other
factors.







|                                   |  |       |             |                               |  |      |            |      |  |      |            |  |  |  |            |  |  |  |        | 
|---------------------------------- |  | ----- | ----------- | ----------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- |  |  |  | ------ | 
|                                   |  |       |             |                              
|                                   |  |       |             | For the years ending July 31,
|                                   |  |       |             |                              
|                                   |  | Total |             | 2002                          |  | 2003 |            | 2004 |  | 2005
|                                   |  |       |             |                               |  |      |            |      |  |     
|Electricity purchase contracts     |  |       | 122,656,780 |                               |  |      | 69,944,800 |      |  |      | 32,565,300 |  |  |  | 20,146,680 |  |  |  |       | 
|Notes payable under line of credit |  |       | 3,578,753   |                               |  |      | 3,578,753  |      |  |      |           |  |  |  |           |  |  |  |       | 
|Operating leases                   |  |       | 1,893,459   |                               |  |      | 841,087    |      |  |      | 652,949    |  |  |  | 371,835    |  |  |  | 27,588 | 
|                                   |  |       |             |                               |  |      |            |      |  |      |            |  |  |  |            |  |  |  |        | 
|                                   |  |       | 128,128,992 |                               |  |      | 74,364,640 |      |  |      | 33,218,249 |  |  |  | 20,518,515 |  |  |  | 27,588 | 
|                                   |  |       |             |                               |  |      |            |      |  |      |            |  |  |  |            |  |  |  |        | 







The Company is in negotiations to secure new
California energy purchase contracts comparable to the existing
contract which expires June 2002. Based upon current market
conditions, we believe we should be able to enter into new
contracts to purchase electricity at approximately the currently
contracted rate.




We expect that our existing funds, our existing
line of credit and our cash flow from operations will be
sufficient to fund our operations and meet our capital
requirements for the next 12 months.

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##### Table of Contents






Item 7A. Quantitative and Qualitative
Disclosures About Market Risk




We do not have or use any derivative instruments
as of January 31, 2002 nor do we have any plans to enter
into such derivative instruments. We generally invest cash
equivalents in high-quality credit instruments consisting
primarily of high yielding 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 cash equivalents 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. In addition, we do not currently incur
significant expenses denominated in foreign currencies.
Therefore, we believe that we are not currently subject to
significant risk as a result of currency fluctuations.




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




|             |  |              
|------------ |  | -------------
|California   |  | $18.1 million
|Pennsylvania |  | $11.0 million









Item 8. Financial Statements and
Supplementary Data


The Companys financial statements, as
listed under Item 14, appear in a separate section of this
Annual Report on Form 10-K beginning on page F-1.






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

None

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##### Table of Contents






PART III




Item 10. Directors and Executive
Officers




In November 2000 at the annual meeting of
shareholders, the shareholders adopted a Bylaw amendment
changing the number of authorized directors to five. The
November 2000 vote to adopt a fixed number of five directors was
adopted by the affirmative votes of a narrow majority of the
outstanding shares entitled to vote as required by
Sections 211, 212 and 152 of the California Corporations
Code. That majority was 14,989,333, out of approximately
29.3 million shares.







The proper number of shares outstanding in
November 2000 was approximately 29.3 million. This number
was derived by eliminating from the record any reference to
4.72 million shares of Fred Blooms Common Stock that
were subsequently stipulated on August 10, 2001 to be void.
That stipulation was accepted by the Superior Court having
jurisdiction over our litigation (see Item 8 
Legal Proceedings). Void means void ab
initio; or having never been issued. Therefore, the
4.72 million shares were void from the beginning and could
never be counted in determining any vote. In addition, in
calculating whether the shareholders achieved an affirmative
majority of 29.3 million shares, Mr. Blooms
1.2 million accommodation shares were not
counted as outstanding shares entitled to vote because by
contract (the Accommodation Agreement between the Company and
Mr. Bloom, which has been honored by both parties)
Mr. Bloom had given up that right for all purposes. As a
matter of contract, these shares could not be voted by anyone.




A. Identification of Directors.




Our directors and their ages as of
January 31, 2002 are as follows:







|                      |  |     |    |          |  |                      
|--------------------- |  | --- | -- | -------- |  | ---------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Ian B. Carter         |  |     | 63 |          |  | Chairman of the Board
|Bradley L. Gates      |  |     | 61 |          |  | Director             
|Craig G. Goodman      |  |     | 52 |          |  | Director             
|Robert C. Perkins     |  |     | 62 |          |  | Director             
|Junona A. Jonas       |  |     | 58 |          |  | Director             
|Joseph P. Saline, Jr. |  |     | 60 |          |  | Director             







At our November 27, 2001 annual shareholders
meeting, Craig Goodman was elected to the Board of Directors and
Brad Gates, a director since January 1999, was not re-elected.
The directors of the Company serve as such until the next annual
meeting of the shareholders of the Company or until their
successors are elected and qualified.




Ian
B. Carter  Chairman of the Board and Chief Executive
Officer

Mr. Carter has been a member of the Board
since January 1999 and Chief Executive Officer since January
2000. For four months prior to that, he acted as Interim
President. From June 1986 through September 1999,
Mr. Carter spent 14 years with Coldwell Banker
Commercial Brokerage, as an investment specialist. Prior to
that, he spent four years as a Systems Engineer and Salesman
with IBM. Mr. Carter also spent almost seven years in the
United States Army serving in Vietnam, Europe and the Pentagon.
Mr. Carter received his Bachelor of Science
(BS) degree in Engineering from the United States Military
Academy at West Point, New York and his Master in Business
Administration (MBA) in finance from the University of
Southern California.

Bradley
L. Gates  Director

Mr. Gates has been a member of the Board
since January 1999, and has nearly 40 years of
distinguished professional business and law enforcement
experience. He served as the elected Sheriff of Orange County,
California from 1974 until his retirement in 1998.
Mr. Gates received an MS degree and Bachelor of Science
degree in criminology from California State University, Long
Beach.

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Craig
G. Goodman  Director







From 1997 to the present 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. Mr. Goodman
is admitted to the bars of the states of Texas and Florida, as
well as Washington, D.C. and the U.S. Supreme Court.
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.




Robert
C. Perkins  Director

Mr. Perkins has been a member of the Board
since January 1999. For the past 30 years, Mr. Perkins
has served as Chairman and CEO of Hospital Management Services
providing financial and management consulting to hospitals and
similar institutions. Mr. Perkins received his Bachelor of
Science degree in accounting from Bob Jones University.

Junona
A. Jonas  Director




Ms. Jonas has been a member of the Board
since January 2001. She brings experience from a career with
PG&E that spanned from 1978 through 1999 during which time
she served as the first President and COO of PG&Es
retail energy services subsidiary, Vantus Energy Corporation,
and subsequently served as Vice President, Gas and Electricity
Supply at PG&E. Ms. Jonas also served as past President
and COO of utility.com. She currently serves as the General
Manager of Alameda Power and Telecom. Ms. Jonas has a
Bachelors degree from Santa Clara University and a Masters
degree from Stanford and Cal State University Hayward.




Joseph
P. Saline, Jr.  Director

Mr. Saline has been a member of the Board
since January 2001. Mr. Saline is currently an Operations
Manager at Litton Industries in their Integrated Systems
Division, and also serves on the board of directors of InterBill
Inc. in Rohnert Park, California. Mr. Saline retired as a
Colonel in the United States Air Force Reserve. He received a
Bachelors degree from the University of Detroit and a Masters
degree from Purdue University.

B. Identification of Executive
Officers.




Our executive officers and their ages as of
January 31, 2002 are as follows:




|                   |  |     |    |          |  |                              
|------------------ |  | --- | -- | -------- |  | -----------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Ian B. Carter      |  |     | 63 |          |  | Chief Executive Officer      
|Richard L. Paulsen |  |     | 53 |          |  | Chief Operating Officer      
|James L. Oliver    |  |     | 53 |          |  | Chief Financial Officer      
|John A. Barthrop   |  |     | 58 |          |  | General Counsel and Secretary

Richard
L. Paulsen Chief
Operating Officer

Mr. Paulsen has been the Chief Operating
Officer since May 2000. Mr. Paulsen previously served as
the CEO 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. From 1978 to 1986, he started and
financed the firm of Basic Computer Systems, Inc., a national
supplier of application software and systems. Mr. Paulsen
graduated from Loyola University with a Bachelor of Science
degree in mathematics.

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##### Table of Contents



James
L. Oliver Chief
Financial Officer

Mr. Oliver has been the Chief Financial
Officer of the Company since November 1999. Mr. Oliver
spent seven years with Emerson Electric Co. as Chief Financial
Officer for two operating units. Prior to that, Mr. Oliver
served as CFO for a business unit of Smithkline Beckman, as head
of strategic and financial planning for an operating unit of
Dresser Industries. He has consulted for a variety of companies
including Snapple, the Stanley garage door opener business and
the private equity firm of former U.S. Secretary of the
Treasury, William E. Simon. Mr. Oliver received his
Bachelor of Science degree in accounting and finance from the
University of Southern California.

John
A. Barthrop General
Counsel

Mr. Barthrop has been our General Counsel
since May 1999, and has over 30 years of experience
practicing law and counseling businesses. Prior to accepting a
position with us, he was a principal member of the business and
litigation law firm of Smith, Sinek & Barthrop. He owned and
operated his own law firm in Orange, California for over
15 years. He was General Counsel and Assistant to the
President for Newman Properties, a national real estate
development company, responsible for negotiating phased retail
development projects in the Western states. He was also
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 from University
of California, Hastings College of Law, and is licensed to
practice before the State Courts and the U.S. District Courts.

C. Family Relationships.

There are no family relationships among
directors, executive officers or persons nominated or chosen by
the Company to become directors or executive officers.




Item 11. Executive
Compensation

The following table sets forth for each of the
past three fiscal years, all compensation received for services
rendered in all capacities by all persons serving as chief
executive officer and each of the other current most highly
compensated executive officers of our company.

|                            |                         |                     |      |        |  |         |         |           |  |                        |         |            |  |         |        |           |  |  |   |   |  |  |         |           |     |   |   |   |  |   |        |        |    
|--------------------------- | ----------------------- | ------------------- | ---- | ------ |  | ------- | ------- | --------- |  | ---------------------- | ------- | ---------- |  | ------- | ------ | --------- |  |  | - | - |  |  | ------- | --------- | --- | - | - | - |  | - | ------ | ------ | ---
|                            |                         |                     |      |        |  |         |         |           |  |                       
|                            |                         |                     |      |        |  |         |         |           |  | Long Term Compensation
|                            |                         |                     |      |        |  |         |         |           |  |                       
|                            |                         |                     |      |        |  |        
|                            |                         | Annual Compensation |      | Awards |  | Payouts
|                            |                         |                     |      |        |  |        
|(a)                         |                         | (b)                 |      | (c)    |  | (d)     |         | (e)       |  |                        |         | (g)        |  | (h)     |        |          
|                            |                         |                     |      |        |  |         |         | Other     |  | (f)                    |         | Securities |  |         |        | (i)      
|                            |                         |                     |      |        |  |         |         | Annual    |  | Restricted             |         | Underlying |  |         |        | All Other
|                            |                         | Fiscal              |      |        |  |         |         | Compen-   |  | Stock                  |         | Options/   |  | LTIP    |        | Compen-  
|Name and Principal Position |                         | Year                |      | Salary |  | Bonus   |         | sation(2) |  | Award(s)               |         | SARs(4)    |  | Payouts |        | sation   
|                            |                         |                     |      |        |  |         |         |           |  |                        |         |            |  |         |        |          
|Ian Carter,                 |                         |                     | 2001 |        |  | $       | 313,336 |           |  | $                      | 100,000 |            |  | $       | 15,600 |           |  |  |  |   |  |  | 300,000 |           |     | $ |  |   |  | $ |       |       
|                            | Chief Executive Officer |                     |      | 2000   |  |         |         | 211,932   |  |                        |         |           |  |         |        | 7,800     |  |  |   |  |  |  |         | 3,300,000 | (3) |   |   |  |  |   |        |       |    
|                            |                         |                     | 1999 |        |  |         |        |           |  |                        |        |            |  |         |       |           |  |  |  |   |  |  | 200,000 |           |     |   |  |   |  |   |       |       
|Frederick Bloom,            |                         |                     | 2001 |        |  |         |        |           |  |                        |        |            |  |         |       |           |  |  |  |   |  |  |        |           |     |   |  |   |  |   | 92,138 | (1)   
|                            | Former Chief            |                     |      | 2000   |  |         |         | 184,899   |  |                        |         | 50,000     |  |         |        |          |  |  |   |  |  |  |         |          |     |   |   |  |  |   |        | 40,373 | (1)
|                            | Executive Officer       |                     |      | 1999   |  |         |         | 168,250   |  |                        |         | 25,000     |  |         |        |          |  |  |   |  |  |  |         |          |     |   |   |  |  |   |        |       |    
|Richard Paulsen,            |                         |                     | 2001 |        |  |         | 248,326 |           |  |                        | 50,000  |            |  |         | 4,155  |           |  |  |  |   |  |  | 900,000 |           |     |   |  |   |  |   |       |       
|                            | Chief Operating Officer |                     |      | 2000   |  |         |         | 36,250    |  |                        |         |           |  |         |        |          |  |  |   |  |  |  |         |          |     |   |   |  |  |   |        |       |    
|John Barthrop,              |                         |                     | 2001 |        |  |         | 150,971 |           |  |                        | 40,000  |            |  |         | 4,800  |           |  |  |  |   |  |  | 500,000 |           |     |   |  |   |  |   |       |       
|                            | General Counsel         |                     |      | 2000   |  |         |         | 101,552   |  |                        |         |           |  |         |        |          |  |  |   |  |  |  |         |          |     |   |   |  |  |   |        |       |    
|                            |                         |                     | 1999 |        |  |         | 21,154  |           |  |                        |        |            |  |         |       |           |  |  |  |   |  |  | 50,000  |           |     |   |  |   |  |   |       |       
|James L. Oliver,            |                         |                     | 2001 |        |  |         | 140,526 |           |  |                        | 40,000  |            |  |         | 4,800  |           |  |  |  |   |  |  | 500,000 |           |     |   |  |   |  |   |       |       
|                            | Chief Financial Officer |                     |      | 2000   |  |         |         | 76,058    |  |                        |         |           |  |         |        | 2,800     |  |  |   |  |  |  |         |          |     |   |   |  |  |   |        |       |    




|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents severance payments made in conjunction
	with the employees resignation and severance agreement
	effective June 1, 2000.
|   
|(2) | Represents auto allowance paid.                                                                                                    
|   
|(3) | Includes an option to purchase 2,600,000 shares
	pursuant to performance criteria in his employment contract.                      

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|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | The column represents options and are not to be
	confused with shares. Once earned these options may be exercised
	as stock at the designated option price.

The compensation table above excludes $1,080,000
of stock-based compensation charged to operations in fiscal 2001
related to Mr. Carters performance-based stock options
granted. The difference between the exercise price of these
stock options and the estimated fair value of the Companys
common stock as estimated by the Companys management for
financial reporting purposes is recorded as stock-based
compensation charges.

We currently have in place our 1999 Equity
Incentive Plan, pursuant to which 7,000,000 shares of common
stock are reserved for issuance, to provide incentive
compensation to our employees. Directors are eligible for the
Companys 1999 Equity Incentive Plan if they are both
Directors and employees. At this time, Ian Carter is the
Companys only employee Director and is therefore the only
Director that qualifies to participate in the tax benefits under
this plan.

The following table sets forth information
concerning nonqualified stock options granted our 1999 Equity
Incentive Plan to the executive officers during the fiscal year
ended July 31, 2001.




|                |  |                 |         |                |  |          |      |            |  |                               |      |     |  |  |          |  |  |   |           |  |  |   |           | 
|--------------- |  | --------------- | ------- | -------------- |  | -------- | ---- | ---------- |  | ----------------------------- | ---- | --- |  |  | -------- |  |  | - | --------- |  |  | - | --------- | 
|                |  |                 |         |                |  |          |      |            |  |                              
|                |  |                 |         |                |  |          |      |            |  | Potential realizable value at
|                |  |                 |         | % of total     |  |          |      |            |  | assumed annual rates of stock
|                |  | # of Securities |         | options        |  |          |      |            |  | price appreciation for option
|                |  | underlying      |         | granted        |  |          |      |            |  | term                         
|                |  | options         |         | to employee in |  | Exercise |      | Expiration |  |                              
|Name            |  | granted         |         | fiscal year    |  | Price(1) |      | Date       |  | 5%                            |      | 10%
|                |  |                 |         |                |  |          |      |            |  |                               |      |    
|Ian Carter      |  |                 | 300,000 |                |  |          | 10.2 | %          |  | $                             | 2.50 |     |  |  | 01/01/10 |  |  | $ | 471,671   |  |  | $ | 1,195,307 | 
|Richard Paulsen |  |                 | 900,000 |                |  |          | 30.5 | %          |  |                               | 2.75 |     |  |  | 11/01/07 |  |  |   | 1,007,574 |  |  |   | 2,348,075 | 
|John Barthrop   |  |                 | 500,000 |                |  |          | 16.9 | %          |  |                               | 2.75 |     |  |  | 11/01/07 |  |  |   | 559,763   |  |  |   | 1,304,486 | 
|James L. Oliver |  |                 | 500,000 |                |  |          | 16.9 | %          |  |                               | 2.75 |     |  |  | 11/01/07 |  |  |   | 559,763   |  |  |   | 1,304,486 | 












|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All stock options were granted with exercise
	prices determined by the Board of Directors or Compensation
	Committee to be the fair market value of the underlying shares
	of Common Stock at the date of grant of the stock option. No
	trading market existed for the underlying stock at the date of
	grant of the stock options summarized in this table.







The following table sets forth information
concerning the aggregate stock options exercised by and granted
to the executive officers during the fiscal year ended
July 31, 2001.







|                                          |  |             |       |          |  |                           |       |                           |  |  |                     |  |  |   |                   | 
|----------------------------------------- |  | ----------- | ----- | -------- |  | ------------------------- | ----- | ------------------------- |  |  | ------------------- |  |  | - | ----------------- | 
|                                          |  |             |       |          |  | Number of Securities      |       |                          
|                                          |  |             |       |          |  | underlying                |       | Value of unexercised     
|                                          |  |             |       |          |  | unexercised options       |       | in-the-money options     
|                                          |  | Shares      |       |          |  | at July 31, 2001          |       | at July 31, 2001         
|                                          |  | acquired on |       | Value    |  |                           |       |                          
|Name and Principal Position               |  | exercise    |       | realized |  | Exercisable/Unexercisable |       | Exercisable/Unexercisable
|                                          |  |             |       |          |  |                           |       |                          
|Ian B. Carter,
	Chief Executive Officer   |  |             |      |          |  | $                         |      |                           |  |  | 1,950,000/1,650,000 |  |  | $ | 1,497,500/907,500 | 
|Richard Paulsen,
	Chief Operating Officer |  |             |      |          |  |                           |      |                           |  |  | 225,000/775,000     |  |  |   | 67,500/232,500    | 
|John Barthrop,
	General Counsel           |  |             | 2,000 |          |  |                           | 2,002 |                           |  |  | 173,500/375,000     |  |  |   | 159,000/112,500   | 
|James L. Oliver,
	Chief Financial Officer |  |             |      |          |  |                           |      |                           |  |  | 125,000/375,000     |  |  |   | 37,500/112,500    | 




(A) Compensation Committee
Interlocks




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 Ian Carter. The
Compensation Committee meets periodically or on 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. Except for
Mr. Carter, none of the Compensation Commit-




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tee members are or has been an officer or
employee of Commonwealth Energy Corporation. Mr. Carter
recuses himself on compensation issues relating to himself. No
member of the Compensation Committee is or has been a director
or member of the compensation committee of another entity, one
of whose executive officers serves or has served on our
Compensation Committee. In addition, no member of the
Compensation Committee is or has been the member of a
compensation committee of another entity, one of whose executive
officers is or has been a member of our Board of Directors. The
Compensation Committee was formed by the Board in September
1999, and both Mr. Perkins and Mr. Carter were
appointed to the Compensation Committee in December 1999.
Mr. Goodman was appointed in January 2002 and replaced
Mr. Gates (a former board member) on the Compensation
Committee.





(B) Employment Agreements

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

Mr. Carter received a base salary of
$275,000 for the first twelve months of his employment and will
receive a salary according to the following schedule, subject to
possible increases which the Board of Directors may grant from
time to time: $325,000 for the second twelve months, $375,000
for the third twelve months, $425,000 for the fourth twelve
months and $500,000 for the fifth twelve months. In addition,
Mr. Carter is entitled to receive a bonus of $100,000 and
any additional discretionary cash bonus based on the
Companys results of operation. Under his employment
agreement, Mr. Carter is eligible to earn options to purchase,
in the aggregate, up to 4,500,000 shares of the Companys
common stock at an exercise price of $2.50 per share, expiring
on January 1, 2010. The option includes the rights to purchase
700,000 shares upon the execution of his employment agreement,
with 300,000 vested immediately and an additional 100,000 vest
each January 1 from 2001 through 2004. As of January 4,
2002, 500,000 of such automatically vesting options had vested.
An additional option covering 2,300,000 shares were granted upon
execution and is performance-based, vesting upon the occurrence
of certain events as specified on page F-17 of the Notes to the
Consolidated Financial Statements. As of January 4, 2002,
1,250,000 of such performance-based options have vested. Mr.
Carters employment agreement further provides for the
granting of up to 300,000 additional options each January from
2001 through 2004 upon meeting or exceeding the Companys
financial performance objectives as set forth in its business
plans for years 2000 through 2004. The Company met said
performance goal in 2000 and exceeded it by at least 10% in
2001, earning Mr. Carter the right to purchase 100,000 and
300,000 shares in January 2001 and January 2002, respectively.
Prior to entering into, and separate from, his employment
agreement, Mr. Carter had received 200,000 vested options. As of
January 2002, Mr. Carter holds, in the aggregate options
exercisable to purchase up to 2,350,000 shares of the
Companys common stock.

If during the term of the agreement,
Mr. Carter is terminated, leaves, or is replaced as a
result of: (i) all or substantially all of the assets of
the Company or more than fifty percent (50%) of the issued and
outstanding voting shares of the Company being acquired by any
one person or entity not then affiliated with the Company;
(ii) control of the Company being taken over by a group of
shareholders when no significant change of ownership has taken
place; or (iii) a merger, acquisition, strategic alliance
or any other event that could bring substantial capital into the
Company, the Company will pay Mr. Carter an amount equal to
eight times the annual base salary due him plus the amount of
taxes payable by Mr. Carter under I.R.S. Code
§ 280G. In such events, Mr. Carter has the right
to require the Company to repurchase all of his stock and all
stock options referenced in his agreement, whether earned or
unearned, at a value two (2) times then aggregate price
value of the Companys stock.

The Company may terminate Mr. Carters
employment upon the occurrence of any of the following:
Mr. Carters death, total disability, or for cause.
Total disability is deemed to have occurred if
Mr. Carter is incapacitated for 120 consecutive
calendar days or for 150 calendar days (whether or not
consecutive) in any 180 calendar day period. Upon a
termination for death or total disability, the Company will
continue to pay Mr. Carter for a period of one year
thereafter or until expiration of the term of the agreement,
whichever occurs first, his then current base salary and bonus.
For cause is limited to a conviction, entry of plea
of guilty or nolo contendere for any felony that would
materially and adversely interfere with his ability to

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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 only terminate his employment
for cause, which is limited to either (i) the
sale of all or substantially all of the Companys assets to
a person unaffiliated with the Company or the occurrence of a
change of control without Mr. Carters consent or
(ii) the Companys material breach of the agreement.
In the case of a termination described in (i) above,
Mr. Carter is entitled to receive a payment equal to eight
times his then current base salary. In the case of termination
under (ii) above, Mr. Carter is entitled to receive a
payment equal to the monetary value of all of the compensation
and benefits payable to him for the remainder of the term.

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

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

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

If during the term of the agreement there is a
Change in Control, then the Company will pay Mr. Paulsen a
cash bonus equal to the sum of eight times his then annual base
salary plus the amount of taxes payable by him under I.R.S. Code
§ 280G. A Change in Control is generally
defined as any of the following: (i) any person acquires
50% or more of (A) the outstanding shares of Common Stock
of the Company or (B) the combined voting power of the
Companys then-outstanding securities entitled to vote
generally in the election of Directors; (ii) during any
period of not more than two consecutive years, the incumbent
Directors cease for any reason to constitute at least a majority
of the Board of Directors; or (iii) a merger or
consolidation resulting in the holders of voting securities of
the Company outstanding immediately prior thereto failing to
continue to represent at least 50% of the combined voting power
of the voting securities of the Company, or the Companys
sale or disposition of all or substantially all of the
Companys assets or any transaction; (iv) the Company
is subject to a hostile takeover in the form of a proxy fight;
or (v) any other means that allows the Company to be
controlled by a material change in the Board of Directors. In
such events, Mr. Paulsen has the right to require the
Company to repurchase all of his stock and all stock options
referenced in his agreement, whether earned or unearned, at a
value two (2) times the then aggregate price value of the
Companys stock not to exceed $10,000 per share.

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

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

Mr. Oliver will receive a base salary
according to the following schedule, subject to increases which
the CEO 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

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##### Table of Contents



per annum thereafter. Mr. Oliver will be
paid an annual cash bonus of 30% of his then current annual
salary provided that the Company has met or exceeded the
projections in its annual business plan or as the Board of
Directors deems appropriate.





If during the term of the agreement there is a
Change in Control (as defined above), then the Company will pay
Mr. Oliver a cash bonus equal to the sum of four times
Mr. Olivers then current annual base salary plus the
amount of taxes payable by Mr. Oliver under I.R.S. Code
§ 280G. In the event of a sale of assets or any change
of control as defined therein, Mr. Oliver shall have the
right to require the Company to repurchase all of his stock and
stock options, then earned or to be earned, at two
(2) times the then aggregate price value of the
Companys stock not to exceed $10.00 per share.




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

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

Mr. Barthrop will receive a base salary
according to the following schedule, subject to possible
increases which the CEO 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 the Company has met
or exceeded the projections in its annual business plan or as
the Board of Directors deems appropriate.




If during the term of the agreement there is a
Change in Control (as defined above), then the Company will pay
Mr. Barthrop a cash bonus equal to the sum of four times
Mr. Barthrops then current annual base salary plus
the amount of taxes payable by Mr. Barthrop under I.R.S.
Code § 280G.




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

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

Pursuant to the previous employment agreement
entered into on May 6, 1999 with John Barthrop, he received
an option to purchase 50,000 shares of our Common Stock.

(C) Directors Fees

Only non-employee (outside) directors are
compensated for Board service. We do not have any standard
arrangements for director compensation, rather each director may
be offered a retainer amount and meeting attendance fees based
on such factors as length of service, industry experience, and
service on committees of the Board. Directors who serve on Board
Committees are paid $300 for each committee meeting attended,
the amount is increased to $500 for the Committee Chairperson.
In connection with their election to our Board,

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##### Table of Contents






Messrs. Perkins and Gates and
Mrs. Jonas each receive compensation of $6,250 per quarter
and an annual grant of options to purchase 50,000 shares of our
common stock at an exercise price set by the Company from time
to time. The option grants issued to Messrs. Perkins and
Gates and Mrs. Jones in fiscal 2001 have an exercise price
of $2.75 per share.





(D) Change in Control
Agreements




We have entered into employment agreements with
certain of our executive officers, which, among other things,provide for severance and other benefits if, during the term
of the such agreements (i) all or substantially all of the
assets of Commonwealth Energy Corporation or more than fifty
percent (50%) of the issued and outstanding voting shares of the
Commonwealth Energy Corporation are, in any transaction or
series of transactions, acquired by any one person or entity not
then affiliated with the company, or (ii) control of
Commonwealth Energy Corporation is taken over by a group of
shareholders when no significant change of ownership has taken
place, or (iii) a liquidity event such as a merger,
acquisition, strategic alliance or any other event that could
bring substantial capital into the company and any of these
events listed require that such officer be terminated, leave the
company, be replaced or any other event that no longer allows or
requires such officer to remain with the Company. Certain change
in control rights include the right to require the Company to
repurchase all of the employees stock and stock options,
earned or to be earned at two (2) times the aggregate price
value of the Companys stock.







Item 12. Security Ownership of Certain
Beneficial Owners and Management

The following table sets forth information with
respect to beneficial ownership of our Series A Convertible
Preferred Stock and Common Stock as of September 30, 2001
for:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | each person known by us to beneficially own more
	than 5% of our Series A Convertible Preferred Stock or 5%
	of our common stock;
|
| |  | each executive officer named in the Summary
	Compensation Table set forth in Item 6 
	Executive Compensation;                 
|
| |  | each of our directors; and                                                                                                       
|
| |  | all of our executive officers and directors as a
	group.                                                                         




Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and
includes voting or investment power with respect to the
securities. Unless otherwise indicated, the address for those
listed below is c/o Commonwealth Energy Corporation,
15901 Red Hill Avenue, Suite 100, Tustin, California
92780. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. In
preparing the table below, we have relied upon information
supplied by such persons and our stock records. The number of
shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common
stock underlying options held by such persons that are
exercisable within 60 days of January 31, 2002, but
excludes shares of common stock underlying options held by any
other person. Percentage of beneficial ownership is based on
27,323,071 shares of common stock and 775,000 shares of
Series A Convertible Preferred Stock outstanding as of
January 31, 2002.




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|                                     |  |                                             |  |        |           |          |  |  |       |     
|------------------------------------ |  | ------------------------------------------- |  | ------ | --------- | -------- |  |  | ----- | ----
|                                     |  |                                             |  |        |           | Percent 
|Title of Class                       |  | Name                                        |  | Amount |           | of Class
|                                     |  |                                             |  |        |           |         
|Series A Convertible Preferred Stock |  | Robert Perkins                              |  |        | 25,000    |          |  |  | 3.23  | %   
|                                     |  | Joseph P. Saline                            |  |        | 0         | (10)     |  |  | *     |     
|Common Stock                         |  | Ian B. Carter                               |  |        | 2,400,000 | (1)      |  |  | 8.09  | %   
|                                     |  | Robert Perkins                              |  |        | 327,000   | (2)      |  |  | 1.19  | %   
|                                     |  | Richard Paulsen                             |  |        | 450,000   | (3)      |  |  | 1.62  | %   
|                                     |  | John Barthrop                               |  |        | 300,000   | (4)      |  |  | 1.09  | %   
|                                     |  | James Oliver                                |  |        | 250,000   | (5)      |  |  | *     |     
|                                     |  | Brad Gates                                  |  |        | 100,000   | (6)      |  |  | *     |     
|                                     |  | Junona Jonas                                |  |        | 50,000    | (7)      |  |  | *     |     
|Series A Convertible Preferred Stock |  | Directors and Executive Officers as a Group |  |        | 25,000    |          |  |  | 3.23  | %   
|Common Stock                         |  | Directors and Executive Officers as a Group |  |        | 3,877,000 | (8)      |  |  | 12.53 | %(9)







|  |                                  
|- | ---------------------------------
|* | Represents less than one percent.



|    |                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Includes an option to purchase 2,350,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                   
|   
|   
|   
|(2) | Includes an option to purchase 150,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                     
|   
|   
|   
|(3) | Includes an option to purchase 450,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                     
|   
|   
|   
|(4) | Includes an option to purchase 298,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                     
|   
|   
|   
|(5) | Includes an option to purchase 250,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                     
|   
|   
|   
|(6) | Includes an option to purchase 100,000 shares
	that may be exercised as shares within 60 days of
	January 31, 2002.                                                                                                                                                                                                     
|   
|   
|   
|(7) | Includes an option to purchase 50,000 shares that
	may be exercised as shares within 60 days of January 31,
	2002.                                                                                                                                                                                                      
|   
|   
|   
|(8) | This figure is based on the current number of
	shares of Common Stock that each director and executive officer
	of the Company owns plus the number of shares of Common Stock
	that each director and executive officer has the right to obtain
	within 60 days from January 31, 2002.                                  
|   
|   
|   
|(9) | This percentage was derived by dividing the
	figure obtained in footnote (8) above by the total number
	of shares of Common Stock outstanding as of November 30,
	2001 plus the number of shares of Common Stock that each
	director and executive officer has the right to obtain within
	60 days from January 31, 2002
|   






|     |                                                                                                                                                                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Saline has filed a claim for certain
	preferred shareholder rights which differ from the rights set
	forth in the Certificate of Determination. The Company has
	returned his original investment of $25,000 wherein he claims to
	have purchased 50,000 shares. See Item 3 
	Legal Proceedings.







Item 13. Certain Relationships and
Related Transactions

None.

28



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##### Table of Contents






PART IV




Item 14. Exhibits, Financial
Statements and Reports on Form 8-K

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

|                                                                                                       |  |  |     | 
|------------------------------------------------------------------------------------------------------ |  |  | --- | 
|Report of Ernst & Young LLP, independent
	auditors                                                     |  |  | F-1 | 
|Consolidated balance sheets at July 31, 2000
	and 2001                                                 |  |  | F-2 | 
|Consolidated statements of operations for three
	years in the period ended July 31, 2001               |  |  | F-3 | 
|Consolidated statements of shareholders
	equity for the three years in the period ended July 31, 2001 |  |  | F-4 | 
|Consolidated statements of cash flows for the
	three years in the period ended July 31, 2001           |  |  | F-5 | 
|Notes to consolidated financial statements                                                             |  |  | F-6 | 

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

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




(b) Reports on Form 8-K.






| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | January 7, 2002. Adoption of $10 million Stock
	Repurchase Program and Stockholder Right Plan                                                                            
|
|
|
| | January 22, 2002. Report of the Inspector of
	Election in Connection with the Annual Meeting of Shareholder of
	Commonwealth Energy Corporation Held on November 27, 2001
|

(c) 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  |                  |  | Bylaws of Commonwealth Energy Corporation, as
	amended(1)                                                                                                                                                   
|        | 3.4  |                  |  | 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)                                         
|        | 10.1 |                  |  | Power Purchase Agreement dated July 27,
	1999, between Commonwealth Energy Corporation and Calpine Power
	Services Company(4)                                                                              
|        | 10.2 |                  |  | First Amendment to Power Purchase Agreement dated
	as of July 29, 1999(4)                                                                                                                                  
|        | 10.3 |                  |  | Second Amendment to Power Purchase Agreement
	dated as of May 28, 1999, between Commonwealth Energy
	Corporation and Calpine Power Services Company(4)                                                     
|        | 10.4 |                  |  | Loan and Security Agreement dated June 28,
	2000 between Commonwealth Energy Corporation, electricAmerica,
	Inc. and electric.com, Inc. and Coast Business Credit(1)                                        
|        | 10.5 |                  |  | Warrant dated June 28, 2000, issued by
	Commonwealth Energy Corporation in favor of Coast Business
	Credit.(1)                                                                                              
|        | 10.6 |                  |  | 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)    
|        | 10.7 |                  |  | PECO Energy Company Confirmation Agreement dated
	January 30, 2001.(1)                                                                                                                                      
|        | 10.8 |                  |  | Exelon Generation Company, LLC Confirmation
	Agreement dated May 13, 2001(1)                                                                                                                                




29



---



##### Table of Contents






|        |       |                  |  |                                                                                                                                                                                                          
|------- | ----- | ---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                 
|Number  |       | Title of Exhibit
|        |       |                 
|        | 10.9  |                  |  | 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)
|        | 10.10 |                  |  | 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)                    
|        | 10.11 |                  |  | Severance Agreement dated June 1, 2000,
	among Commonwealth Energy Corporation, electricAmerica, Inc. and
	Frederick M. Bloom(1)                                                                         
|        | 10.12 |                  |  | Employment Agreement dated January 1, 2000,
	between Commonwealth Energy Corporation and Ian Carter, as
	modified by an Addendum to Employment Agreement dated as of
	November 1, 2000(1)                
|        | 10.13 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and Richard Paulsen(2)                                                                                             
|        | 10.14 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and James Oliver(2)                                                                                                
|        | 10.15 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and John Barthrop(2)                                                                                               
|        | 10.16 |                  |  | Commonwealth Energy Corporation 1999 Equity
	Incentive Plan for Employees(1)                                                                                                                             
|        | 10.17 |                  |  | Amendment Number 6 to lease by and between
	Warner/Redhill Associates and Frederick Michael Bloom(2)                                                                                                     
|        | 10.18 |                  |  | Commonwealth vs. Bloom Settlement Agreement Terms
	dated August 10, 2001(3)                                                                                                                              
|        | 10.19 |                  |  | Second Amendment to the Limited Liability Company
	Agreement of Summit Energy Ventures, LLC(4)                                                                                                           
|        | 10.20 |                  |  | Commonwealth Energy Corporation Summary of Rights
	to Purchase Preferred Stock(4)                                                                                                                        
|        | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                                                                                                                                        







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






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




30



---



##### 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: April 10, 2002




| |                                
| | -------------------------------
| | COMMONWEALTH ENERGY CORPORATION
|
| | By: /s/ IAN B. CARTER          
| |                                
| | Name: Ian B. Carter            
| | Title: Chief Executive Officer 
|
| | By: /s/ ROBERT C. PERKINS      
| |                                
| | Name: Robert C. Perkins        
| | Title: Director                
|
|
| | By: /s/ JAMES L. OLIVER        
|
| |                                
| | Name: James L. Oliver          
| | Title: Chief Financial Officer 

31



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors

Commonwealth Energy Corporation


We have audited the accompanying consolidated
balance sheets of Commonwealth Energy Corporation as of
July 31, 2000 and 2001, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the three years in the period ended
July 31, 2001. Our audit also included the financial
statement schedule listed in the index at Item 14(a)(2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Commonwealth Energy
Corporation at July 31, 2000 and 2001, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended July 31, 2001, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



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

Orange County, California

October 12, 2001


F-1



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |            |            |             | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------------ | ----------- | ---------- | ---------- | ---------- | ---------- | ---------- | ----------- | 
|                                     |                                                                                                                                                                   |                                     
|                                     |                                                                                                                                                                   | July 31,                            
|                                     |                                                                                                                                                                   |                                     
|                                     |                                                                                                                                                                   | 2000                                 |                                            | 2001       
|                                     |                                                                                                                                                                   |                                      |                                            |            
|Current assets:                      |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     | Cash and cash equivalents                                                                                                                                         |                                      | $                                          | 4,213,168   |            |            | $          | 41,114,046 |           
|                                     | Accounts receivable:                                                                                                                                              |                                      |                                            |             |            |            |            |            |           
|                                     |                                                                                                                                                                   | Billed                               |                                            |             | 17,468,027 |            |            |            | 16,818,659 |            
|                                     |                                                                                                                                                                   | Unbilled                             |                                            |             | 6,333,096  |            |            |            | 3,338,172  |            
|                                     |                                                                                                                                                                   | Green power credits                  |                                            |             | 2,806,508  |            |            |            | 1,176,611  |            
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | 26,607,631                                 |             |            |            | 21,333,442 |           
|                                     |                                                                                                                                                                   | Less allowance for doubtful accounts |                                            |             | (1,458,984 | )          |            |            | (3,946,388 | )          
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     | Net accounts receivable                                                                                                                                           |                                      |                                            | 25,148,647  |            |            |            | 17,387,054 |           
|                                     | Prepaid income taxes                                                                                                                                              |                                      |                                            |            |            |            |            | 2,109,997  |           
|                                     | Deferred tax asset                                                                                                                                                |                                      |                                            |            |            |            |            | 6,607,711  |           
|                                     | Prepaid expenses and other current assets                                                                                                                         |                                      |                                            | 795,539     |            |            |            | 3,943,625  |           
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total current assets                       |             |            | 30,157,354 |            |            |            | 71,162,433  | 
|Property and equipment, net          |                                                                                                                                                                   |                                      | 3,316,877                                  |             |            |            | 3,606,078  |           
|Restricted cash                      |                                                                                                                                                                   |                                      | 6,146,339                                  |             |            |            | 28,242,911 |           
|                                    
|Other assets:                        |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     | Intangible assets                                                                                                                                                 |                                      |                                            | 997,500     |            |            |            | 945,000    |           
|                                     | Deposits and notes receivable                                                                                                                                     |                                      |                                            | 972,135     |            |            |            | 388,466    |           
|                                     | Deferred tax asset                                                                                                                                                |                                      |                                            |            |            |            |            | 2,671,058  |           
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total other assets                         |             |            | 1,969,635  |            |            |            | 4,004,524   | 
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total assets                               |             | $          | 41,590,205 |            |            | $          | 107,015,946 | 
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     | Accounts payable                                                                                                                                                  |                                      | $                                          | 8,148,848   |            |            | $          | 9,404,851  |           
|                                     | Notes payable under line of credit                                                                                                                                |                                      |                                            | 5,281,272   |            |            |            | 3,888,072  |           
|                                     | Other current liabilities                                                                                                                                         |                                      |                                            | 3,924,083   |            |            |            | 7,685,954  |           
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total current liabilities                  |             |            | 17,354,203 |            |            |            | 20,978,877  | 
|                                    
|Commitments and contingencies        |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                    
|Shareholders equity:                |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     | Convertible preferred
	stock  10,000,000 shares authorized with no par
	value; 939,000 and 862,500 shares issued and outstanding in 2000
	and 2001, respectively |                                      |                                            | 1,053,972   |            |            |            | 842,112    |           
|                                     | Common stock  50,000,000 shares
	authorized with no par value; 29,333,164 and 29,360,363 shares
	issued and outstanding in 2000 and 2001, respectively           |                                      |                                            | 58,740,149  |            |            |            | 60,304,847 |           
|                                     | Retained earnings (accumulated deficit)                                                                                                                           |                                      |                                            | (35,558,119 | )          |            |            | 24,890,110 |           
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total shareholders equity                 |             |            | 24,236,002 |            |            |            | 86,037,069  | 
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           
|                                     |                                                                                                                                                                   |                                      | Total liabilities and shareholders equity |             | $          | 41,590,205 |            |            | $          | 107,015,946 | 
|                                     |                                                                                                                                                                   |                                      |                                            |             |            |            |            |           

See accompanying notes.

F-2



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |           | 
|---------------------------------------------------------------------- | ----------------------------------- | ------------------- | ----------- | --------- | - | ---- | ---------- | ------- | - | - | ----------- | --------- | 
|                                                                       |                                     |                    
|                                                                       |                                     | Year Ended July 31,
|                                                                       |                                     |                    
|                                                                       |                                     | 1999                |             | 2000      |   | 2001
|                                                                       |                                     |                     |             |           |   |     
|Retail energy sales                                                    |                                     | $                   | 35,583,644  |           |   | $    | 87,320,533 |         |   | $ | 99,981,187  |          
|Wholesale energy sales                                                 |                                     |                     |            |           |   |      |           |         |   |   | 79,303,586  |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Net energy sales                                                       |                                     |                     | 35,583,644  |           |   |      | 87,320,533 |         |   |   | 179,284,773 |          
|Green power credits                                                    |                                     |                     | 3,540,405   |           |   |      | 12,303,794 |         |   |   | 3,978,989   |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Net revenue                                                            |                                     |                     | 39,124,049  |           |   |      | 99,624,327 |         |   |   | 183,263,762 |          
|Direct energy costs                                                    |                                     |                     | 38,728,563  |           |   |      | 86,731,876 |         |   |   | 76,615,138  |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Gross margin                                                           |                                     |                     | 395,486     |           |   |      | 12,892,451 |         |   |   | 106,648,624 |          
|Selling and marketing expenses                                         |                                     |                     | 2,038,139   |           |   |      | 6,211,360  |         |   |   | 3,597,001   |          
|General and administrative expenses                                    |                                     |                     | 11,184,025  |           |   |      | 15,380,674 |         |   |   | 21,183,396  |          
|Stock-based compensation charges                                       |                                     |                     | 5,718,410   |           |   |      | 445,277    |         |   |   | 1,080,000   |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Income (loss) from operations                                          |                                     |                     | (18,545,088 | )         |   |      | (9,144,860 | )       |   |   | 80,788,227  |          
|Interest income                                                        |                                     |                     | 128,946     |           |   |      | 586,479    |         |   |   | 2,319,628   |          
|Interest expense                                                       |                                     |                     | (5,585      | )         |   |      | (87,708    | )       |   |   | (726,446    | )        
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Income (loss) before provision for income taxes                        |                                     |                     | (18,421,727 | )         |   |      | (8,646,089 | )       |   |   | 82,381,409  |          
|Provision for income taxes                                             |                                     |                     |            |           |   |      |           |         |   |   | 21,851,992  |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Net income (loss)                                                      |                                     | $                   | (18,421,727 | )         |   | $    | (8,646,089 | )       |   | $ | 60,529,417  |          
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Net income (loss) per common share
	(1999 and 2000 restated  Note 1): |                                     |                     |             |           |   |      |            |         |   |   |             |          
|                                                                       | Basic                               |                     | $           | (.84      | ) |      | $          | (.30    | ) |   | $           | 2.06      | 
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|                                                                       | Diluted                             |                     | $           | (.84      | ) |      | $          | (.30    | ) |   | $           | 1.77      | 
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|Stock-based compensation charges relate to the
	following:             |                                     |                     |             |           |   |      |            |         |   |   |             |          
|                                                                       | Selling and marketing expenses      |                     | $           | 1,454,427 |   |      | $          | 423,500 |   |   | $           |          | 
|                                                                       | General and administrative expenses |                     |             | 4,263,983 |   |      |            | 21,777  |   |   |             | 1,080,000 | 
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          
|                                                                       |                                     |                     | $           | 5,718,410 |   |      | $          | 445,277 |   |   | $           | 1,080,000 | 
|                                                                       |                                     |                     |             |           |   |      |            |         |   |   |             |          

See accompanying notes.

F-3



---



##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

Years Ended July 31, 1999, 2000 and
2001


|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------- |  | ------------ | ---------- | --------------- |  | ------------ | ---------- | ------ |  | -------- | ------- | ----- |  | - | --------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                              |  |              |            |                 |  |              |            |        |  |         
|                                                                                              |  |              |            | Convertible     |  | Retained     |            |       
|                                                                                              |  | Common Stock |            | Preferred Stock |  | Earnings     |            |       
|                                                                                              |  |              |            |                 |  | (Accumulated |            |       
|                                                                                              |  | Shares       |            | Amount          |  | Shares       |            | Amount |  | Deficit) |         | Total
|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |      
|Balance at July 31, 1998                                                                      |  |              | 16,928,526 | (A)             |  | $            | 10,567,314 |        |  |          | 939,000 |       |  | $ | 885,232   |   |  | $ | (8,321,563  | ) |  | $ | 3,130,983   |  
|Proceeds from sales of common stock, net of
	issuance costs of $7,399,016                     |  |              | 9,686,945  |                 |  |              | 24,382,626 |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 24,382,626  |  
|Stock options granted included in issuance costs                                              |  |              |           |                 |  |              | 3,869,606  |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 3,869,606   |  
|Stock options granted for services received                                                   |  |              |           |                 |  |              | 669,347    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 669,347     |  
|Compensation charge related to stock options
	granted                                         |  |              |           |                 |  |              | 5,222,410  |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 5,222,410   |  
|Exercise of stock options                                                                     |  |              | 39,750     |                 |  |              | 798        |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 798         |  
|Transfer of common stock from founder to officer                                              |  |              |           |                 |  |              | 496,000    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 496,000     |  
|Common shares issued for acquisition of
	intangible assets                                    |  |              | 100,000    |                 |  |              | 550,000    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 550,000     |  
|Cumulative unpaid dividends on convertible
	preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 84,370    |   |  |   | (84,370     | ) |  |   |            |  
|Net loss and comprehensive loss                                                               |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | (18,421,727 | ) |  |   | (18,421,727 | )
|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |             |  
|Balance at July 31, 1999                                                                      |  |              | 26,755,221 | (A)             |  |              | 45,758,101 |        |  |          | 939,000 |       |  |   | 969,602   |   |  |   | (26,827,660 | ) |  |   | 19,900,043  |  
|Proceeds from sales of common stock, net of
	issuance costs of $1,828,665                     |  |              | 2,185,537  |                 |  |              | 12,020,356 |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 12,020,356  |  
|Stock options granted included in issuance costs                                              |  |              |           |                 |  |              | 31,500     |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 31,500      |  
|Exercise of stock options                                                                     |  |              | 392,406    |                 |  |              | 70,115     |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 70,115      |  
|Compensation charge related to stock options
	granted (including $414,800 of severance costs) |  |              |           |                 |  |              | 436,577    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 436,577     |  
|Transfer of common stock from founder to officer                                              |  |              |           |                 |  |              | 423,500    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 423,500     |  
|Cumulative unpaid dividends on convertible
	preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 84,370    |   |  |   | (84,370     | ) |  |   |            |  
|Net loss and comprehensive loss                                                               |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | (8,646,089  | ) |  |   | (8,646,089  | )
|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |             |  
|Balance at July 31, 2000                                                                      |  |              | 29,333,164 | (A)             |  |              | 58,740,149 |        |  |          | 939,000 |       |  |   | 1,053,972 |   |  |   | (35,558,119 | ) |  |   | 24,236,002  |  
|Exercise of stock options                                                                     |  |              | 103,699    |                 |  |              | 5,678      |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 5,678       |  
|Compensation charge related to settlement of
	employee stock option disputes                  |  |              |           |                 |  |              | 139,725    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 139,725     |  
|Compensation charge related to performance based
	stock options                               |  |              |           |                 |  |              | 1,080,000  |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 1,080,000   |  
|Income tax benefits arising from exercise of
	stock options                                   |  |              |           |                 |  |              | 339,295    |        |  |          |        |       |  |   |          |   |  |   |            |   |  |   | 339,295     |  
|Cumulative unpaid dividends on convertible
	preferred stock                                   |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | 81,188    |   |  |   | (81,188     | ) |  |   |            |  
|Payment of dividends on preferred stock                                                       |  |              |           |                 |  |              |           |        |  |          |        |       |  |   | (216,548  | ) |  |   |            |   |  |   | (216,548    | )
|Repurchase of preferred stock                                                                 |  |              | (76,500    | )               |  |              |           |        |  |          | (76,500 | )     |  |   | (76,500   | ) |  |   |            |   |  |   | (76,500     | )
|Net income and comprehensive income                                                           |  |              |           |                 |  |              |           |        |  |          |        |       |  |   |          |   |  |   | 60,529,417  |   |  |   | 60,529,417  |  
|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |             |  
|Balance at July 31, 2001                                                                      |  |              | 29,360,363 |                 |  | $            | 60,304,847 |        |  |          | 862,500 |       |  | $ | 842,112   |   |  | $ | 24,890,110  |   |  | $ | 86,037,069  |  
|                                                                                              |  |              |            |                 |  |              |            |        |  |          |         |       |  |   |           |   |  |   |             |   |  |   |             |  




(A) Restated as described in Note 1.


See accompanying notes.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |            |            |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------- | ----------- | --------- | ---------- | ---- | ----------- | ------- | ---------- | - | ----------- | ---------- | ---------- | -
|                                                                                                    |                                                             |                                  
|                                                                                                    |                                                             | Year Ended July 31,              
|                                                                                                    |                                                             |                                  
|                                                                                                    |                                                             | 1999                              |             | 2000      |            | 2001
|                                                                                                    |                                                             |                                   |             |           |            |     
|Cash Flows From Operating Activities                                                                |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Net income (loss)                                                                                   |                                                             | $                                 | (18,421,727 | )         |            | $    | (8,646,089  | )       |            | $ | 60,529,417  |           
|Adjustments to reconcile net income (loss) to net
	cash provided by (used in) operating activities: |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|                                                                                                    | Depreciation                                                |                                   |             | 251,566   |            |      |             | 687,125 |            |   |             | 860,726    |           
|                                                                                                    | Amortization                                                |                                   |             |          |            |      |             | 52,500  |            |   |             | 52,500     |           
|                                                                                                    | Provision for doubtful accounts                             |                                   |             | 612,909   |            |      |             | 846,075 |            |   |             | 4,666,126  |           
|                                                                                                    | Stock-based compensation charges                            |                                   |             | 5,718,410 |            |      |             | 445,277 |            |   |             | 1,080,000  |           
|                                                                                                    | Fair value of stock options issued for services
	received   |                                   |             | 669,347   |            |      |             |        |            |   |             |           |           
|                                                                                                    | Fair value of stock options issued as severance
	costs      |                                   |             |          |            |      |             | 414,800 |            |   |             |           |           
|                                                                                                    | Income tax benefits arising from exercise of
	stock options |                                   |             |          |            |      |             |        |            |   |             | 339,295    |           
|                                                                                                    | Deferred income taxes                                       |                                   |             |          |            |      |             |        |            |   |             | (9,278,769 | )         
|                                                                                                    | Changes in operating assets and liabilities:                |                                   |             |           |            |      |             |         |            |   |             |            |           
|                                                                                                    |                                                             | Billed accounts receivable        |             |           | (7,746,794 | )    |             |         | (9,278,406 | ) |             |            | (1,529,354 | )
|                                                                                                    |                                                             | Unbilled accounts receivable      |             |           | (1,620,743 | )    |             |         | (3,919,039 | ) |             |            | 2,994,924  |  
|                                                                                                    |                                                             | Green power credits receivable    |             |           | (3,075,585 | )    |             |         | 269,077    |   |             |            | 1,629,897  |  
|                                                                                                    |                                                             | Prepaid expenses and other assets |             |           | (535,752   | )    |             |         | (13,714    | ) |             |            | (4,674,414 | )
|                                                                                                    |                                                             | Accounts payable                  |             |           | 3,168,835  |      |             |         | 2,809,368  |   |             |            | 1,256,003  |  
|                                                                                                    |                                                             | Other current liabilities         |             |           | 715,868    |      |             |         | 1,305,141  |   |             |            | 3,901,596  |  
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Net cash provided by (used in) operating
	activities                                                |                                                             |                                   | (20,263,666 | )         |            |      | (15,027,885 | )       |            |   | 61,827,947  |           
|                                                                                                   
|Cash Flows From Investing Activities                                                                |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Purchases of property and equipment                                                                 |                                                             |                                   | (1,988,096  | )         |            |      | (1,760,064  | )       |            |   | (1,149,927  | )         
|Purchase of intangible assets                                                                       |                                                             |                                   | (500,000    | )         |            |      |            |         |            |   |            |           
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Net cash used in investing activities                                                               |                                                             |                                   | (2,488,096  | )         |            |      | (1,760,064  | )       |            |   | (1,149,927  | )         
|                                                                                                   
|Cash Flows From Financing Activities                                                                |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Borrowings under (repayments of) line of credit                                                     |                                                             |                                   |            |           |            |      | 5,281,272   |         |            |   | (1,393,200  | )         
|Increase in restricted cash                                                                         |                                                             |                                   | (3,406,200  | )         |            |      | (2,740,139  | )       |            |   | (22,096,572 | )         
|Proceeds from sales of common stock                                                                 |                                                             |                                   | 28,252,232  |           |            |      | 12,051,856  |         |            |   |            |           
|Repurchase of preferred stock                                                                       |                                                             |                                   |            |           |            |      |            |         |            |   | (76,500     | )         
|Dividends paid on preferred stock                                                                   |                                                             |                                   |            |           |            |      |            |         |            |   | (216,548    | )         
|Proceeds from exercises of stock options                                                            |                                                             |                                   | 798         |           |            |      | 70,115      |         |            |   | 5,678       |           
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Net cash provided by (used in) financing
	activities                                                |                                                             |                                   | 24,846,830  |           |            |      | 14,663,104  |         |            |   | (23,777,142 | )         
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Increase (decrease) in cash and cash
	equivalents                                                   |                                                             |                                   | 2,095,068   |           |            |      | (2,124,845  | )       |            |   | 36,900,878  |           
|Cash and cash equivalents at beginning of year                                                      |                                                             |                                   | 4,242,945   |           |            |      | 6,338,013   |         |            |   | 4,213,168   |           
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Cash and cash equivalents at end of year                                                            |                                                             | $                                 | 6,338,013   |           |            | $    | 4,213,168   |         |            | $ | 41,114,046  |           
|                                                                                                    |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|Cash paid for:                                                                                      |                                                             |                                   |             |           |            |      |             |         |            |   |             |           
|                                                                                                    | Interest expense                                            |                                   | $           | 5,585     |            |      | $           | 87,708  |            |   | $           | 726,446    |           
|                                                                                                    | Income taxes                                                |                                   |             |          |            |      |             |        |            |   |             | 32,900,800 |           

Supplemental Cash Flow Information

During the year ended July 31, 1999, the
Company issued 100,000 shares of common stock having a fair
value of $550,000 for a portion of the $1,050,000 purchase price
of the intangible assets.

See accompanying notes.

F-5



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

July 31, 2001


1. Summary of Significant
Accounting Policies

Description of Business

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

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

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

Basis of Presentation

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

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

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

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

Estimates and
Assumptions

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant
estimates in the Companys consolidated financial
statements relate to the allowance for doubtful accounts,
unbilled receivables, legal claims and the useful lives of
property and equipment and intangible assets. Actual results
could differ from those estimates.

F-6



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


Revenue and Cost
Recognition

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

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

|                                |  |                     |            |      |  |      |            |  |  |   |             | 
|------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ----------- | 
|                                |  |                    
|                                |  | Year ended July 31,
|                                |  |                    
|                                |  | 1999                |            | 2000 |  | 2001
|                                |  |                     |            |      |  |     
|Retail and commercial end users |  | $                   | 35,583,644 |      |  | $    | 87,320,533 |  |  | $ | 99,981,187  | 
|Wholesale                       |  |                     |           |      |  |      |           |  |  |   | 79,303,586  | 
|                                |  |                     |            |      |  |      |            |  |  |   |             | 
|                                |  | $                   | 35,583,644 |      |  | $    | 87,320,533 |  |  | $ | 179,284,773 | 
|                                |  |                     |            |      |  |      |            |  |  |   |             | 

Common Stock Grant

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

Unbilled Receivables

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

Cash and Cash
Equivalents

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

Property and Equipment

Property and equipment are carried at cost.
Depreciation of property and equipment is provided over their
estimated useful lives, generally five to ten years, using the
straight line method. Expenditures for maintenance, repairs and
renewals are expensed as incurred. The Company capitalizes
certain software development costs incurred on significant
projects for internal use in accordance with the provisions of
AICPA Statement of Position 98-1, Accounting for
Software Costs.Qualifying internal and external costs,
consisting primarily of third-party system development costs
incurred during the application development stage are
capitalized and amortized on the straight-line basis over five
years.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


Intangible Assets

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

Income Taxes

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

Advertising Costs

Advertising costs, consisting primarily of media
advertising, are expensed as incurred. Advertising costs were
$1,670,270, $2,175,400 and $253,120 for 1999, 2000 and 2001,
respectively.

Stock-Based Compensation

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

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

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

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

Concentration of Credit
Risk

The Company maintains allowances for potential
credit losses.

As of July 31, 2001, 52.3% of the
Companys billed and unbilled receivables are due from a
large number of retail and commercial end users in California
and Pennsylvania who are billed by and make remittances to the
UDCs or the EDC that deliver their electricity which, in
turn, forward such remittances to the Company. One of the
UDCs, Pacific Gas and Electric (PG&E), filed for
bankruptcy in April 2001 and has withheld from payment to the
Company a portion of the remittances due to the Company. The
Company has filed a Proof of Claim in PG&Es bankruptcy
proceedings to recover these amounts which approximated
$1,100,000

F-8



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


at July 31, 2001. The Company has provided
fully for these disputed amounts in its allowance for doubtful
accounts. The Company does not have any similar disputes with
its other UDCs.

The remainder of the Companys billed and
unbilled accounts receivable are due primarily from wholesale
customers including $4,417,841 due from Automated Power Exchange
(APX). This amount includes $2,226,630 in ISO credit holdbacks
relating to November 2000 and January 2001 activity. APX has
informed the Company that the holdbacks were made, in part,
because certain organizations, including PG&E and PX, which
have declared bankruptcy, did not make their scheduled payments
to APX. The Company has provided an allowance of $1,471,142 for
doubtful accounts related to the APX holdbacks.

No customer has accounted for more than 10% of
net revenue in 1999, 2000 or 2001, except for two wholesale
customers, the state of California Department of Water Resources
and the PX, which represented 22.0% and 10.6%, respectively, of
net revenue in 2001.

Impairment of Long-Lived
Assets

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

Recent Accounting
Pronouncements

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

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

Fair Value of Financial
Instruments

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

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


2. Market and Regulatory Risks

California Deregulated Electric
Power Markets

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

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

Commitments to Purchase Electric
Power

For the California market, the Company has
entered into a contract, which expires on June 30, 2002
with Calpine Power Services Company, to acquire 3,000 MWH of
electric power per day for the remainder of the contract. The
Company is obligated to minimum electric purchases of
$32.3 million for the year ending July 31, 2002 under
this commitment. The electric power acquired under this contract
qualifies for the California Green Power Credit upon
its resale to certain classes of customers.

For the Pennsylvania market, the Company has
entered into various contractual arrangements for the purchase
of electric power through May 2004. The Company is obligated to
minimum electric power purchases of $37.6 million for the
year ending July 31, 2002, and $51.9 million
thereafter under these contracts.

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

Pennsylvania Operations

During the year ended July 31, 2000, the
Company began selling electric power in Pennsylvania. In
accordance with its standard customer contract in Pennsylvania,
the Company may only charge certain maximum rates for its sales
of electric power which, at times, could be less than the
Companys costs of acquiring, distributing and scheduling
such electric power. Energy capacity charges for servicing
electric power in the Pennsylvania market varies significantly
from month to month and can effect gross profit margins.

California Green Power
Credits

The state of California enacted the Public
Purpose Program (Program) which established a $540 million
fund to provide overall incentives to suppliers of
green power to initially reduce, among other things,
the net costs of such power to certain consumers by
1.5 cents per KWH which, as of July 31, 2001, is at a
rate 1.0 cent

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


per KWH. Green Power is defined by
the Program as electricity produced by at least 50% renewable
energy resources. The benefit of Green Power Credits has been
passed through to the Companys customers. The Program
provides that this subsidy is available to suppliers of
green power through March 31, 2002 and the
Company does not know if the subsidy will be continued
thereafter.

3. Per Share Information

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

|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |           | 
|------------------------------------------------- | ----------------------------------------------- | ------------------- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | --------- | 
|                                                  |                                                 |                    
|                                                  |                                                 | Year Ended July 31,
|                                                  |                                                 |                    
|                                                  |                                                 | 1999                |             | 2000 |  | 2001
|                                                  |                                                 |                     |             |      |  |     
|Numerator:                                        |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Net income (loss)                                 |                                                 | $                   | (18,421,727 | )    |  | $    | (8,646,089 | ) |  | $ | 60,529,417 |          
|Preferred stock dividend                          |                                                 |                     | (84,370     | )    |  |      | (84,370    | ) |  |   | (81,188    | )        
|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Income (loss) applicable to common
	stock  Basic |                                                 |                     | (18,506,097 | )    |  |      | (8,730,459 | ) |  |   | 60,448,229 |          
|Assumed conversion of preferred stock             |                                                 |                     |            |      |  |      |           |   |  |   | 81,188     |          
|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Net income (loss)  Dilutive                      |                                                 | $                   | (18,506,097 | )    |  | $    | (8,730,459 | ) |  | $ | 60,529,417 |          
|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Denominator(restated for 1999 and 2000):          |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Weighted - average outstanding
	shares  Basic    |                                                 |                     | 21,905,210  |      |  |      | 28,794,921 |   |  |   | 29,384,617 |          
|Dilutive shares:                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|                                                  | Exercise of dilutive stock options              |                     |             |     |  |      |            |  |  |   |            | 3,842,866 | 
|                                                  | Conversion of preferred stock into common stock |                     |             |     |  |      |            |  |  |   |            | 924,538   | 
|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          
|Weighted - average outstanding
	shares  Dilutive |                                                 |                     | 21,905,210  |      |  |      | 28,794,921 |   |  |   | 34,152,021 |          
|                                                  |                                                 |                     |             |      |  |      |            |   |  |   |            |          

For the years ended July 31, 1999 and 2000,
the effects of the exercise of potentially dilutive stock
options and warrants and the assumed conversion of preferred
stock into common stock have been excluded from the calculation
of dilutive earnings per share information because the effect of
their inclusion would be anti-dilutive. For the year ended
July 31, 2001, the effects of stock options with exercise
prices in excess of the estimated fair value of the
Companys common stock and of the exercise of warrants have
been excluded from the calculation of diluted earnings per share
because the effect of their inclusion would be anti-dilutive.

4. Investment in Summit Energy Ventures,
LLC

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

As of July 31, 2001, the Companys
interest in Summit is a 100% preferred membership interest and,
after the Company receives its original capital and a 10%
preferred return, profits of Summit are to be allocated 50% to
the Company and 50% to its partner, Northwest Power Management
(Northwest); net losses are allocated per capital contribution.
Northwest receives no return until after the Company receives
return of its investment and 10% preferred annual return on its
investment. The Company shall have the option to

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


purchase any of Summits investments on such
terms and conditions that are established between the Company
and Northwest.

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

|                |                           |             |            
|--------------- | ------------------------- | ----------- | -----------
|Assets:         |                           |            
|                | Cash and cash equivalents |             | $14,635,411
|                | Prepaid management fees   |             | 379,110    
|                |                           |            
|                |                           | $15,014,521
|                |                           |            
|Members equity |                           | $15,014,521
|                |                           |            

The effect of Summits results of operations
from its date of inception through July 31, 2001 on the
Companys consolidated results of operations was
insignificant.

5. Other Current Liabilities and Related
Matters

Other current liabilities is comprised of:

|                                      |  |          |           |      |  |   |           | 
|------------------------------------- |  | -------- | --------- | ---- |  | - | --------- | 
|                                      |  |         
|                                      |  | July 31,
|                                      |  |         
|                                      |  | 2000     |           | 2001
|                                      |  |          |           |     
|Payroll and related                   |  | $        | 450,302   |      |  | $ | 467,511   | 
|Severance costs                       |  |          | 956,978   |      |  |   | 75,000    | 
|Legal accruals                        |  |          | 1,249,897 |      |  |   | 1,476,584 | 
|Customer termination costs            |  |          | 681,270   |      |  |   | 65,000    | 
|Settlement of litigation with founder |  |          |          |      |  |   | 4,790,000 | 
|Other                                 |  |          | 585,636   |      |  |   | 811,859   | 
|                                      |  |          |           |      |  |   |           | 
|                                      |  | $        | 3,924,083 |      |  | $ | 7,685,954 | 
|                                      |  |          |           |      |  |   |           | 

Severance Arrangements

The Companys founder and former Chairman
and Chief Executive Officer had an employment agreement with a
subsidiary of the Company. He resigned from his positions with
the subsidiary in consideration of a severance agreement
effective June 1, 2000. The present value of $927,254 of
this obligation, based upon a discount rate of 10%, was recorded
as of June 1, 2000 and is included in general and
administrative expenses for 2000. During 2001, the Company paid
$92,138 to its founder pursuant to this agreement. The Company
ceased making payments under this agreement to its founder in
December 2000 pending resolution of the litigation with the
founder described in Note 11. In the settlement of this
litigation in August 2001, the founder released his claims for
any further payments due under the severance agreement.

The Company had granted its former President an
option to acquire 1,000,000 shares of the Companys common
stock. The options were fully vested at their date of grant, had
an exercise price of $2.50 per share and were to expire on
December 31, 2002. The fair value of $414,800 of these
stock options, as determined on the minimum value method, was
included in general and administrative expenses for 2000. By a
subsequent agreement the former President released his rights
and waived any claims to said option. In addition, costs of
$425,000 and $300,000 were recorded in 1999 and 2000,
respectively, related to the severance of other employees.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


Customer Termination
Costs

The Company terminated certain California
commercial and industrial customers during June and July 2000.
At July 31, 2000, an accrual of $681,270 was recorded to
provide for the estimated costs of terminating these customers
including meter lease termination settlement costs and
settlement of terminated customer damage claims. Except for
$65,000 which was accrued at July 31, 2001, all of these
customer termination costs were paid during 2001.

6. Property and Equipment,
Net

Property and equipment, net is comprised of the
following:

|                                               |  |          |           |      |  |   |            |  
|---------------------------------------------- |  | -------- | --------- | ---- |  | - | ---------- | -
|                                               |  |         
|                                               |  | July 31,
|                                               |  |         
|                                               |  | 2000     |           | 2001
|                                               |  |          |           |     
|Office furniture and equipment                 |  | $        | 1,237,053 |      |  | $ | 1,227,536  |  
|Information technology equipment and systems   |  |          | 2,882,360 |      |  |   | 4,094,531  |  
|Leasehold improvements                         |  |          | 172,356   |      |  |   | 119,629    |  
|                                               |  |          |           |      |  |   |            |  
|                                               |  |          | 4,291,769 |      |  |   | 5,441,696  |  
|Less accumulated depreciation and amortization |  |          | (974,892  | )    |  |   | (1,835,618 | )
|                                               |  |          |           |      |  |   |            |  
|                                               |  | $        | 3,316,877 |      |  | $ | 3,606,078  |  
|                                               |  |          |           |      |  |   |            |  

7. Restricted Cash and Intangible
Assets

Restricted Cash

Restricted cash consists of the following:



|                                                                                                                                      |  |          |           |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | --------- | ---- |  | - | ---------- | 
|                                                                                                                                      |  |         
|                                                                                                                                      |  | July 31,
|                                                                                                                                      |  |         
|                                                                                                                                      |  | 2000     |           | 2001
|                                                                                                                                      |  |          |           |     
|Short-term investments pledged as collateral for
	letters of credit in connection with agreements for the purchase
	of electric power |  | $        | 6,146,339 |      |  | $ | 13,607,500 | 
|Cash and cash equivalents of Summit                                                                                                   |  |          |          |      |  |   | 14,635,411 | 
|                                                                                                                                      |  |          |           |      |  |   |            | 
|                                                                                                                                      |  | $        | 6,146,339 |      |  | $ | 28,242,911 | 
|                                                                                                                                      |  |          |           |      |  |   |            | 

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

Intangible Assets

The Companys intangible assets represent
the net unamortized costs of purchasing, in July 1999, the
1-800-Electric telephone number and the rights to eight internet
domain names. The initial cost of these intangible assets was
$1,050,000. Amortization expense for these intangible assets was
$52,500 in 2000 and 2001.

8. Line of Credit

On June 29, 2000, the Company entered into a
three-year, $15 million line of credit. Borrowings under
the line of credit, which amounted to $3,888,072 at
July 31, 2001, are collateralized by accounts receivable,
inventory and other assets. In connection with obtaining the
line of credit, the Company agreed to pay a commitment fee of
$300,000, one-half of which was paid at closing and the
remainder to be paid incrementally at each annual renewal date.
The Company also issued the lender a warrant expiring
June 29,

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


2003 to purchase 100,000 shares of the
Companys common stock at a price of $5.50 per share.
Interest on borrowings is based on the lenders prime rate
plus 1.75%. At July 31, 2001, the interest rate on
borrowings under the line of credit was 8.5% and the average
effective interest rate on borrowings outstanding during the
years ended July 31, 2000 and 2001 was 11.25% and 13.0%,
respectively. The credit line is subject to certain financial
covenants in the event the Companys net worth falls below
$15 million or the Company operates with a negative gross
profit.

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

9. Shareholders Equity

Convertible Preferred
Stock

The convertible preferred stock, which was
initially issued on September 15, 1997, provides for
cumulative dividends which accrue at an annual rate of 10% and
are payable at the discretion of the Company. Cumulative unpaid
dividends were $97,612 as of July 31, 2001. Each
convertible preferred share is convertible into one share of the
Companys common stock at the shareholders discretion
and has full voting rights. In addition, preferred shareholders
are entitled to preferential liquidation rights over common
stock in the amount of $1.00 per share plus an amount equal to
all declared but unpaid dividends. During 2001, all holders of
the convertible preferred stock were offered the option to
rescind their initial purchase of convertible preferred stock at
the initial offering price of $1.00 per share. Holders of 76,500
shares of convertible preferred stock, who had also received
76,500 shares of the Companys common stock subsequently as
part of the stock grant described in Note 1, elected to
rescind their initial purchase and the Company repurchased both
their preferred and common shares.

Common
Stock

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

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

At July 31, 2001, the Company has reserved
the following shares of its common stock for issuance upon
conversion of the issued and outstanding shares of convertible
preferred stock, exercise of warrants and exercise of
outstanding stock options:

|                                                        |  |  |            | 
|------------------------------------------------------- |  |  | ---------- | 
|Reserved for conversion of convertible preferred
	stock |  |  | 862,500    | 
|Reserved for exercise of warrants                       |  |  | 100,000    | 
|Reserved for exercise of outstanding stock options      |  |  | 10,283,192 | 
|                                                        |  |  |            | 
|                                                        |  |  | 11,245,692 | 
|                                                        |  |  |            | 

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

F-14



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


Stock
Options

The Companys Board of Directors has
approved grants of options to acquire a total of 12,901,825
shares of the Companys common stock to the Companys
employees, outside directors and service providers. As of
July 31, 2001, 10,283,192 of these stock options were
outstanding. The options were vested as of their date of grant
and expire in December 2002 for the options granted prior to
December 1999 and expire in December 2004 through 2010 for the
options granted after December 1999.

F-15



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


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(A) 
|                         |                                                          |                                                 |            |                |           |                |              |          
|Balance at July 31, 1998 |                                                          |                                                 | 931,310    |                |           |                | $.01  $ .05 |           |              | $ | 0.011 |   |       | $ | 0.71 |  
|Options granted:         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|                         | Exercise price less than fair value of common
	stock(A): |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Employee commissions for stock sales          |            |                | 1,511,250 |                |              |           | $.01  $1.00 |   |       | $ | 0.067 |   |      | $ | 2.63 | 
|                         |                                                          |  Other employee                                |            |                | 2,104,090 |                |              |           | $.01  $1.00 |   |       | $ | 0.339 |   |      | $ | 2.85 | 
|                         |                                                          |  Outside service providers                     |            |                | 254,675   |                |              |           | $.01  $1.00 |   |       | $ | 0.212 |   |      | $ | 3.54 | 
|                         |                                                          |  Outside directors                             |            |                | 40,000    |                |              |           | $1.00        |   |       | $ | 1.00  |   |      | $ | 3.75 | 
|                         | Exercise price equal to fair value of common
	stock(A):  |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Employee commissions for stock sales          |            |                | 425,000   |                |              |           | $3.75        |   |       | $ | 3.750 |   |      | $ | 3.75 | 
|Options exercised        |                                                          |                                                 | (39,750    | )              |           |                | $.01  $ .05 |           |              | $ | 0.020 |   |       |   |      |  
|                         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|Balance at July 31, 1999 |                                                          |                                                 | 5,226,575  |                |           |                | $.01  $3.75 |           |              | $ | 0.478 |   |       |   |      |  
|Options granted:         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|                         | Exercise price less than fair value of common
	stock(A): |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Employee commissions for stock sales          |            |                | 21,000    |                |              |           | $1.00        |   |       | $ | 1.000 |   |      | $ | 2.50 | 
|                         |                                                          |  Other employees                               |            |                | 12,000    |                |              |           | $1.00        |   |       | $ | 1.000 |   |      | $ | 2.50 | 
|                         | Exercise price equal to fair value of common
	stock(A):  |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Employee performance-based                    |            |                | 2,600,000 |                |              |           | $2.50        |   |       | $ | 2.500 |   |      | $ | 2.50 | 
|                         |                                                          |  Other employee                                |            |                | 750,000   |                |              |           | $2.50        |   |       | $ | 2.500 |   |      | $ | 2.50 | 
|                         |                                                          |  Outside directors                             |            |                | 250,000   |                |              |           | $2.50        |   |       | $ | 2.500 |   |      | $ | 2.50 | 
|                         |                                                          |  Non-employee                                  |            |                | 52,500    |                |              |           | 2.50         |   |       |   | 2.50  |   |      |   | 2.50 | 
|                         |                                                          |  Settlement and Severance of former
	president |            |                | 1,000,000 |                |              |           | 2.50         |   |       |   | 2.50  |   |      |   | 2.50 | 
|Options exercised        |                                                          |                                                 | (392,406   | )              |           |                | $.01  $1.00 |           |              | $ | 0.179 |   |       |   |      |  
|Options cancelled        |                                                          |                                                 | (269,777   | )              |           |                | $.05  $3.75 |           |              | $ | 1.902 |   |       |   |      |  
|                         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|Balance at July 31, 2000 |                                                          |                                                 | 9,249,892  |                |           |                | $.01  $3.75 |           |              | $ | 1.469 |   |       |   |      |  
|Options granted:         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|                         | Exercise price less than fair value of common
	stock(A): |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Employee performance-based                    |            |                | 300,000   |                |              |           | $2.50        |   |       | $ | 2.500 |   |      | $ | 2.75 | 
|                         | Exercise price equal to fair value of common
	stock(A):  |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |   |     
|                         |                                                          |  Other employees                               |            |                | 2,500,000 |                |              |           | $2.75        |   |       | $ | 2.750 |   |      | $ | 2.75 | 
|                         |                                                          |  Outside directors                             |            |                | 150,000   |                |              |           | $2.75        |   |       | $ | 2.750 |   |      | $ | 2.75 | 
|Options exercised        |                                                          |                                                 | (67,200    | )              |           |                | $.01  $1.00 |           |              | $ | 0.072 |   |       |   |      |  
|Options cancelled        |                                                          |                                                 | (1,849,500 | )              |           |                | $.01  $3.75 |           |              | $ | 1.723 |   |       |   |      |  
|                         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  
|Balance at July 31, 2001 |                                                          |                                                 | 10,283,192 |                |           |                | $.01  $3.75 |           |              | $ | 1.792 |   |       |   |      |  
|                         |                                                          |                                                 |            |                |           |                |              |           |              |   |       |   |       |   |      |  




(A) At date of grant.


F-16



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


The weighted average remaining contractual life
and weighted average exercise price of options outstanding and
of options exercisable as of July 31, 2001 were as follows:

|                |  |             |            |              |  |             |      |                |  |  |           |  |  |   |      | 
|--------------- |  | ----------- | ---------- | ------------ |  | ----------- | ---- | -------------- |  |  | --------- |  |  | - | ---- | 
|                |  |             |            | Average      |  |             |      |               
|                |  | Number of   |            | Remaining    |  |             |      | Weighted      
|Range of        |  | Shares      |            | Contractual  |  | Shares      |      | Average       
|Exercise Prices |  | Outstanding |            | Life (Years) |  | Exercisable |      | Exercise Price
|                |  |             |            |              |  |             |      |               
|$ .01  $ .50   |  |             | 3,126,017  |              |  |             | 1.63 |                |  |  | 3,126,017 |  |  | $ | 0.11 | 
|$1.00           |  |             | 512,175    |              |  |             | 1.44 |                |  |  | 512,175   |  |  | $ | 1.00 | 
|$2.50  $3.75   |  |             | 6,645,000  |              |  |             | 6.97 |                |  |  | 2,922,500 |  |  | $ | 2.65 | 
|                |  |             |            |              |  |             |      |                |  |  |           |  |  |   |      | 
|Total           |  |             | 10,283,192 |              |  |             | 5.07 |                |  |  | 6,560,692 |  |  | $ | 1.31 | 
|                |  |             |            |              |  |             |      |                |  |  |           |  |  |   |      | 

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

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

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

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

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


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

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

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

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

Options
Granted during the Year Ended July 31, 2001

During the year ended July 31, 2001, the
Company granted 2,500,000 stock options to employees and 150,000
stock options to non-employee directors. The stock options
granted to employees were 25% vested on their date of grant and
vest 25% at the anniversary of the dates of grant over the next
three years. These stock options expire on November 11,
2007.

Other
Stock-Based Compensation

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

The Companys founder and, at the time, its
Chairman and Chief Executive Officer, gave a total of 248,000
and 123,500 shares of the Companys common stock owned by
him to two officers of the Company in 1999 and 2000,
respectively. In accordance with Staff Accounting Bulletin
No. 79, Accounting for Expenses or Liabilities Paid by
Principal Stockholder, the estimated fair value of such
shares of $496,000 and $423,500 was included in stock-based
compensation charges in 1999 and 2000, respectively.

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


Stock-based compensation charges relate to the
following:

|                                                                                                         |  |                     |            |      |  |      |         |   |  |   |           | 
|-------------------------------------------------------------------------------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | ------- | - |  | - | --------- | 
|                                                                                                         |  |                    
|                                                                                                         |  | Year Ended July 31,
|                                                                                                         |  |                    
|                                                                                                         |  | 1999                |            | 2000 |  | 2001
|                                                                                                         |  |                     |            |      |  |     
|Stock options granted with fair value of
	Companys common stock in excess of exercise price of
	options |  | $                   | 8,548,500  |      |  | $    | 53,277  |   |  | $ |          | 
|Performance-based stock options                                                                          |  |                     |           |      |  |      |        |   |  |   | 1,080,000 | 
|Gift of shares from founder to officers                                                                  |  |                     | 496,000    |      |  |      | 423,500 |   |  |   |          | 
|                                                                                                         |  |                     |            |      |  |      |         |   |  |   |           | 
|                                                                                                         |  |                     | 9,044,500  |      |  |      | 476,777 |   |  |   | 1,080,000 | 
|Less amount related to commissions on sales of
	the Companys common stock                               |  |                     | (3,326,090 | )    |  |      | (31,500 | ) |  |   |          | 
|                                                                                                         |  |                     |            |      |  |      |         |   |  |   |           | 
|                                                                                                         |  | $                   | 5,718,410  |      |  | $    | 445,277 |   |  | $ | 1,080,000 | 
|                                                                                                         |  |                     |            |      |  |      |         |   |  |   |           | 

Warrants

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

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

Pro forma information regarding results of
operations and net income (loss) per common share is required by
SFAS No. 123 for stock-based awards to employees, which are
comprised of stock options for the purchase of the
Companys common stock, as if the Company had accounted for
such awards using a valuation method permitted under SFAS
No. 123. In determining such pro forma information, stock
options to employees and outside directors were valued using the
minimum value method assuming no expected dividends, an average
expected life through the option expiration dates, and a
weighted-average risk-free interest rate of 6.0%. The minimum
value method does not consider stock price volatility. For pro
forma purposes, the estimated minimum value of the
Companys stock-based awards to employees and outside
directors were expensed at the date of grant of the stock
options for options that were fully vested at date of grant and
was expensed over the vesting period of stock options that vest
over a period of time. The results of applying Statement
No. 123 to the Companys stock option grants to
employees and outside directors on the assumptions described
above approximate the Companys reported amounts of net
income (loss) and net income (loss) per common share for each
year.

F-19



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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


10. Income Taxes

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

|                          |                                  |          |            |             |   |   |            |            |  
|------------------------- | -------------------------------- | -------- | ---------- | ----------- | - | - | ---------- | ---------- | -
|                          |                                  |         
|                          |                                  | July 31,
|                          |                                  |         
|                          |                                  | 2000     |            | 2001       
|                          |                                  |          |            |            
|Deferred tax assets:      |                                  |          |            |             |   |   |            |           
|                          | Net operating loss carryforwards |          | $          | 9,846,000   |   |   | $          | 1,021,000  |  
|                          | Stock options                    |          |            | 2,232,000   |   |   |            | 2,756,000  |  
|                          | Allowance for doubtful accounts  |          |            | 625,000     |   |   |            | 601,000    |  
|                          | Reserves and accruals            |          |            | 1,641,000   |   |   |            | 4,421,000  |  
|                          | State income taxes               |          |            |            |   |   |            | 1,586,000  |  
|                          |                                  |          |            |             |   |   |            |           
|                          |                                  |          | 14,344,000 |             |   |   | 10,385,000 |           
|                          | Less valuation allowance         |          |            | (14,254,000 | ) |   |            | (1,021,000 | )
|                          |                                  |          |            |             |   |   |            |           
|                          |                                  |          | 90,000     |             |   |   | 9,364,000  |           
|Deferred tax liabilities: |                                  |          |            |             |   |   |            |           
|                          | Depreciation and amortization    |          |            | (72,000     | ) |   |            | (85,000    | )
|                          | Other                            |          |            | (18,000     | ) |   |            |           |  
|                          |                                  |          |            |             |   |   |            |           
|Net deferred tax asset    |                                  | $        |           |             |   | $ | 9,279,000  |           
|                          |                                  |          |            |             |   |   |            |           

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

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

There was no provision for income taxes for the
years ended July 31, 1999 and 2000.

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

|                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|------------------------------------------ |  | ------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                           |  |                    
|                                           |  | Year Ended July 31,
|                                           |  |                    
|                                           |  | 1999                |       | 2000 |  | 2001
|                                           |  |                     |       |      |  |     
|Federal statutory income tax rate          |  |                     | 34.0  | %    |  |      | 34.0  | % |  |  | 35.0  | %
|Valuation allowance recorded due to losses |  |                     | (34.0 | )    |  |      | (34.0 | ) |  |  |      |  
|Reversal of valuation allowance            |  |                     |      |      |  |      |      |   |  |  | (13.1 | )
|State income taxes, net of federal benefit |  |                     |      |      |  |      |      |   |  |  | 3.6   |  
|Other                                      |  |                     |      |      |  |      |      |   |  |  | 1.1   |  
|                                           |  |                     |       |      |  |      |       |   |  |  |       |  
|Income tax rate per financial statements   |  |                     |      | %    |  |      |      | % |  |  | 26.6  | %
|                                           |  |                     |       |      |  |      |       |   |  |  |       |  

A valuation allowance was recorded to reflect the
uncertainty of realization of the deferred tax asset during 1999
and 2000. The valuation allowance at July 31, 2001 was
recorded to reflect the uncertainty of the deferred tax asset
related to the net operating loss carryforward, the use of which
is limited as described in the following paragraph. The
valuation allowance increased by $7,881,000 and $2,840,000
during 1999 and 2000, respectively, and during 2001 was
increased by $362,000 for a change in the federal income tax
rate applied to

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


the Companys temporary differences and
decreased by $13,595,000 for the release of the valuation
allowance because of the Companys profitable operations
during the year ended July 31, 2001.

At July 31, 2001, the Company had net
operating loss carryforwards of approximately $2,330,000 for
federal and state income tax purposes that begin to expire in
years 2018 and 2006, respectively. The timing of the utilization
of federal net operating loss carryforwards is subject to an
annual limitation due to the change of ownership
provision of the Tax Reform Act of 1986. As a result of the
annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax
liabilities.

11. Commitments and Contingencies

Commitments

Purchase Commitments

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

Leasing Arrangements

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

The following is a schedule of the future minimum
rental payments required under the above operating leases as of
July 31, 2001:

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year ending July 31, |  |  
|                     |  |  
|2002                 |  | $ | 841,087   | 
|2003                 |  |   | 652,949   | 
|2004                 |  |   | 371,835   | 
|2005                 |  |   | 27,588    | 
|                     |  |   |           | 
|                     |  | $ | 1,893,459 | 
|                     |  |   |           | 

Rent expense for operating leases amounted to
$367,300, $786,300 and $697,498 in 1999, 2000 and 2001,
respectively.

Employment
contracts

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

|                     |  |   |           | 
|-------------------- |  | - | --------- | 
|Year ending July 31, |  |  
|                     |  |  
|2002                 |  | $ | 1,017,916 | 
|2003                 |  |   | 1,172,917 | 
|2004                 |  |   | 1,346,250 | 
|2005                 |  |   | 627,083   | 

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

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


the event of a change in control as defined in
the contracts, the executive is to receive an amount equal to
four times the annual base salary plus the amount of income
taxes payable under IRS Code § 280G.

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

Contingencies

California Department of
Corporations Investigation

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

California Public Utilities
Commission Investigation

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

Litigation with Companys
Founder

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

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


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

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

Litigation

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

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##### Table of Contents



COMMONWEALTH ENERGY CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

July 31, 2001


12. 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, 2000:                                        |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|Net revenue                                                      |                   | $                                           | 20,169.4 |            |   | $        | 18,670.8 |         |   | $ | 17,950.0 |      |   | $ | 42,834.1 |    
|Gross margin                                                     |                   |                                             | 2,796.8  |            |   |          | 1,040.0  |         |   |   | 2,389.6  |      |   |   | 6,666.0  |    
|Net income (loss)                                                |                   |                                             | (2,137.8 | )          |   |          | (3,548.7 | )       |   |   | (3,305.1 | )    |   |   | 345.5    |    
|                                                                
|Net income (loss) per common share
	(restated)(A):               |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|                                                                 | Basic and diluted |                                             |          | (.08       | ) |          |          | (.12    | ) |   |          | (.11 | ) |   |          | .01 | 
|                                                                
|Net income (loss) per common share
	(as originally reported)(A): |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|                                                                 | Basic and diluted |                                             |          | (.07       | ) |          |          | (.10    | ) |   |          | (.10 | ) |   |          | .01 | 
|                                                                
|Year ended July 31, 2001:                                        |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|Net revenue                                                      |                   | $                                           | 43,106.0 |            |   | $        | 52,659.0 |         |   | $ | 48,272.6 |      |   | $ | 39,226.1 |    
|Gross margin                                                     |                   |                                             | 18,833.0 |            |   |          | 41,153.9 |         |   |   | 28,431.2 |      |   |   | 18,230.0 |    
|Net income                                                       |                   |                                             | 11,759.2 |            |   |          | 27,865.2 |         |   |   | 14,509.6 |      |   |   | 6,395.5  |    
|                                                                
|Net income per common share (restated)(A):                       |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|                                                                 | Basic             |                                             |          | .40        |   |          |          | .95     |   |   |          | .49  |   |   |          | .22 | 
|                                                                 | Diluted           |                                             |          | .34        |   |          |          | .81     |   |   |          | .43  |   |   |          | .19 | 
|Net income per common share
	(as originally reported)(A):        |                   |                                             |          |            |   |          |          |         |   |   |          |      |   |   |          |    
|                                                                 | Basic             |                                             |          | .35        |   |          |          | .86     |   |   |          | .51  |   |   |          |     | 
|                                                                 | Diluted           |                                             |          | .30        |   |          |          | .75     |   |   |          | .44  |   |   |          |     | 



---



|    |                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | See Note 1, Adjustment of Number of
	Outstanding Shares and Restatement of Per Share
	Informationfor a description of the basis of the
	restatement of the per share information for the quarters ended
	October 31, 1999 and 2000, January 31, 2000 and 2001,
	and April 30, 2000 and 2001.

F-24



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##### Table of Contents



SCHEDULE II

COMMONWEALTH ENERGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS


(in thousands)


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

F-25



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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   |                  |  | Bylaws of Commonwealth Energy Corporation, as
	amended(1)                                                                                                                                                   
|        | 3.4   |                  |  | 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)                                         
|        | 10.1  |                  |  | Power Purchase Agreement dated July 27,
	1999, between Commonwealth Energy Corporation and Calpine Power
	Services Company(4)                                                                              
|        | 10.2  |                  |  | First Amendment to Power Purchase Agreement dated
	as of July 29, 1999(4)                                                                                                                                  
|        | 10.3  |                  |  | Second Amendment to Power Purchase Agreement
	dated as of May 28, 1999, between Commonwealth Energy
	Corporation and Calpine Power Services Company(4)                                                     
|        | 10.4  |                  |  | Loan and Security Agreement dated June 28,
	2000 between Commonwealth Energy Corporation, electricAmerica,
	Inc. and electric.com, Inc. and Coast Business Credit(1)                                        
|        | 10.5  |                  |  | Warrant dated June 28, 2000, issued by
	Commonwealth Energy Corporation in favor of Coast Business
	Credit.(1)                                                                                              
|        | 10.6  |                  |  | 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)    
|        | 10.7  |                  |  | PECO Energy Company Confirmation Agreement dated
	January 30, 2001.(1)                                                                                                                                      
|        | 10.8  |                  |  | Exelon Generation Company, LLC Confirmation
	Agreement dated May 13, 2001(1)                                                                                                                                
|        | 10.9  |                  |  | 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)   
|        | 10.10 |                  |  | 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)                       
|        | 10.11 |                  |  | Severance Agreement dated June 1, 2000,
	among Commonwealth Energy Corporation, electricAmerica, Inc. and
	Frederick M. Bloom(1)                                                                            
|        | 10.12 |                  |  | Employment Agreement dated January 1, 2000,
	between Commonwealth Energy Corporation and Ian Carter, as
	modified by an Addendum to Employment Agreement dated as of
	November 1, 2000(1)                   
|        | 10.13 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and Richard Paulsen(2)                                                                                                
|        | 10.14 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and James Oliver(2)                                                                                                   
|        | 10.15 |                  |  | Employment Agreement dated November 1, 2000,
	between Commonwealth Energy Corporation and John Barthrop(2)                                                                                                  
|        | 10.16 |                  |  | Commonwealth Energy Corporation 1999 Equity
	Incentive Plan for Employees(1)                                                                                                                                
|        | 10.17 |                  |  | Amendment Number 6 to lease by and between
	Warner/Redhill Associates and Frederick Michael Bloom(2)                                                                                                        
|        | 10.18 |                  |  | Commonwealth vs. Bloom Settlement Agreement Terms
	dated August 10, 2001(3)                                                                                                                                 






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##### Table of Contents






|        |       |                  |  |                                                                                               
|------- | ----- | ---------------- |  | ----------------------------------------------------------------------------------------------
|Exhibit |       |                 
|Number  |       | Title of Exhibit
|        |       |                 
|        | 10.19 |                  |  | Second Amendment to the Limited Liability Company
	Agreement of Summit Energy Ventures, LLC(4)
|        | 10.20 |                  |  | Commonwealth Energy Corporation Summary of Rights
	to Purchase Preferred Stock(4)             
|        | 21.1  |                  |  | Subsidiaries of the Registrant(1)                                                             







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






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