**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**(Mark
      One)**





R
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF
                1934**





**For
                the quarterly period
                ended October 31, 2007**





**OR**





£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF
                1934**





**For
                the transition period
                from  to**





**Commission
      File Number 001-32239**





**Commerce
      Energy Group, Inc.**


**(Exact
      name of registrant as specified in its charter)**





**Delaware**
            **20-0501090****(State
                or other jurisdiction**
            **(I.R.S.
                Employer****of
                incorporation or organization)**
            **Identification
                No.)****600
                Anton Boulevard, Suite 2000****Costa
                Mesa, California**
            **92626****(Address
                of principal executive offices)**
            **(Zip
                code)**




**(714)
                  259-2500****(Registrant’s
                  telephone number, including area
                  code)**




**Not
                  Applicable****(Former
                  name, former address and former fiscal year, if changed since last****report)**





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
      the past 90 days.


Yes
R  No
      £





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer £     Accelerated
      filer £     Non-accelerated
      filer R





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
£  No
      R





As
      of
      December 8, 2007, 30,385,868 shares of the registrant’s common stock, par value
      $0.001 per share, were outstanding.








COMMERCE
        ENERGY GROUP, INC.





**Form
      10-Q**





**For
      the Period Ended October 31, 2007**





**Index**





**Page**
              **No.**PART
                I — FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)
            1Condensed
                Consolidated Statements of Operations for the three months ended
                October
                31, 2007 and 2006
            1Condensed
                Consolidated Balance Sheets as of October 31, 2007 and July 31,
                2007
            2Condensed
                Consolidated Statements of Cash Flows for the three months ended
                October
                31, 2007 and 2006
            3Notes
                to Condensed Consolidated Financial Statements
            4Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            12Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            20Item
                4. Controls and Procedures
            21PART
                II — OTHER INFORMATIONItem
                1. Legal Proceedings
            22Item
                1A. Risk Factors
            22Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            22Item
                3. Defaults Upon Senior Securities
            24Item
                4. Submission of Matters to a Vote of Security Holders
            24Item
                5. Other Information
            24Item
                6. Exhibits
            27Signatures
            28








**PART
      I — FINANCIAL INFORMATION**





**Item
      1. *Financial Statements.***





**COMMERCE
      ENERGY GROUP, INC.**





**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(In
      thousands, except per share amounts)**


**(Unaudited)**





**Three
                Months Ended**
              **October
                31,****2007**
            
            
            **2006**Net
                revenue
            
            $
            105,597
            
            
            $
            70,507Direct
                energy costs
            
            
            89,209
            
            
            
            60,451Gross
                profit
            
            
            16,388
            
            
            
            10,056Selling
                and marketing expenses
            
            
            3,932
            
            
            
            2,235General
                and administrative expenses
            
            
            13,460
            
            
            
            7,849Loss
                from operations
            
            
            (1,004
            )
            
            
            (28
            )Other
                income (expense):Interest
                income
            
            
            230
            
            
            
            412Interest
                expense
            
            
            (313
            )
            
            
            —Total
                other income and expenses
            
            
            (83
            )
            
            
            412Net
                income (loss)
            
            $
            (1,087
            )
            
            $
            384Income
                (loss) per common share:Basic
            
            $
            (0.04
            )
            
            $
            0.01Diluted
            
            $
            (0.04
            )
            
            $
            0.01





The
          accompanying notes are an integral part of these Condensed Consolidated
          Financial Statements.
 1
 **COMMERCE
              ENERGY GROUP, INC.**
 
 **CONDENSED
              CONSOLIDATED BALANCE SHEETS**
 **(In
              Thousands, Except Per Share Amounts)**


**October
                    31, 2007**
            
            
            **July
                31, 2007****(Unaudited)****ASSETS**Current
                assets:Cash
                and equivalents
            
            $
            5,442
            
            
            $
            6,559Accounts
                receivable, net
            
            
            65,950
            
            
            
            65,231Natural
                gas inventory
            
            
            9,382
            
            
            
            5,905Prepaid
                expenses and other current
            
            
            9,245
            
            
            
            7,224Total
                current assets
            
            
            90,019
            
            
            
            84,919Restricted
                cash and equivalents
            
            
            10,104
            
            
            
            10,457Deposits
                and other assets
            
            
            1,802
            
            
            
            1,906Property
                and equipment, net
            
            
            8,970
            
            
            
            8,662Goodwill
            
            
            4,247
            
            
            
            4,247Other
                intangible assets, net
            
            
            5,946
            
            
            
            6,385Total
                assets
            
            $
            121,088
            
            
            $
            116,576**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Energy
                and accounts payable
            
            $
            31,068
            
            
            $
            37,926Short-term
                borrowings
            
            
            12,400
            
            
            
            —Accrued
                liabilities
            
            
            7,209
            
            
            
            8,130Total
                current liabilities
            
            
            50,677
            
            
            
            46,056Commitments
                and contingenciesStockholders’
                equity:Common
                stock — 150,000 shares authorized with $0.001 par value;
              30,373
                (unaudited) issued and outstanding at October 31, 2007
              and
                30,383 at July 31, 2007
            
            
            60,789
            
            
            
            60,599Other
                comprehensive income (loss)
            
            
            (35
            )
            
            
            (823
            )Retained
                earnings
            
            
            9,657
            
            
            
            10,744Total
                stockholders’ equity
            
            
            70,411
            
            
            
            70,520Total
                liabilities and stockholders’ equity
            
            $
            121,088
            
            
            $
            116,576





The
            accompanying notes are an integral part of these Condensed Consolidated
            Financial Statements.
 2
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **CONDENSED
            CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(In
            Thousands)**
 **(Unaudited)**


**Three
                Months Ended**
              **October
                31,****2007**
            
            
            **2006****Cash
                Flows From Operating Activities**Net
                income (loss)
            
            $
            (1,087
            )
            
            $
            384Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Depreciation
            
            
            544
            
            
            
            348Amortization
            
            
            440
            
            
            
            365Amortization
                of deferred loan costs
            
            
            41
            
            
            
            124Provision
                for doubtful accounts
            
            
            3,665
            
            
            
            875Stock-based
                compensation expense
            
            
            190
            
            
            
            134Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (4,384
            )
            
            
            (7,749
            )Inventory
            
            
            (3,476
            )
            
            
            (2,689
            )Prepaid
                expenses and other assets
            
            
            (1,959
            )
            
            
            (373
            )Accounts
                payable
            
            
            (6,859
            )
            
            
            (3,297
            )Accrued
                liabilities and other
            
            
            (133
            )
            
            
            2,390Net
                cash used in operating activities
            
            
            (13,018
            )
            
            
            (9,488
            )**Cash
                Flows From Investing Activities**Purchase
                of property and equipment
            
            
            (852
            )
            
            
            (1,529
            )Purchase
                of intangible assets
            
            
            —
            
            
            
            (4,218
            )Net
                cash used in investing activities
            
            
            (852
            )
            
            
            (5,747
            )**Cash
                Flows From Financing Activities**Short-term
                borrowings
            
            
            12,400
            
            
            
            —Credit
                line commitment fee
            
            
            —
            
            
            
            18Decrease
                in restricted cash
            
            
            353
            
            
            
            362Net
                cash provided by financing activities
            
            
            12,753
            
            
            
            380Decrease
                in cash and cash equivalents
            
            
            (1,117
            )
            
            
            (14,855
            )Cash
                and cash equivalents at beginning of period
            
            
            6,559
            
            
            
            22,941Cash
                and cash equivalents at end of period
            
            $
            5,442
            
            
            $
            8,086








The
            accompanying notes are an integral part of these Condensed Consolidated
            Financial Statements.
 3
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)**
 **(Dollars
            In Thousands, Except Per Share Amounts)**
 **(Unaudited)**


**Note
      1. Summary of Significant Accounting Policies**


***Basis
        of Presentation***
 
 The
        unaudited condensed consolidated financial statements as of October 31, 2007
        and
        for the three months ended October 31, 2007 and 2006 of Commerce Energy Group,
        Inc., or the Company, include its two wholly-owned subsidiaries: Commerce
        Energy, Inc. or Commerce, and Skipping Stone Inc., or Skipping Stone. All
        material inter-company balances and transactions have been eliminated in
        consolidation. As used herein and unless the context requires otherwise,
        the
        reference to the Company, “we,” “us” and “our” refers to Commerce Energy Group,
        Inc. and its subsidiaries.
 
 ***Preparation
        of Interim Condensed Consolidated Financial
        Statements***
 
 These
        interim condensed consolidated financial statements have been prepared by
        the
        Company’s management, without audit, in accordance with accounting principles
        generally accepted in the United States and, in the opinion of management,
        contain all adjustments (consisting of only normal recurring adjustments)
        necessary to present fairly the Company’s consolidated financial position,
        results of operations and cash flows for the periods presented. Certain
        information and note disclosures normally included in consolidated annual
        financial statements prepared in accordance with accounting principles generally
        accepted in the United States have been condensed or omitted in these condensed
        consolidated interim financial statements, although the Company believes
        that
        the disclosures are adequate to make the information presented not misleading.
        The condensed consolidated results of operations, financial position, and
        cash
        flows for the interim periods presented herein are not necessarily indicative
        of
        future financial results. These interim condensed consolidated financial
        statements should be read in conjunction with the annual consolidated financial
        statements and the notes thereto included in the Company’s Annual Report on Form
        10-K for the year ended July 31, 2007.
 
 ***Uses
        of Estimates***
 
 The
        preparation of condensed consolidated financial statements in conformity
        with
        accounting principles generally accepted in the United States requires
        management to make certain estimates and assumptions that affect the reported
        amounts and timing of revenue and expenses, the reported amounts and
        classification of assets and liabilities, and disclosure of contingent assets
        and liabilities. These estimates and assumptions are based on the Company’s
        historical experience as well as management’s future expectations. As a result,
        actual results could materially differ from management’s estimates and
        assumptions. In preparing our financial statements and accounting for the
        underlying transactions and balances, we apply our accounting policies as
        disclosed in our notes to the condensed consolidated financial statements.
        The
        accounting policies relating to accounting for derivatives and hedging
        activities, inventory, independent system operator costs, allowance for doubtful
        accounts, revenue and unbilled receivables are those that we consider to
        be the
        most critical to an understanding of our financial statements because their
        application places the most significant demands on our ability to assess
        the
        effect of inherently uncertain matters on our financial results.
 
 ***Revenue
        Recognition***
 
 Energy
        revenues are recognized when the electricity and natural gas are delivered
        to
        the Company’s customers and are comprised of the following:


**Three
                Months
                Ended**
              **October
                31,****2007**
            
            
            **2006**Retail
                electricity sales
            
            $
            84,225
            
            
            $
            53,407Excess
                electricity sales
            
            
            —
            
            
            
            1,436Total
                electricity sales
            
            
            84,225
            
            
            
            54,843Retail
                natural gas sales
            
            
            21,372
            
            
            
            15,664Net
                revenue
            
            $
            105,597
            
            
            $
            70,507





4
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) —
            (Continued)**
 **(Dollars
            In Thousands, Except Per Share Amounts)**
 **(Unaudited)**


The
        Company purchases electricity and natural gas utilizing forward physical
        delivery contracts based on the projected usage of its customers.
 
 ***Stock-Based
        Compensation***
 
 The
        total
        compensation cost associated with stock options and restricted stock for
        the
        three months ended October 31, 2007 was $(9) and $199, respectively, and
        for the
        three months ended October 31, 2006 were $65 and $69 respectively. These
        costs
        are included in general and administrative expenses. In October 2007, our
        Senior
        Vice President and General Counsel resigned from his position and pursuant
        to
        his separation agreement 10,000 shares of his 60,000 unvested, restricted
        stock
        was forfeited and cancelled. The remaining 50,000 unvested shares were
        accelerated, to vest on January 2, 2008, which incurred additional compensation
        cost of $93 through October 31, 2007.
 
 The
        fair
        value of options granted is estimated on the date of grant using the
        Black-Scholes model based on the weighted-average assumptions in the table
        below. The assumptions for the expected lives are based on evaluations of
        historical and expected future exercise behavior. The risk-free interest
        rate is
        based on the U.S. Treasury rates at the date of the grant with maturity dates
        approximating the expected life at the grant date. The historical volatility
        of
        the Company’s common stock is used as the basis for the expected
        volatility.


**Three
                Months Ended**
              **October
                31,****2007**
            
            
            **2006**Weighted-average
                risk-free interest rate
            
            
            4.5
            %
            
            
            4.6
            %Average
                expected life in years
            
            
            4.15
            
            
            
            4.63Expected
                dividends
            
            None
            
            
            NoneExpected
                volatility
            
            
            0.71
            
            
            
            0.75




A
        summary
        of option activity under the Company’s 1999 Equity Incentive Plan, or the 1999
        Plan, and the Company’s 2006 Stock Incentive Plan, or the SIP, and under certain
        individual plans, during the quarter ended October 31, 2007 is presented
        below.


**Options
                Outstanding****Number
                of**
              **Shares**
              **(in
                Thousands)**
            
            
            **Exercise
                Price**
              **Per
                Share**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Options
                outstanding as of July 31, 2007
            
            
            6,983
            
            
            $
            1.00-$3.75
            
            
            $
            2.33Options
                expired
            
            
            (757
            )
            
            $
            2.75
            
            
            $
            2.75Options
                forfeited
            
            
            (45
            )
            
            $
            2.56
            
            
            $
            2.56Options
                outstanding as of October 31, 2007 (1)
            
            
            6,181
            
            
            $
            1.00-$3.75
            
            
            $
            2.28


____________





(1)
            Options
                exercisable and outstanding as of October 31, 2007 were 6,181 with
                weighted average exercise price of $2.28 and an aggregate intrinsic
                value
                of $620.





As
        of
        October 31, 2007, there was no unrecognized compensation cost relating to
        non-vested outstanding stock options; all options were vested. The total
        unrecognized compensation cost relating to non-vested restricted stock was
        $277
        and will be recognized over the period of November 2007 through November
        2009.
        For the three months ended October 31, 2007, no restricted stock was issued.
        A
        total of 362,000 unvested restricted shares were outstanding as of October
        31,
        2007, with a total market value of $838. These restricted shares vest in
        accordance with the terms of various written agreements. At October 31, 2007,
        988,334 shares of the Company’s common stock may be issued pursuant to awards
        under the Company’s 2006 Stock Incentive Plan.


***Income
      Tax***





The
        Company has
        established valuation allowances to reserve its net deferred tax assets due
        to
        the uncertainty that the Company will realize the related tax benefits in
        the
        foreseeable future. At October 31, 2007, the Company


5
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
            In Thousands, Except Per Share Amounts)**
 **(Unaudited)**
 had
        net
        operating loss carryforwards of approximately $8.5 million and $11.3 million
        for
        federal and state income tax purposes, respectively.


The
        Company adopted the provisions of FIN 48 in August 2007. As of the date of
        adoption, the Company had no unrecognized income tax benefits. Accordingly,
        the
        annual effective tax rate will not be affected by the adoption of FIN 48.
        Unrecognized tax benefits are not expected to increase or decrease within
        the
        next 12 months as a result of the anticipated lapse of an applicable statue
        of
        limitations. Interest and penalties related to unrecognized income tax benefits
        will be accrued in interest expense and operating expense, respectively.
        The
        Company has not accrued interest or penalties as of the date of adoption
        because
        they are not applicable.
 
 The
        Company may be audited by applicable federal and state taxing authorities
        in the
        following income tax jurisdictions in which the Company previously filed
        or
        expects to file income tax returns for the years indicated:
 
 Jurisdictions
                Tax
                    YearsFederal
                2003-2006California
                2002-2006Florida
                2005-2006Maryland
                2003-2006Massachusetts
                2003-2006Michigan
                2002-2006Missouri
                2003-2006New
                    Jersey
                2002-2006New
                    York
                2003-2006Ohio
                2003-2006Pennsylvania
                2004-2006Texas
                2002-2006Virginia
                2003-2006Wisconsin
                2006Georgia
                2006Kentucky
                2006City
                    of Philadelphia
                2003-2006


However,
            because the Company had net operating losses and credits carried forward
            in
            several of the jurisdictions including federal and California, certain
            items
            attributable to closed tax years are still subject to adjustment by applicable
            taxing authorities through an adjustment to tax attributes carried forward
            to
            open years.
 
 ***Comprehensive
            Income (Loss)***
 
 Statement
            of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” or
            SFAS 130, establishes standards for reporting and displaying comprehensive
            income and its components in the Company’s consolidated financial statements.
            Comprehensive income is defined in SFAS 130 as the change in equity (net
            assets)
            of a business enterprise during a period from certain transactions and
            other
            events and circumstances and is comprised of net income (loss) and other
            comprehensive income (loss).
 
 The
            components of comprehensive income (loss) are as follows:


**Three
                Months Ended****October
                31,****2007**
            
            
            **2006**Net
                income (loss)
            
            $
            (1,087
            )
            
            $
            384Changes
                in fair value of cash flow hedges
            
            
            788
            
            
            
            (2,597
            )Comprehensive
                income (loss)
            
            $
            (299
            )
            
            $
            (2,213
            )





Accumulated
      other comprehensive loss included in stockholders’ equity totaled $35 and $326
      at October 31, 2007 and October 31, 2006, respectively.


6
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
            In Thousands, Except Per Share Amounts)**
 **(Unaudited)**





***Segment
          Reporting***
 
 The
          Company’s chief operating decision makers consist of members of senior
          management that work together to allocate resources to, and assess the
          performance of, the Company’s business. These members of senior management
          currently manage the Company’s business, assess its performance, and allocate
          its resources as the single operating segment of energy retailing. As Skipping
          Stone, net of inter-company eliminations, accounts for less than 1% of
          total net
          revenue, and geographic information is not significant, no segment information
          is provided.
 
 ***Accounts
          Receivable, Net***
 
 Accounts
          receivable, net, is comprised of the following:


**October
                31,**
              **2007**
            
            
            **July
                31,**
              **2007**Billed
            
            $
            51,029
            
            
            $
            44,693Unbilled
            
            
            22,967
            
            
            
            24,96373,996
            
            
            
            69,656Less
                allowance for doubtful accounts
            
            
            (8,046
            )
            
            
            (4,425
            )Accounts
                receivable, net
            
            $
            65,950
            
            
            $
            65,231




***Inventory***
 
 Inventory
        consists of natural gas in storage as required by state regulators and
        contracted obligations under customer choice programs. Inventory is stated
        at
        the lower of weighted average cost or market.
 
 ***Adoption
        of New Accounting Pronouncements***
 
 In
        June
        2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”, an
        interpretation of SFAS No. 109, “Accounting for Income Taxes”. The
        interpretation contains a two-step approach to recognizing and measuring
        uncertain tax positions accounted for in accordance with SFAS No. 109. The
        Company adopted FIN 48 during the first quarter of fiscal year 2008, and
        the
        adoption had no impact on its financial statements.
 
 ***New
        Accounting Standards***
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        forFinancial Assets and Financial Liabilities Including an Amendment of FASB
        StatementNo. 115”. SFAS No. 159 permits entities to choose to
        measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value. This statement also
        establishes presentation and disclosure requirements designed to facilitate
        comparisons between entities that choose different measurement attributes
        for
        similar types of assets and liabilities. SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007. The Company is evaluating
        the impact this statement may have on its financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements”, which provides guidance for using fair value to measure assets
        and liabilities. The pronouncement clarifies (1) the extent to which
        companies measure assets and liabilities at fair value; (2) the information
        used to measure fair value; and (3) the effect that fair value measurements
        have on earnings. SFAS No. 157 will apply whenever another standard
        requires (or permits) assets or liabilities to be measured at fair value.
        SFAS No. 157 is effective for fiscal years beginning after
        November 15, 2007. The Company is evaluating the impact this statement will
        have on its financial statements.
 
 ***Note
        2. Liquidity***
  Based
          on
          current cash flow estimates, the Company has alerted its Credit Facility
          Lender
          that it may, during the current quarter, seek a temporary waiver of certain
          conditions contained in the credit facility, similar to concessions previously
          obtained on a temporary basis. This waiver would likely take the form of
          eliminating or reducing temporarily the required excess availability of
          $2.5
          million and possibly other concessions. There is no assurance that such a
          waiver, if needed, will be granted. The
          Company expects needing to add to its capital resources in fiscal
          2008: (1) to meet the credit facility requirement to have $10 million in
          excess
          availability at all times on and after July 1, 2008, and (2) if the Company
          expands its business, either from internal growth or acquisition, if energy
          prices increase materially, or if energy industry volatility and/or uncertainty
          create additional credit requirements.
 ***Note
        3. Basic and Diluted Income (Loss) per Common Share***
 
 Basic
        income (loss) per common share was computed by dividing net income (loss)
        available to common stockholders, by the weighted average number of common
        shares outstanding during the period. Diluted income per common share reflects
        the potential dilution that would occur if all outstanding options or other
        contracts to issue common stock were exercised or converted, and was computed
        by
        dividing net income (loss) by the weighted average number of common shares
        plus
        dilutive common equivalent shares outstanding, unless they were
        anti-dilutive.


7
 **COMMERCE
            ENERGY GROUP, INC.**
 
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
            In Thousands, Except Per Share Amounts)**
 **(Unaudited)**


The
      following is a reconciliation of the numerator, income (loss), and the
      denominator, (common shares in thousands), used in the computation of basic
      and
      diluted income (loss) per common share:




**Three
                Months
                Ended**
              **October
                31,****2007**
            
            
            **2006****Numerator:**Net
                income (loss)
            
            $
            (1,087
            )
            
            $
            384Net
                income (loss) applicable to common stock —basic and
                diluted
            
            $
            (1,087
            )
            
            $
            384**Denominator:**Weighted-average
                outstanding common shares — basic
            
            
            30,380
            
            
            
            29,639Effect
                of stock options
            
            
            —
            
            
            
            26Weighted-average
                outstanding common shares — diluted
            
            
            30,380
            
            
            
            29,665





**Note
        4. Market and Regulatory**
 
 The
        Company currently serves electricity customers in six states across 12 utility
        markets and gas customers in seven states across 13 utility markets and
        collectively operates in nine states with authority to operate in an additional
        four states. Regulatory requirements are determined at the individual state
        level and administered and monitored by the Public Utility Commission, or
        PUC,
        of each state. Operating rules and tariff filings by states and by utility
        markets can significantly impact the viability of the Company’s sales and
        marketing plans and its overall operating and financial results.
 
 **Note
        5. HESCO Customer Acquisition**
 
 Effective
        September 1, 2006, the Company acquired from Houston Energy Services
        Company, L.L.C., or HESCO certain assets consisting principally of contracts
        with end-use customers in California, Florida, Nevada, Kentucky and Texas
        consuming approximately 12 billion cubic feet of natural gas annually. The
        acquisition price of approximately $4.1 million in cash and
        $0.2 million in assumption of liabilities was allocated to customer
        contracts and is being amortized over an estimated life of four
        years.
 
 **Note
        6. Contingencies**
 
 ***APX
        Settlement***
 
 During
        2000 and 2001, we bought, sold and scheduled power in the California wholesale
        energy markets through the markets and services of APX, Inc., or APX. As
        a
        result of a complaint filed at the Federal Energy Regulatory Commission,
        or
        FERC, by San Diego Gas & Electric Co. in August 2000 and a line of
        subsequent FERC orders, we became involved in proceedings at FERC related
        to
        sales and schedules in the California Power Exchange, or CPX, and the California
        Independent System Operator, or CAISO, markets. We refer to these proceedings
        as
        the California Refund Cases. The APX Settlement, described below, is a part
        of
        that proceeding relating to APX’s involvement in those markets.
 
 On
        January 5, 2007, APX, we and certain other parties signed an APX Settlement
        and Release of Claims Agreement, or the APX Settlement Agreement, which among
        other things, established a mechanism for allocating refunds owed to APX
        and
        resolved certain other matters and claims related to APX’s participation in the
        PX and CAISO centralized spot markets for wholesale electricity from May 1,
        2000 through June 20, 2001. Under the APX Settlement Agreement, Commerce
        and certain other parties were entitled to receive payments from APX, with
        Commerce expected to receive up to approximately $6.5 million. In April
        2007, we received a payment of $5.1 million and in August 2007 we received
        the remaining settlement payment of $1.4 million.
 
 8
 **COMMERCE
              ENERGY GROUP, INC.**
 
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
              In Thousands, Except Per Share Amounts)**
 **(Unaudited)**


Certain
        other aspects of the California Refund Case which may affect the Company
        remain
        pending. The Company cannot at this time predict whether, or to what extent,
        these proceedings will have an impact on the Company’s financial
        results.
 
 **Note
        7. Derivative Financial Instruments**
 
 The
        Company purchases substantially all of its power and natural gas utilizing
        forward physical delivery contracts. These physical delivery contracts are
        defined as commodity derivative contracts under Statement of Financial
        Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
        Activities” (“SFAS 133”). Using the exemption available for qualifying contracts
        under SFAS No. 133, the Company applies the normal purchase and normal sale
        accounting treatment to its forward physical delivery contracts. Accordingly,
        the Company records revenue generated from customer sales as energy is delivered
        to retail customers and the related energy under the forward physical delivery
        contracts is recorded as direct energy costs when received from
        suppliers.
  For
        forward or future contracts that do not meet the qualifying criteria for
        normal
        purchase, normal sale accounting treatment, the Company elects cash flow
        hedge
        accounting, where appropriate. Under cash flow hedge accounting, the fair
        value
        of the contract is recorded as a current or long-term derivative asset or
        liability. Subsequent changes in the fair value of the derivative assets
        and
        liabilities are recorded on a net basis in Accumulated other comprehensive
        income (loss) (“OCI”), and reflected as direct energy cost in the statement of
        operations as the related energy is delivered.
 
 The
        amounts recorded in Accumulated OCI at October 31, 2007 and July 31, 2007
        related to cash flow hedges are summarized in the following table: **October
                    31,**
                  **2007**
                
                
                **July
                    31,**
                  **2007**Current
                    assets
                
                $
                251
                
                
                $
                —Current
                    liabilities
                
                
                (286
                )
                
                
                (671
                )Deferred
                    gains/(losses)
                
                
                —
                
                
                
                (152
                )Hedge
                    ineffectiveness
                
                
                —
                
                
                
                —Accumulated
                    other comprehensive income
                
                $
                (35
                )
                
                $
                (823
                )


Certain
        financial derivative instruments (such as swaps, options and futures),
        designated as fair-value hedges, economic hedges or as speculative, do not
        qualify or meet the requirements for normal purchase, normal sale accounting
        treatment or cash flow hedge accounting and are recorded currently in operating
        income (loss) and as a current or long-term derivative asset or liability
        depending on their term. The subsequent changes in the fair value of these
        contracts may result in operating income (loss) volatility as the fair value
        of
        the changes are recorded on a net basis in direct energy cost in the
        consolidated statement of operations for each fiscal period. For the three
        months ending October 31, 2007, the impact of financial derivatives accounted
        for as mark-to-market resulted in an expense of $17, and resulted mostly
        from
        economic hedging related to the Company’s natural gas portfolio. The notional
        value of all derivatives accounted for as mark-to-market which was outstanding
        at October 31, 2007 was $4,284.
 
 As
        of
        October 31, 2007, the Company had $251 of derivative assets included in Prepaid
        expenses and other, and $286 of total derivative liabilities included in
        Accrued
        liabilities.
 
 **Note
        8. Credit Facility****and Supply Agreements**
 
 *Wachovia
        Capital Finance Corporation (Western)*
 
 In
        June 2006, Commerce
        and Commerce Energy entered into a Loan and Security Agreement, or the Credit
        Facility, with Wachovia Capital Finance Corporation (Western), or the Agent,
        for
        up to $50 million. The three-year Credit Facility is secured by
        substantially all of the Company’s assets and provides for issuance of letters
        of credit and for revolving credit loans, which we may use for working capital
        and general corporate purposes. The availability of letters of credit and
        loans
        under the Credit Facility is limited by a calculated borrowing base consisting
        of the majority of the Company’s cash on deposit with the Agent and the
        Company’s receivables and natural gas inventories. As of October 31, 2007,
        letters of credit issued under the facility totaled $11.6 million,
        and
 9
 **COMMERCE
              ENERGY GROUP, INC.**
 
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
              In Thousands, Except Per Share Amounts)**
 **(Unaudited)**
 outstanding
            borrowings were $12.4 million. Fees for letters of credit issued range
            from 1.50
            to 1.75 percent per annum, depending on the level of Excess Availability,
            as defined in the Credit Facility. We also pay an unused line fee equal
            to
            0.375 percent of the unutilized credit line. Generally, outstanding
            borrowings under the Credit Facility are priced at a domestic bank rate
            plus
            0.25 percent or LIBOR plus
            2.75 percent.


The
        Credit Facility contains typical covenants, subject to specific exceptions,
        restricting Commerce, the Company and its subsidiaries from: (i) incurring
        additional indebtedness; (ii) granting certain liens; (iii) disposing
        of certain assets; (iv) making certain restricted payments;
        (v) entering into certain other agreements; and (vi) making certain
        investments. The Company was also required to maintain a minimum of
        $10 million of Eligible Cash Collateral, at all times.
 
 From
        September 2006 through September 2007, the Company and Commerce Energy have
        entered into five amendments and a modification to the Loan and Security
        Agreement with the Agent and Lenders, several of which involved waivers of
        prior
        or existing instances of covenant non-compliance relating to the maintenance
        of
        Eligible Cash Collateral, capital expenditures and notification requirements
        (First Amendment), maintenance and deferral of prospective compliance, of
        minimum Fixed Charge Coverage Rates and maintenance of the minimum Excess
        Availability Ratio (Second and Third Amendments). In addition, in the First
        Amendment, the Agent and Lender agreed to certain prospective waivers of
        covenants in the Credit Facility to enable Commerce Energy to consummate
        the
        HESCO acquisition of customers. In the Fourth Amendment, the amount allowable
        under the Credit Facility’s capital expenditures covenant was increased to
        $6.0 million. In the Second, Third and Fifth Amendment and in the
        Modification Agreement, each addressed reducing and/or restructuring the
        Excess
        Availability covenant in the Credit Facility to accommodate Commerce Energy’s
        business. In the Modification Agreement, the Agent and the Lenders also
        permitted Commerce Energy for a period from September 20, 2007 to
        October 5, 2007 to exceed its Gross Borrowing Base, as defined in the
        Agreement.
 
 The
        Sixth
        Amendment, executed on November 16, 2007, adjusted the required excess
        availability required at all times to $2.5 million until July 1, 2008 at
        which
        time it becomes and remains $10 million. It also eliminated the Eligible
        Cash
        Collateral covenant which required keeping $10 million cash on
        deposit.  In connection with elimination of the Eligible Cash
        Collateral covenant, the Sixth Amendment revised the Fixed Charge Coverage
        Ratio
        and added minimum EBITDA requirements.  The Sixth Amendment also
        extended the maturity of the Credit Facility from June 8, 2009 to June 8,
        2010.
  At
        October 31, 2007, the Company had approximately $2.5 million of remaining
        availability under our Credit Facility, As it is industry practice to pay
        energy
        bills towards the end of  the month, the remaining availability at the end
        of a month is lower than most other times during a month.
 
 *Tenaska
        Power Services Co.*
 
 In
        August
        2005, the Company entered into several agreements with Tenaska Power Services
        Co., or Tenaska, for the supply of the majority of Commerce’s wholesale
        electricity supply needs in Texas, utilizing commercially standard master
        purchase and sale, a lockbox control, security and guaranty agreements. The
        Company’s Texas customers pay into a designated account that is used to pay
        Tenaska for the electricity. Tenaska also extends credit to the Company to
        buy
        wholesale electricity supply secured by funds pledged by the Company in the
        lockbox, its related accounts receivables and customers contracts. The Company
        entered into a guaranty agreement, pursuant to which it, as the parent company
        of Commerce, unconditionally guaranteed to Tenaska full and prompt payment
        of
        all indebtedness and obligations owed to Tenaska. At October 31, 2007, Tenaska
        had extended approximately $14.8 million of trade credit to the Company.
        Tenaska
        also serves as the Company’s exclusive provider of qualified scheduling services
        and marketing services in the region of Texas administered by the Electric
        Reliability Council of Texas.
 
 *Pacific
        Summit Energy LLC*
 
 In
        September 2006, the
        Company entered into several agreements with Pacific Summit LLC, or Pacific
        Summit, for the supply of natural gas to serve end-use customers that we
        acquired in connection with the HESCO acquisition, utilizing operating, a
        lockbox control and security agreements. Under the agreements, these customers
        remit their
 10
 **COMMERCE
              ENERGY GROUP, INC.**
 
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)—
(Continued)**
 **(Dollars
              In Thousands, Except Per Share Amounts)**
 **(Unaudited)**
 payments
          into the lockbox used to pay Pacific Summit for natural gas supplies. Pacific
          Summit also extends credit to the Company to buy wholesale natural gas
          supplies,
          secured by funds pledged by the Company in the lockbox, its related accounts
          receivable and a $3.5 million letter of credit. At October 31, 2007,
          Pacific Summit had extended approximately $9.5 million of trade credit to
          the Company under this arrangement.


**Note
        9. Subsequent Events**
 
 ***Lawrence
        Clayton, Jr.***
 
 On
        November 28, 2007, the Company entered into a Settlement Agreement with Lawrence
        Clayton, Jr., the former Senior Vice President, Chief Financial Officer and
        Secretary of the Company on November 29, 2007 (the “Settlement Agreement”),
        which became effective on December 7, 2007, the eighth day after it was
        executed. The Settlement Agreement provides for the Company to make a lump-sum
        settlement payment to Mr. Clayton of $400,000 on January 2, 2008. Of the
        aggregate amount of the settlement payment, all but $120,000 was covered
        by
        insurance. Each party to the Settlement Agreement agreed to mutual general
        releases of all claims that the parties may have against each
        other.


11


**Item
        2.*****Management’s Discussion and Analysis of Financial
        Condition and Results******of
        Operations.***
 
 *As
        used herein and unless the context requires otherwise, references to**the “Company,” “we,” “us,” and “our” refer specifically to Commerce
        Energy**Group, Inc. and its subsidiaries. “Commerce” refers to Commerce
        Energy, Inc.,**our principal operating subsidiary. This discussion and
        analysis should be read**in conjunction with Management’s Discussion and
        Analysis of Financial Condition**and Results of Operations set forth in
        our Annual Report on Form 10-K for the year ended July 31, 2007, or the Form
        10-K.*
 
 *Some
        of the statements in this quarterly report on Form 10-Q are forward-looking
        statements**regarding our assumptions, projections, expectations,
        targets, intentions or**beliefs about future events which involve risks
        and uncertainties. All**statements other than statements of historical
        facts included in this Item 2**relating to expectation of future
        financial performance, continued growth,**changes in economic conditions
        or capital markets and changes in customer usage**patterns and
        preferences, are forward-looking statements. In some cases, you**can
        identify forward-looking statements by terms such as “may,”
“will,”**“should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,”
“believe,”**“estimate,” “predict,” “potential,” “continue” or the
        negative of these terms**or other comparable terms. The forward-looking
        statements contained in this**quarterly report on Form 10-Q involve
        known and unknown risks and uncertainties and situations that**may cause
        our or our industry’s actual results, level of activity, performance**or
        achievements to be materially different from any future results, levels of**activity, performance or achievements expressed or implied by these
        statements.**Factors that might cause actual events or results to differ
        materially from**those indicated by these forward-looking statements may
        include the matters**listed under “Risk Factors” in Item 1A in the Form
        10-K and elsewhere in this**Form 10-Q, including, without limitation,
        changes in general economic**conditions in the markets in which we may
        compete; fluctuations in the market**price of energy which may negatively
        impact the competitiveness of our product**offerings to current and
        future customers; decisions by our energy suppliers requiring us to post
        additional collateral for our energy purchases; *uncertainties
        in the capital markets should we seek to raise additional capital; uncertainties
        relating to federal and state proceedings regarding issues emanating from
        the
        2000-2001 California energy crisis, including any resulting federal, state,
        or
        administrative legal proceedings which could effect us;*increased
        competition; our ability**to retain key members of management; our
        ability to address changes in laws and**regulations; our ability to
        successfully integrate businesses or customer**portfolios that we may
        acquire; our ability to obtain and retain credit**necessary to
        profitably support our operations; adverse state or federal**legislation
        or regulation or adverse determinations by regulators; and other**factors identified from time to time in our filings with the Securities
        and**Exchange Commission, or the SEC. We caution that, while we make
        such statements**in good faith and we believe such statements are based
        on reasonable**assumptions, including, without limitation, management’s
        examination of**historical operating trends, data contained in records
        and other data available**from third parties, we cannot assure you that
        our expectations will be**realized.*
 
 *Any
        forward-looking statement speaks only as of the date on which such**statement is made, and, except as required by law, we undertake
        no
        obligation**to update any forward-looking statement to reflect events or
        circumstances**after the date on which such statement is made or to
        reflect the occurrence of**unanticipated events. New factors emerge from
        time to time, and it is not**possible for management to predict all such
        factors.*
 
 **Our
        Company**
 
 We
        are an
        independent marketer of retail electricity and natural gas to residential,
        commercial, industrial and institutional end-use customers. Commerce is licensed
        by the Federal Energy Regulatory Commission, or FERC, and by state regulatory
        agencies as an unregulated retail marketer of electricity and natural
        gas.
 
 We
        were
        founded in 1997 as a retail electricity marketer in California. As of October
        31, 2007, we delivered electricity to approximately 135,000 customers in
        California, Maryland, Michigan, New Jersey, Pennsylvania and Texas; and natural
        gas to approximately 59,000 customers in California, Florida, Georgia, Maryland,
        Nevada, Ohio and Pennsylvania.
 
 The
        electricity and natural gas we sell to our customers is purchased from
        third-party suppliers under both short-term and long-term contracts. We do
        not
        own electricity generation or delivery facilities, natural gas producing
        properties or pipelines. The electricity and natural gas we sell is generally
        metered and always delivered to our customers by the local utilities. The
        local
        utilities also provide billing and collection services for many of our customers
        on our behalf. Additionally, to facilitate load shaping and demand balancing
        for
        our customers, we buy and sell surplus electricity and natural gas from and
        to
        other market participants when necessary. We utilize third-party facilities
        for
        the storage of our natural gas.
 12


The
        growth of our business depends upon a number of factors, including the degree
        of
        deregulation in each state, our ability to acquire new and retain existing
        customers and our ability to acquire energy for our customers at competitive
        prices and on reasonable credit terms.
 
 **Significant
        Customer Acquisitions**
 
 ***HESCO
        Acquisition***
 
 In
        September 2006, the Company acquired from Houston Energy Services Company,
        L.L.C., or HESCO certain assets consisting principally of contracts with
        end-use
        customers in California, Florida, Nevada, Kentucky and Texas consuming
        approximately 12 billion cubic feet of natural gas annually. The
        acquisition price of approximately $4.1 million in cash and
        $0.2 million in assumption of liabilities was allocated to customer
        contracts and is being amortized over an estimated life of four
        years.
 
 **Market
        and Regulatory**
 
 The
        Company currently serves electricity customers in six states across 12 utility
        markets and gas customers in seven states across 13 utility markets and
        collectively operates in nine states with authority to operate in an additional
        four states. Regulatory requirements are determined at the individual state
        level and administered and monitored by the Public Utility Commission, or
        PUC,
        of each state. Operating rules and tariff filings by states and by utility
        markets can significantly impact the viability of the Company’s sales and
        marketing plans and its overall operating and financial results.
 
 **Results
        of Operations**
 
 ***Three
        Months Ended October 31, 2007 Compared to Three Months Ended October 31,
        2006***
 
 The
        following table summarizes the results of our operations for the three months
        ended October 31, 2007 and 2006 (dollars in thousands):


**Three
                    Months Ended October
                    31,****2007**
                
                
                **2006****Dollars**
                
                
                **%
                    Revenue**
                
                
                **Dollars**
                
                
                **%
                    Revenue**Retail
                    electricity sales
                
                $
                84,225
                
                
                
                80
                %
                
                $
                53,407
                
                
                
                76
                %Natural
                    gas sales
                
                
                21,372
                
                
                
                20
                %
                
                
                15,664
                
                
                
                22
                %Excess
                    electricity sales(1)
                
                
                —
                
                
                
                —
                
                
                
                1,436
                
                
                
                2
                %Net
                    revenue
                
                
                105,597
                
                
                
                100
                %
                
                
                70,507
                
                
                
                100
                %Direct
                    energy costs
                
                
                89,209
                
                
                
                84
                %
                
                
                60,451
                
                
                
                86
                %Gross
                    profit
                
                
                16,388
                
                
                
                16
                %
                
                
                10,056
                
                
                
                14
                %Selling
                    and marketing expenses
                
                
                3,932
                
                
                
                4
                %
                
                
                2,235
                
                
                
                3
                %General
                    and administrative expenses
                
                
                13,460
                
                
                
                13
                %
                
                
                7,849
                
                
                
                11
                %Loss
                    from operations
                
                $
                (1,004
                )
                
                
                (1
                )%
                
                $
                (28
                )
                
                
                —
 (1)Electricity
        supply greater than retail electricity demand which is sold back into the
        wholesale market.
 13


***Net
      revenue***





The
      following table summarizes net revenues for the three months ended October
      31,
      2007 and 2006 (dollars in thousands):




**Three
                Months Ended October
                31,****2007**
            
            
            **2006****Dollars**
            
            
            **%
                Revenue**
            
            
            **Dollars**
            
            
            **%
                Revenue**Retail
                Electricity Sales:Texas
            
            $
            48,191
            
            
            
            46
            %
            
            $
            16,730
            
            
            
            24
            %California
            
            
            13,387
            
            
            
            13
            %
            
            
            17,283
            
            
            
            25
            %Pennsylvania/New
                Jersey
            
            
            12,984
            
            
            
            12
            %
            
            
            14,214
            
            
            
            20
            %Maryland
            
            
            7,965
            
            
            
            7
            %
            
            
            1,489
            
            
            
            2
            %Michigan
                and Others
            
            
            1,698
            
            
            
            2
            %
            
            
            3,691
            
            
            
            5
            %Total
                Retail Electricity Sales
            
            
            84,225
            
            
            
            80
            %
            
            
            53,407
            
            
            
            76
            %Natural
                Gas Sales:HESCO
                Customers
            
            
            14,569
            
            
            
            14
            %
            
            
            7,257
            
            
            
            10
            %California
            
            
            3,334
            
            
            
            3
            %
            
            
            4,022
            
            
            
            6
            %Ohio
            
            
            3,278
            
            
            
            3
            %
            
            
            3,004
            
            
            
            4
            %Georgia
            
            
            36
            
            
            
            —
            
            
            
            987
            
            
            
            1
            %All
                Others
            
            
            155
            
            
            
            —
            
            
            
            394
            
            
            
            1
            %Total
                Natural Gas Sales
            
            
            21,372
            
            
            
            20
            %
            
            
            15,664
            
            
            
            22
            %Excess
                Electricity Sales
            
            
            —
            
            
            
            —
            
            
            
            1,436
            
            
            
            2
            %Net
                Revenue
            
            $
            105,597
            
            
            
            100
            %
            
            $
            70,507
            
            
            
            100
            %


Net
        revenues increased $35.1 million, or 49.8%, to $105.6 million for the three
        months ended October 31, 2007 from $70.5 million for the three months ended
        October 31, 2006. The increase in net revenues was driven primarily by a
        57.7%
        increase in electricity sales and a 36.4% increase in natural gas sales.
        Higher
        retail electricity sales reflects the impact of a 224% and a 385% increase
        in
        sales volumes in Texas and Maryland, respectively, due to customer growth
        that
        was partly offset by lower retail sales in the California and Michigan markets
        resulting from customer attrition. Higher natural gas sales reflect the impact
        of a full quarter of HESCO customers, which were acquired in September
        2006.
 
 Retail
        electricity sales increased $30.8 million to $84.2 million for the three
        months
        ended October 31, 2007, from $53.4 million for the three months ended October
        31, 2006, reflecting the impact of a 56% increase in sales volume. For the
        three
        months ended October 31, 2007, we sold 716 million kilowatt hours, or kWh,
        at an
        average retail price per kWh of $0.118, as compared to 458 million kWh sold
        at
        an average retail price per kWh of $0.117 for the three months ended October
        31,
        2006.
 
 Natural
        gas sales increased $5.7 million to $21.4 million for the three months ended
        October 31, 2007 from $15.7 million for the three months ended October 31,
        2006
        reflecting the impact of a 36% increase in sales volumes, partly offset by
        a
        4.7% decline in average retail sales prices. For the three months ended October
        31, 2007, we sold 3.0 million dekatherms, or DTH, at an average retail price
        per
        DTH of $7.11, as compared to 2.1 million DTH, sold at an average retail price
        per DTH of $7.46 during three months ended October 31, 2006. For the three
        months ended October 31, 2007, sales to the commercial and industrial natural
        gas customers acquired in September 2006 totaled $14.6 million on sales volume
        of 2.2 million DTH at an average sales price of $6.64 per DTH.
 
 We
        had
        approximately 194,000 electricity and natural gas customers at October 31,
        2007,
        an increase of 21% from 161,000 at October 31, 2006. We had approximately
        135,000 electricity and 59,000 natural gas customers at October 31, 2007,
        as
        compared to 95,000 and 66,000 at October 31, 2006. A gross increase of
        approximately 90,000 electricity customers in Texas and Maryland more than
        offset high customer attrition in our Pennsylvania/New Jersey and Michigan
        markets; an increase of approximately 30,000 natural gas customers in our
        Ohio
        markets offset customer attrition in other natural gas markets. Attrition
        in our
        retail customer base largely results from the impact of increased sales prices
        to our customers resulting from our passing on higher wholesale energy and
        transmission costs to our customers without the incumbent utility passing
        on
        corresponding price increases to their customers. This competitive imbalance
        is
        created as a result of a lack of market responsive ratemaking and a lagging
        regulatory approval process.


14


***Direct
        Energy Costs***
 
 Direct
        energy costs, which are recognized concurrently with related energy sales,
        include the commodity cost of natural gas and electricity, electricity
        transmission costs from the Independent Systems Operators, or ISOs,
        transportation costs from local distribution companies, or LDCs and pipelines,
        other fees and costs incurred from various energy-related service providers
        and
        energy-related taxes that cannot be passed directly through to the
        customer.
 
 Direct
        energy costs for the three months ended October 31, 2007 totaled $69.2 million
        and $20.0 million for electricity and natural gas, respectively, compared
        to
        $46.5 million and $13.9 million, respectively, for the three months ended
        October 31, 2006. Electricity costs averaged $0.097 per kWh for the three
        months
        ended October 31, 2007 compared to $0.102 per kWh for the three months ended
        October 31, 2006. Direct energy costs for natural gas averaged $6.66 per
        DTH for
        the three months ended October 31, 2007 as compared to $6.62 per DTH for
        the
        three months ended October 31, 2006.
 
 ***Gross
        Profit***
 
 Gross
        profit increased $6.3 million, or 63.0% to $16.4 million for the three months
        ended October 31, 2007 from $10.1 million for the three months ended October
        31,
        2006. Gross profit from electricity increased $6.6 million to $15.0 million
        for
        the three months ended October 31, 2007 from $8.4 million for the three months
        ended October 31, 2006, reflecting the impact of customer growth in Texas
        and
        Maryland. Gross profit from natural gas decreased $0.3 million to $1.4 million
        for the three months ended October 31, 2007, from $1.7 million for the three
        months ended October 31, 2006 primarily due to the impact of much lower margins
        relating to the HESCO customers due to unusually high transportation charges,
        primarily in Florida.
 
 ***Selling
        and Marketing Expenses***
 
 Selling
        and marketing expenses increased to $3.9 million for the three months ended
        October 31, 2007 from $2.2 million for the three months ended October 31,
        2006,
        reflecting the impact of higher telemarketing, third-party commissions and
        direct mail costs related to the Company’s increased customer acquisition
        initiatives, and an increase in personnel and consultants to support these
        initiatives.
 
 ***General
        and Administrative Expenses***
 
 General
        and administrative expenses increased to $13.5 million for the three months
        ended October 31, 2007 from $7.8 million for the three months ended October
        31,
        2006. Of the $5.7 million increase, $2.8 million was attributable to an increase
        in the bad debt provision, primarily a result of the rapid growth in revenue
        in
        Texas from $10.3 million to $47.6 million, respectively. In addition, regulatory
        changes in Texas surrounding customer credit checking procedures, customer
        disconnection processes and billing delays led to an increase in receivable
        balances and delinquency at quarter end. The remaining $2.9 million was
        attributable to an increase in personnel costs relating to higher customer
        service and information technology staff to support increased customer
        acquisition initiatives, an increase in professional service fees resulting
        from
        the Company’s review of its strategic alternatives, and depreciation and
        amortization expenses.
 
 ***Income
        Taxes***
 
 No
        provision for, or benefit from, income taxes was recorded for the three months
        ended October 31, 2007 or the three months ended 2006. We provided valuation
        allowances equal to our calculated tax due to the amount of the Company’s net
        operating loss carryforwards and the related uncertainty that we would realize
        these tax benefits in the foreseeable future. At October 31, 2007, the Company
        had net operating loss carryforwards of approximately $8.5 million and $11.3
        million for federal and state income tax purposes, respectively.
 
 The
        Company adopted the provisions of FIN 48 in August 2007; however, this
        implementation had no impact on the Company’s financial statements.
 15
 **Liquidity
        and Capital Resources**





The
      following table summarizes our liquidity measures:




(Dollars
                in
                Thousands**)****October
                31, 2007**
            
            
            **July
                31, 2007**Cash
                and cash equivalents
            
            $
            5,442
            
            
            $
            6,559Short-term
                borrowings
            
            $
            12,400
            
            
            
            —Working
                capital
            
            $
            39,342
            
            
            $
            38,863Current
                ratio (current assets to current liabilities)
            
            1.8:1.0
            
            
            1.8:1.0Restricted
                cash
            
            $
            10,104
            
            
            $
            10,457Letters
                of credit outstanding
            
            $
            11,609
            
            
            $
            19,334


***Consolidated
      Cash Flows***





The
      following table summarizes our statements of cash flows for the three months
      ended October 31, 2007 and 2006 (in thousands):




**Three
                  Months Ended****October
                  31, 2007**
              
              
              **October
                  31, 2006****Net
                  cash provided by (used in):**Operating
                  activities
              
              $
              (13,018
              )
              
              $
              (9,488
              )Investing
                  activities
              
              
              (852
              )
              
              
              (5,747
              )Financing
                  activities
              
              
              12,753
              
              
              
              380**Net
                  decrease in cash and cash equivalents**
              
              $
              (1,117
              )
              
              $
              (14,855
              )




Our
        principal sources of liquidity to fund ongoing operations have been existing
        cash and cash equivalents on hand, cash generated from operations, our credit
        facility and credit extended by our suppliers (both secured and unsecured).
        Based on our current cash flow estimates, we have alerted
        our
        Credit Facility Lender that we may, during the current quarter, seek a temporary
        waiver of certain conditions contained in our credit facility, similar to
        concessions previously obtained on a temporary basis. This waiver would likely
        take the form of eliminating or reducing temporarily the required excess
        availability of $2.5 million and possibly other concessions.We
        expect
        to need to add to our capital resources in fiscal 2008: (1) to meet the credit
        facility requirement to have $10 million in excess availability at all times
        on
        and after July 1, 2008, and (2) if we expand our business, either from internal
        growth or acquisition, if energy prices increase materially, or if energy
        industry volatility and/or uncertainty create additional credit
        requirements.
  Cash
        used
        in operating activities for the three months ended October 31, 2007 was
        $13.0 million, compared to cash used in operations of $9.5 million in
        the three months ended October 31, 2006. For the three months ended October
        31,
        2007, cash used in operating activities was comprised primarily of a net
        loss of
        $1.1 million, increases in accounts receivable, net of $0.7 million
        (including a provision of $3.7 million for bad debts); inventory of $3.5
        million
        and a decrease in accounts payable of $6.9 million. The larger changes in
        accounts payable and inventory were primarily due to seasonality as higher
        summer power supply costs declined going into the fall months and inventories
        were building in anticipation of the winter heating season. For the three
        months
        ended October 31, 2006, cash used in operating activities was comprised
        primarily of increases in accounts receivable of $6.9 million (net of
        provision for bad debts of $0.9 million) primarily due to the HESCO customer
        list acquisition, a seasonal increase in inventory of $2.7 million, and a
        seasonal decrease in accounts payable of $3.3 million. This was offset by
        an
        increase of $2.4 million in accrued liabilities and other.
 
 Cash
        used
        in investing activities was $0.9 million for the three months ended October
        31, 2007, compared to $5.7 million used in investing activities in the
        three months ended October 31, 2006. The cash used in investing activities
        for
        the three months ended October 31, 2007 was spent for the upgrades in our
        key
        customer billing, risk management and customer contact platforms. The cash
        used
        in the three months ended October 31, 2006 was primarily for upgrades in
        the
        previously discussed platforms and for the purchase of the HESCO customer
        list
        for $4.2 million.
 
 Cash
        provided by
        financing activities for the three months ended October 31, 2007 was
        $12.8 million, an increase of $12.4 million in short-term borrowings under
        our credit facility, compared to $0.4 provided by financing activities for
        the
        three months ended October 31, 2006. The increase in borrowings was used
        to fund
        operations in
 16
 the
          three
          months ended October 31, 2007; during the three months ended October 31,
          2006,
          we funded operations with available cash.


At
        October 31, 2007, the Company had approximately $2.5 million of remaining
        availability under our credit facility.  As it is industry practice to pay
        energy bills toward the end of the month, the remaining availability at the
        end
        of a month is lower than most other times during a month.
 
 Credit
        terms from our suppliers may require us to post collateral against our energy
        purchases and against our mark-to-market exposure with them. As of
        October 31, 2007, we had $10.1 million in restricted cash primarily in
        connection with a $10 million requirement of our credit facility. This cash
        was released in the Sixth Amendment to the credit facility discussed below.
        We
        also have $5.7 million in deposits pledged as collateral to our energy
        suppliers in connection with energy purchase agreements.
 
 As
        of
        October 31, 2007, cash and cash equivalents decreased to $5.4 million
        compared with $6.5 million at July 31, 2007. This decrease of
        $1.1 million was used primarily to fund seasonal inventory growth.
        Restricted cash and cash equivalents at October 31, 2007 was
        $15.5 million, compared to $17.0 million at July 31, 2007, for a
        decrease of $1.5 million for the same reason.
 
 **Credit
        Facility**
 
 In
        June
        2006, the Company entered into a Loan and Security Agreement, or the
        Credit Facility, with Wachovia Capital Finance Corporation (Western), or
        the
        Agent, for up to $50 million. The three-year Credit Facility is secured by
        substantially all of the Company’s assets and provides for issuance of letters
        of credit and for revolving credit loans, which we may use for working capital
        and general corporate purposes. The availability of letters of credit and
        loans
        under the Credit Facility is limited by a calculated borrowing base consisting
        of the majority of the Company’s cash on deposit with the Agent and the
        Company’s receivables and natural gas inventories. As of October 31, 2007,
        letters of credit issued under the Credit Facility totaled $11.6 million,
        and outstanding borrowings were $12.4 million. At October 31, 2007, the Company
        had approximately $5.0 million of remaining availability under our credit
        facility, using the amended provisions from the Sixth Amendment, as discussed
        below. As it is industry practice to pay energy bills toward the end of the
        month, the remaining availability at the end of a month is lower than most
        other
        times during a month. Fees for letters of credit issued range from 1.50 to
        1.75 percent per annum, depending on the level of Excess Availability, as
        defined in the Credit Facility. We also pay an unused line fee equal to
        0.375 percent of the unutilized credit line. Generally, outstanding
        borrowings under the Credit Facility are priced at a domestic bank rate plus
        0.25 percent or LIBOR plus 2.75 percent.
 
 The
        Credit Facility contains covenants, subject to specific exceptions,
        restricting the Company  from: (i) incurring additional
        indebtedness; (ii) granting certain liens; (iii) disposing of certain
        assets; (iv) making certain restricted payments; (v) entering into
        certain other agreements; and (vi) making certain investments. The Credit
        Facility also restricts our ability to pay cash dividends on our common stock.
        We were also required to maintain a minimum of $10 million of Eligible Cash
        Collateral, as defined in the Credit Facility, at all times.
 
 From
        September 2006 through September 2007, the Company has entered
        into five amendments and a modification to the Loan and Security Agreement
        with
        the Agent, several of which involved waivers of prior or existing instances
        of
        covenant non-compliance relating to the maintenance of Eligible Cash Collateral,
        capital expenditures and notification requirements (First Amendment),
        maintenance and deferral of prospective compliance, of minimum Fixed Charge
        Coverage Rates and maintenance of the minimum Excess Availability Ratio (Second
        and Third Amendments). In addition, in the First Amendment, the Agent and
        Lender
        agreed to certain prospective waivers of covenants in the Credit Facility
        to
        enable Commerce to consummate the HESCO acquisition of customers. In the
        Fourth
        Amendment, the amount allowable under the Credit Facility’s capital expenditures
        covenant was increased to $6.0 million. In the Second, Third and Fifth
        Amendment and in the Modification Agreement, each addressed reducing and/or
        restructuring the Excess Availability covenant in the Credit Facility to
        accommodate Commerce’s business. In the Modification Agreement, the Agent and
        the Lenders also permitted Commerce for a period from September 20, 2007 to
        October 5, 2007 to exceed its Gross Borrowing Base, as defined in the
        Agreement.
 17


The
        Sixth
        Amendment, executed on November 16, 2007, revised several provisions of the
        Credit Facility including (i) revising the Fixed Charge Coverage Ratio covenant
        and adding a new minimum EBITDA financial covenant; (ii) adjusting the amount
        of
        excess availability required to $2.5 million at all times prior to July 1,
        2008
        at which time it becomes $10 million; (iii) eliminating the previously-required
        provision to maintain $10 million of Eligible Cash Collateral on deposit;
        and
        (iv) extending the term of the Credit Facility for one year to June
        2010.
 
 **Supply
        Agreements**
 
 *Tenaska
        Power Services Co.*
 
 In
        August
        2005, the Company and Commerce entered into several agreements with Tenaska
        Power Services Co., or Tenaska, for the supply of the majority of Commerce’s
        wholesale electricity supply needs in Texas, utilizing a commercially standard
        master power purchase and sale, lockbox, security and guaranty agreements.
        The
        Company’s Texas customers pay into a designated account that is used to pay
        Tenaska for the electricity. Tenaska also extends credit to the Company to
        buy
        wholesale electricity supply secured by funds pledged by the Company in the
        lockbox, its related accounts receivables and customers contracts. The Company
        entered into a guaranty agreement, pursuant to which it, as the parent company
        of Commerce, unconditionally guaranteed to Tenaska full and prompt payment
        of
        all indebtedness and obligations owed to Tenaska. Tenaska has agreed to provide
        credit to Commerce in an amount not to exceed $22 million. At October 31,
        2007, Tenaska had extended approximately $14.8 million of trade credit to
        the
        Company. Tenaska also serves as the Company’s exclusive provider of qualified
        scheduling services and marketing services in the region of Texas administered
        by the Electric Reliability Council of Texas.
 
 *Pacific
        Summit Energy LLC*
 
 In
        September 2006, the Company and Commerce entered into several agreements
        with
        Pacific Summit LLC, or Pacific Summit, for the supply of natural gas to serve
        end-use customers that we acquired in connection with the HESCO acquisition,
        utilizing a base contract for the purchase and sale of natural gas, an
        operating, lockbox control and security agreements. Under the agreements,
        these
        customers remit their payments into the lockbox used to pay Pacific Summit
        for
        natural gas supplies. Pacific Summit also extends credit to the Company to
        buy
        wholesale natural gas supplies, secured by funds pledged by the Company in
        the
        lockbox, its related accounts receivable and a $3.5 million letter of
        credit. Under the security agreement, Commerce agreed to maintain a minimum
        deposit amount in the lockbox account. The security agreement also provided
        for
        monthly withdrawals from the lockbox account, with payments to be made first
        to
        Pacific Summit for amounts due and payable, and second to Commerce for amounts
        exceeding the adjusted minimum deposit amount, as defined in the security
        agreement. At October 31, 2007, Pacific Summit had extended approximately
        $9.5 million of trade credit to the Company under this
        arrangement.
 
 ***Contractual
        Obligations***
 
 As
        of
        October 31, 2007, we had commitments of $30.4 million for energy
        purchase, transportation and capacity contracts. These contracts are with
        various suppliers and extend through December 2008.
 
 ***Letters
        of Credit and Surety Bonds***
 
 As
        of
        October 31, 2007, $11.6 million of letters of credit have been issued
        to energy suppliers and others pursuant to the terms of our Credit Facility
        and
        $6.0 million in surety bonds have been issued.
 
 **Critical
        Accounting Policies and Estimates**
 
 The
        preparation of this
        Quarterly Report on Form 10-Q requires us to make estimates and assumptions
        that affect the reported amounts of assets and liabilities, disclosure of
        contingent assets and liabilities at the date of our financial statements,
        and
        the reported amount of revenue and expenses during the reporting period.
        Actual
        results may differ from those estimates and assumptions. In preparing our
        financial statements and accounting for the underlying transactions and
        balances, we apply our accounting policies as disclosed in our notes to the
        consolidated financial statements. The accounting policies discussed below
        are
        those that we consider to be critical to an understanding of our financial
        statements because their application places the most significant demands
        on
        our
 18
 ability
          to judge the effect of inherently uncertain matters on our financial results.
          For all of these policies, we caution that future events rarely develop
          exactly
          as forecast, and the best estimates routinely require
          adjustment.


•
              *Accounting
                  for Derivative Instruments and Hedging Activities*— We purchase
                  substantially all of our power and natural gas under forward physical
                  delivery contracts for supply to our retail customers. These forward
                  physical delivery contracts are defined as commodity derivative
                  contracts
                  under Statement of Financial Accounting Standard, or SFAS No. 133,
                  “Accounting for Derivative Instruments and Hedging Activities”. Using the
                  exemption available for qualifying contracts under SFAS No. 133, we
                  apply the normal purchase and normal sale accounting treatment
                  to a
                  majority of our forward physical delivery contracts. Accordingly,
                  we
                  record revenue generated from customer sales as energy is delivered
                  to our
                  retail customers and the related energy cost under our forward
                  physical
                  delivery contracts is recorded as direct energy costs when received
                  from
                  our suppliers. We use financial derivative instruments (such as
                  swaps,
                  options and futures) as an effective way of assisting in managing
                  our
                  price risk in energy supply procurement. For forward or future
                  contracts
                  that do not meet the qualifying criteria for normal purchase, normal
                  sale
                  accounting treatment, we elect cash flow hedge accounting, where
                  appropriate.
 
 We
        also
        utilize other financial derivatives, primarily swaps, options and futures
        to
        hedge our commodity price risks. Certain derivative instruments, which are
        designated as economic hedges or as speculative, do not qualify for hedge
        accounting treatment and require current period mark to market accounting
        in
        accordance with SFAS No. 133, with fair market value being used to
        determine the related income or expense that is recorded each quarter in
        the
        statement of operations. As a result, the changes in fair value of derivatives
        that do not meet the requirements of normal purchase and normal sale accounting
        treatment or cash flow hedge accounting are recorded in operating income
        (loss)
        and as a current or long-term derivative asset or liability. The subsequent
        changes in the fair value of these contracts could result in operating income
        (loss) volatility as the fair value of the changes are recorded on a net
        basis
        in direct energy costs in our consolidated statement of operations for each
        period.
 
 As
        a
        result of a sale on January 28, 2005 of two significant electricity forward
        physical delivery contracts (on a net cash settlement basis) back to the
        original supplier, the normal purchase and normal sale exemption under
        SFAS No. 133 was no longer available for our Pennsylvania market
        (PJM-ISO). Accordingly, for the period from February 2005 through July 2006,
        we
        designated forward physical delivery contracts entered into for our Pennsylvania
        electricity market as cash flow hedges, whereby market to market accounting
        gains or losses were deferred and reported as a component of Other Comprehensive
        Income (Loss) until the time of physical delivery. Effective August 1,
        2006, the normal purchase and normal sale exemption has been reinstated for
        our
        Pennsylvania market.
 
 •
              *Utility
                  and independent system operator costs*— Included in direct
                  energy costs, along with the cost of energy that we purchase, are
                  scheduling costs, Independent System Operator, or ISO, fees, interstate
                  pipeline costs and utility service charges. The actual charges
                  and certain
                  energy costs are not finalized until subsequent settlement processes
                  are
                  performed for all distribution system participants. Prior to the
                  completion of settlements (which may take from one to several months),
                  we
                  estimate these costs based on historical trends and preliminary
                  settlement
                  information. The historical trends and preliminary information
                  may differ
                  from actual information resulting in the need to adjust previous
                  estimates.
 
 •
              *Allowance
                  for doubtful accounts*— We maintain allowances for doubtful
                  accounts for estimated losses resulting from non-payment of customer
                  billings. If the financial conditions of certain of our customers
                  were to
                  deteriorate, resulting in an impairment of their ability to make
                  payments,
                  additional allowances may be
                  required.
 
 •
              *Net
                  revenue and unbilled receivables*— Our customers are billed
                  monthly at various dates throughout the month. Unbilled receivables
                  represent the estimated sale amount for power delivered to a customer
                  at
                  the end of a reporting period, but not yet billed. Unbilled receivables
                  from sales are estimated based upon the amount of power delivered,
                  but not
                  yet billed, multiplied by the estimated sales price per
                  unit.
 
 •
              *Inventory*— Inventory consists of natural gas in storage as required by
                  state regulators and contracted obligations under customer choice
                  programs. Inventory is stated at the lower of cost or
                  market.
 19


•
              *Customer
                  Acquisition Cost*— Direct Customer acquisition costs paid to
                  third parties and directly related to specific new customers are
                  deferred
                  and amortized over the life of the initial customer contract, typically
                  one year.
 
 •
              *Legal
                  matters*— From time to time, we may be involved in litigation
                  matters. We regularly evaluate our exposure to threatened or pending
                  litigation and other business contingencies and accrue for estimated
                  losses on such matters in accordance with SFAS No. 5,
                  “Accounting for Contingencies.” As additional information about current or
                  future litigation or other contingencies becomes available, management
                  will assess whether such information warrants the recording of
                  additional
                  expense relating to our contingencies. Such additional expense
                  could
                  potentially have a material adverse impact on our results of operations
                  and financial position.
 
 **Item
        3.*****Quantitative and Qualitative Disclosures about Market
        Risk.***
 
 Our
        activities expose us to a variety of market risks principally from the change
        in
        and volatility of commodity prices. We have established risk management policies
        and procedures designed to manage these risks with a strong focus on the
        retail
        nature of our business and to reduce the potentially adverse effects these
        risks
        may have on our operating results. Our Board of Directors and the Audit
        Committee of the Board oversee the risk management program, including the
        approval of risk management policies and procedures. This program is predicated
        on a strong risk management focus combined with the establishment of an
        effective system of internal controls. We have a Risk Oversight Committee,
        or
        ROC, that is responsible for establishing risk management policies, reviewing
        procedures for the identification, assessment, measurement and management
        of
        risks, and the monitoring and reporting of risk exposures. The ROC is comprised
        of all key members of senior management and is chaired by the Vice President,
        Chief Risk Officer.
 
 **Commodity
        Risk Management**
 
 Commodity
        price and volume risk arise from the potential for changes in the price of,
        and
        transportation costs for, electricity and natural gas, the volatility of
        commodity prices, and customer usage fluctuations due to changes in weather
        and/or customer usage patterns. A number of factors associated with the
        structure and operation of the energy markets significantly influence the
        level
        and volatility of prices for energy commodities. These factors include seasonal
        daily and hourly changes in demand, extreme peak demands due to weather
        conditions, available supply resources, transportation availability and
        reliability within and between geographic regions, procedures used to maintain
        the integrity of the physical electricity system during extreme conditions,
        and
        changes in the nature and extent of federal and state regulations. These
        factors
        can affect energy commodity and derivative prices in different ways and to
        different degrees.
 
 Supplying
        electricity and natural gas to our retail customers requires us to match
        the
        projected demand of our customers with contractual purchase commitments from
        our
        suppliers at fixed or indexed prices. We primarily use forward physical energy
        purchases and derivative instruments to minimize significant, unanticipated
        earnings fluctuations caused by commodity price volatility. Derivative
        instruments are used to limit the unfavorable effect that price increases
        will
        have on electricity and natural gas purchases, effectively fixing the future
        purchase price of electricity or natural gas for the applicable forecasted
        usage
        and protecting the Company from significant price volatility. Derivative
        instruments measured at fair market value are recorded on the balance sheet
        as
        an asset or liability. Changes in fair market value are recognized currently
        in
        earnings unless the instrument has met specific hedge accounting criteria.
        Subsequent changes in the fair value of the derivative assets and liabilities
        designated as a cash flow hedge are recorded on a net basis in Other
        Comprehensive Income (Loss) and subsequently reclassified as direct energy
        cost
        in the statement of operations as the energy is delivered. While some of
        the
        contracts we use to manage risk represent commodities or instruments for
        which
        prices are available from external sources, other commodities and certain
        contracts are not actively traded and are valued using other pricing sources
        and
        modeling techniques to determine expected future market prices, contract
        quantities, or both. We use our best estimates to determine the fair value
        of
        commodity and derivative contracts we hold and sell. These estimates consider
        various factors including closing exchange and over-the-counter price
        quotations, time value, volatility factors and credit exposure. We do not
        engage
        in trading activities in the wholesale energy market other than to manage
        our
        direct energy cost in an attempt to improve the profit margin associated
        with
        the requirements of our retail customers.
 20
 With
          most
          electricity and natural gas customers, we have the ability to change prices
          with
          short notice; and, therefore, the impact on gross profits from increases
          in
          energy prices is not material for these customers. However, sharp and sustained
          price increases could result in customer attrition without corresponding
          price
          increases by local utilities and other competitors. Approximately 55% of
          our
          electricity customers and 33% of our natural gas customers are subject
          to
          multi-month fixed priced unhedged contracts and, accordingly a $10 per
          megawatt
          hour increase in the cost of purchased power and a $1.00 per mmbtu increase
          in
          the cost of purchased natural gas could result in an estimated $3,786,000
          decrease in gross profit for power, and an estimated $1,018,000 decrease
          in
          gross profit for natural gas, respectively, for fiscal 2008.
 
 **Credit
          Risk**
 
 Our
          primary credit risks are exposure to our retail customers for default on
          their
          contractual obligations. Given the high credit quality of the majority
          of our
          energy suppliers, credit risk resulting from failure of our suppliers to
          deliver
          or perform on their contracted energy commitments is not considered
          significant.
 
 The
            retail credit default or nonpayment risk is managed through established
            credit
            policies which actively require screening of customer credit prior to
            contracting with a customer, potentially requiring deposits from customers
            and/or actively discontinuing business with customers that do not pay
            as
            contractually obligated.  At times, the Company is limited in the
            types of credit policies which it may implement by applicable state rules
            and
            regulation in a market in which we sell energy.  Retail credit quality
            is dependent on the economy and the ability of our customers to manage
            through
            unfavorable economic cycles and other market changes. If the business
            environment were to be negatively affected by changes in economic or
            other
            market conditions, our retail credit risk may be adversely
            impacted.
 Counterparty
          credit risks result primarily from credit extended to us for our purchases
          of
          energy from our suppliers. Favorable credit terms from our suppliers make
          it
          easier to procure wholesale energy to service our customers; however, adverse
          market conditions or poor financial performance by us may result in a reduction
          or elimination of available unsecured counterparty credit lines. Additionally,
          we have significant amounts of energy commitments to our contracted term
          customers that we have hedged forward, often for several months. A significant
          decrease in energy prices could adversely impact our cash collateral
          requirements.
 
 **Interest
          Rate Risk**
 
 As
          we had
          no long-term debt outstanding at October 31, 2007, our only exposure to
          interest rate risks is limited to short-term borrowings and our investment
          of
          excess cash balances in interest-bearing instruments. As our borrowings
          are only
          short-term and are adjusted to market rates on a recurring basis, we do
          not
          believe we have interest rate risk on these borrowings. We generally invest
          cash
          equivalents in short-term credit instruments consisting primarily of high
          credit
          quality, short-term money market funds and insured, re-marketable government
          agency securities with interest rate reset maturities of 90 days or less.
          We do not expect any material loss from our investments and we believe
          that our
          potential interest rate exposure is not material. As our practice has been,
          and
          currently continues to be, to only invest in high-quality debt instruments
          with
          maturities or remarketing dates of 90 days or less, we currently are not
          materially susceptible to interest rate risk on our investments.
 
 **Item
          4.*****Controls and Procedures.***
 
 **Evaluation
          of Disclosure Controls and Procedures**
 
 Our
          Chief
          Executive Officer and our Interim Chief Financial Officer have concluded,
          based
          upon their evaluation as of the end of the period covered by this Report,
          that
          our disclosure controls and procedures (as defined under Rule 13a-15(e)
          under
          the Securities Exchange Act of 1934, as amended, or the Exchange Act) are
          effective to ensure that all information required to be disclosed by the
          Company
          in the reports filed or submitted by it under the Exchange Act is recorded,
          processed, summarized and reported within the time periods specified in
          the
          SEC’s rules and forms, and include controls and procedures designed to ensure
          that information required to be disclosed by the Company in such reports
          is
          accumulated and communicated to the Company’s management, including the Chief
          Executive Officer and the Interim Chief Financial Officer, as appropriate,
          and
          allow timely decisions regarding required disclosure.
 
 **Changes
          in Internal Control Over Financial Reporting**
 
 No
          change
          in the Company’s internal control over financial reporting occurred during the
          Company’s last fiscal quarter that has materially affected, or is reasonably
          likely to materially affect, the Company’s internal control over financial
          reporting.


21


**PART
        II — OTHER INFORMATION**
 
 **Item
        1.*****Legal Proceedings.***
 
 Reference
        is made to our Form 10-K for the year ended July 31, 2007, or the Form 10-K,
        for
        a summary of our previously reported legal proceedings. Since the date of
        the
        Form 10-K, there have been no material developments in previously reported
        legal
        proceedings, except as set forth below.
 
 As
        previously reported in the Company’s current report on Form 8-K filed with the
        SEC on December 4, 2007, the Company entered into a Settlement Agreement
        with
        Lawrence Clayton, Jr., the former Senior Vice President, Chief Financial
        Officer
        and Secretary of the Company on November 29, 2007, which became effective
        on
        December 7, 2007, the eighth day after it was executed. As previously disclosed,
        on July 23, 2007, the Company terminated Mr. Clayton’s employment, effective
        July 25, 2007.
 
 The
        Settlement Agreement was the result of a successful mediation of an outstanding
        dispute between Mr. Clayton and the Company relating to the basis for his
        termination. The principal relief sought by Mr. Clayton was a lump sum payment
        of approximately $1.6 million. The Settlement Agreement provides for the
        Company
        to make a lump-sum settlement payment to Mr. Clayton of $400,000 on January
        2,
        2008. Of the aggregate amount of the settlement payment, all but $120,000
        is
        covered by insurance. Each party to the Settlement Agreement agreed to mutual
        general releases of all claims that the parties may have against each
        other.
 
 The
        Company is currently, and from time to time may become, involved in litigation
        concerning claims arising out of the operations of the Company in the normal
        course of business. The Company is currently not involved in any legal
        proceeding that is expected, individually or in the aggregate, to have a
        material adverse effect on the Company’s results of operations or financial
        position.
 
 
 **Item
        1A.*****Risk Factors.***
 
 There
        have been no significant changes to the risk factors disclosed in the Form
        10-K,
        except as described below:
  ***Credit
        facility waiver***
  Based
        on
        our current cash flow estimates, we have alerted our Credit Facility Lender
        that
        we may, during the current quarter, seek a temporary waiver of certain
        conditions contained in our credit facility, similar to concessions previously
        obtained on a temporary basis. This waiver would likely take the form of
        eliminating or reducing temporarily the required excess availability of $2.5
        million and possibly other concessions. There is no assurance that such a
        waiver, if needed, will be granted.
 
 ***We
        need additional capital in the future and it may not be available on acceptable
        terms, or not at all.***
 
 We
        expect
        to need to add to our capital resources in fiscal 2008: (1) to meet the credit
        facility requirement to have $10 million in excess availability at all times
        on
        and after July 1, 2008, and (2) if we expand our business, either from internal
        growth or acquisition, if energy prices increase materially, or if energy
        industry volatility and/or uncertainty create additional credit requirements.
         If such additional capital funds are not available when required or on
        acceptable terms, our business and financial results could suffer.
 
 ***We
        may be subject to claims or liabilities in connection with certain regulatory
        and refund proceedings which could have a material adverse effect on our
        business and our stock price.***
 
 *California
        Refund Proceeding*.  In 2001, FERC ordered an evidentiary hearing
        (Docket No. EL00-95) to determine the amount of refunds due to California
        energy
        buyers for purchases made in the spot markets operated by the California
        Independent System Operator Corporation, or CAISO, and the California Power
        Exchange or CPX, during the period October 2, 2000 through June 20, 2001,
        or the
        Refund Period. Among other holdings in the case, FERC determined that the
        Automated Power Exchange or the APX, and its market participants could be
        responsible for, or entitled to, refunds for transactions completed in the
        CAISO
        and the CPX spot markets through APX. FERC has not issued a final order
        determining “who owes how much to whom” in the California Refund Proceeding, and
        it is not clear when such an order will be issued. As previously disclosed,
        APX
        and its market participants have entered into a settlement that resolves
        how
        refunds owed to APX will be allocated among its market participants, including
        the Company. Under the APX Settlement and Release of Claims dated January
        5,
        2007, we received $6.5 million, $5.1 million in August and $1.4 million in
        August.
 22
 In
          the
          course of the California Refund Proceeding, FERC has issued dozens of orders.
          Most have been taken up on appeal before the United States Court of Appeals
          for
          the Ninth Circuit or the Ninth Circuit, which has issued opinions on some
          issues
          in the last several years. These cases are described below under *Lockyer v.
          FERC* and *CPUC v. FERC*.
 
 *Lockyer
          v. FERC*.   On September 9, 2004, the Ninth Circuit issued a
          decision on the California Attorney General’s challenge to the validity of
          FERC’s market-based rate system. This case was originally presented to FERC
          upon
          complaint that the adoption and implementation of market based rate authority
          was flawed. FERC dismissed the complaint after sellers refilled reports
          of sales
          in the CAISO and the CPX spot markets and bilateral sales to the California
          Department of Water Resources during 2000 and 2001. The Ninth Circuit upheld
          FERC’s authority to authorize sales of electric energy at market-based rates,
          but found that the requirement that sales at market-based rates be reported
          quarterly to FERC for individual transactions is integral to a market-based
          rate
          regime. The State of California, among others, has publicly interpreted
          the
          decision as providing authority to FERC to order refunds for different
          time
          frames and based on different rationales than are currently pending in
          the
          California Refund Proceedings, discussed above in “California Refund
          Proceeding.” The decision remands to FERC the question of whether, and in what
          circumstances, to impose refunds or other remedies for any alleged failure
          to
          report sales transactions to FERC. On December 28, 2006, several energy
          sellers
          filed a petition for a writ of certiorari to the U.S. Supreme Court. The
          U.S.
          Supreme Court denied the petition. We cannot predict the scope or nature
          of, or
          ultimate resolution of this case.
 
 *CPUC
          v. FERC*.  On August 2, 2006, after reviewing certain FERC
          decisions in the California Refund Proceedings, the Ninth Circuit decided
          that
          FERC erred in excluding potential relief for alleged tariff violations
          related
          to transactions in the CAISO and the CPX markets for periods that pre-dated
          October 2, 2000 and additionally ruled that FERC should consider remedies
          for
          certain bilateral transactions with the California Department of Water
          Resources
          previously considered outside the scope of the proceedings. To allow parties
          the
          opportunity to consider ways to settle disputes, the Ninth Circuit extended
          the
          deadline for seeking rehearing of the CPUC and Lockyer decisions to November
          16,
          2007 and delayed issuing the order remanding the CPUC and Lockyer cases
          back to
          FERC. We are studying the court’s decision, but are unable to predict either the
          outcome of the proceedings or the ultimate financial effect to us.
 
 Following
              the 9th Circuit's remand of the Lockyer proceeding back to FERC, the
              People of
              the State of California, ex rel. Edmund G. Brown Jr., Attorney General,
              the
              California Electricity Oversight Board, the Public Utilities Commission
              of the
              State of California, Pacific Gas and Electric Company, and Southern
              California
              Edison, (collectively, the “California Parties”) had requested the Commission
              hold the Lockyer remand proceeding in abeyance.   The California Parties
              have requested the FERC to hold in abeyance its remand proceeding in
              Lockyer,
              pending the remands in CPUC and Port of Seattle; these two cases are
              before the
              9th Circuit.
 Although
          we have not been named as a defendant in any of the foregoing proceedings,
          it is
          possible that we will be named as a defendant in these or other related
          proceedings in the future and may, as a consequence, be exposed to claims
          or
          liabilities for transactions outside the Refund Period. At this time, the
          ultimate financial outcome is unclear. If our past or present operations
          are
          found to be in violation of applicable laws or governmental regulations,
          we may
          be subject to curtailment or restructuring of our operations, and penalties,
          damages and fines, some of which may not be covered by insurance. We may
          also be
          subject to adverse publicity. Similarly, if our power suppliers are found
          to be
          non-compliant with applicable laws, they may be subject to penalties, sanctions
          or curtailing or restructuring of their operations, which could also have
          a
          negative impact on us. The risk of our being found in violation of certain
          applicable laws is increased by the fact that many applicable laws and
          regulations have not been fully interpreted by the regulatory authorities
          or the
          courts, and their provisions may be open to a variety of interpretations.
          Any
          action against us for violation of applicable laws and regulations, even
          if we
          successfully defend against it, could cause us to incur significant legal
          expenses and divert our management’s attention from the operation of our
          business. In addition to adversely impacting our business and prospects,
          adverse
          publicity could materially adversely affect our stock price.
 23
 **Item
            2.*****Unregistered Sales of Equity Securities and Use
            of
            Proceeds.***
 
 **Purchases
            of Equity Securities by the Issuer and Affiliated Purchasers**
 
 During
            the three month period ended October 31, 2007, the Company repurchased
            30,000
            shares of restricted common stock from a former executive officer of
            the Company
            pursuant to the terms of the Company’s 1999 Equity Incentive Plan as set forth
            in the table below:
  **Period**
                  
                  **Total
                      number**
                    **of
                      shares**
                    **purchased**(a)
                  **Average**
                    **price
                      paid**
                    **per
                      share**
                  
                  **Total
                      number of**
                    **shares
                      purchased as**
                    **part
                      of publicly announced plans or programs**
                  
                  **Maximum
                      number of shares that may yet be purchased**
                    **under
                      the plans or programs****2007**August
                      1 - 31
                  
                  
                  0
                  
                  
                  N/A
                  
                  
                  
                  0September
                      1 - 30
                  
                  
                  0
                  
                  
                  N/A
                  
                  
                  
                  0October
                      1 - 31
                  
                  
                  30,000
                  
                  
                  $0.001
                  
                  
                  
                  0Total
                  
                  
                  30,000
                  
                  
                  $0.001
                  
                  
                  
                  0
                  
                  
                  
                  0
 
 (a)
                  These
                      shares were repurchased pursuant to the Company’s 1999 Equity Incentive
                      Plan and the terms of a restricted stock
                      agreement.
 
 **Item
            3.*****Defaults Upon Senior
            Securities.***
 
 None***.***
 
 **Item
            4.*****Submission of Matters to a Vote of Security
            Holders.***
 
 None***.***
 
 **Item
            5.*****Other Information.***
 
 ***Amendments
            to Articles of Incorporation or Bylaws; Change in Fiscal
            Year***
  Effective
            December 13, 2007, the Board of Directors of the Company approved the
            Second
            Amended and Restated Bylaws of the Company. These amended and restated
            bylaws
            amend Section 6.1 of Article VI of the Amended and Restated Bylaws of
            the
            Company to permit the Board of Directors to provide for the issuance
            and
            transfer of uncertificated shares of the Company’s stock. These amended and
            restated bylaws have been adopted in response to the American Stock Exchange’s
            requirement that companies be eligible, by January 1, 2008, to participate
            in a
            direct registration system. The direct registration system allows shareholders
            to own and transact shares in electronic (book-entry) form without the
            issuance
            of physical certificates.
 
 The
              foregoing description of the Second Amended and Restated Bylaws of
              the Company
              does not purport to be complete and is qualified in its entirety by
              reference to
              the Second Amended and Restated Bylaws of the Company, a copy of which
              are filed
              as Exhibit 3.3 hereto and incorporated herein by
              reference.
 ***Completion
            of Review of Strategic Alternatives***
 
 The
              Company announced
              that it had completed its review of the Company's strategic alternatives
              assisted by its financial advisor, RBC Capital Markets, and determined
              that, its
              best course of action to maximize shareholder value is to focus on
              continued
              execution of its business plan.  This decision was the result of a
              detailed review of the Company's major strategic alternatives, including
              a sale
              of the Company  After this review, the Company
 24
 has
                determined that, in light of its present business model and its future
                opportunities, it can deliver the highest shareholder value by remaining
                a
                stand-alone company at this time.


***Chairman
        of the Board of Directors***
 
 The
        Board
        of Directors of the Company decided on December 14, 2007 to rotate the position
        of Chairman of the Board. Dennis R. Leibel, a current member of the Board,
        assumed the position of Chairman, formerly held by Robert C. Perkins. Mr.
        Perkins will remain on the Board and will continue to Chair the Audit Committee.
        Our
        Board of Directors has determined that both Mr. Leibel and Mr. Perkins are
        “independent,” as defined under the rules of the SEC and the American Stock
        Exchange.
 
 ***Annual
        Meeting of Stockholders***
 
 The
        Annual Meeting of Stockholders relating to the Fiscal Year Ended July 31,
        2007,
        or the Annual Meeting, will be held at 10:00 a.m. Pacific Time, on March
        27,
        2008, at the Hilton Costa Mesa Hilton, located at 3050 Bristol Street, Costa
        Mesa, California.
 
 ***Submission
        of Director Nominations and Stockholder Proposals for the Annual
        Meeting***
  ***Nominations
        for Directors***
 
 No
        person
        will be eligible for election as a director unless nominated in accordance
        with
        the provisions of the Company’s Nomination Bylaw. Nominations of persons for
        election to the Board of Directors may be made by (a) the Board of Directors
        or
        a committee appointed by the Board of Directors or (b) any stockholder who
        (i)
        is a stockholder of record at the time of giving the notice provided for
        in the
        Nomination Bylaw, (ii) will be entitled to vote for the election of directors
        at
        the annual meeting and (iii) complies with the notice procedures set forth
        in
        the Nomination Bylaw.
 
 Nominations
        by stockholders must be made in written form to the Secretary of the Company.
        Under the Nomination Bylaw, to be timely for an annual meeting, a stockholder’s
        notice must be delivered to or mailed and received at our principal executive
        offices not more than 120 days nor less than 90 days prior to the first
        anniversary of the preceding year’s annual meeting; provided, however, that in
        the event that the date of an annual meeting is changed by more than 30 days
        before or 70 days after such anniversary date, then for the notice by the
        stockholder to be timely, it must be received by us no earlier than 120 days
        prior to such annual meeting nor later than 90 days prior to such annual
        meeting
        or the 10th day following the day on which public announcement of the date
        of
        the meeting is first made.
 
 Therefore,
        in order to be timely for the Annual Meeting, a stockholder’s notice must have
        been delivered to or mailed and received at our principal executive offices
        not
        earlier than September 27, 2007 and not later than October 27,
        2007.
 
 ***Stockholder
        Proposals***
 
 Under
        the
        terms of the Stockholder Proposal Bylaw, to be properly brought before an
        annual
        meeting, business must be (a) specified in the notice of meeting (or any
        supplement thereto) given by or at the direction of the Board of Directors;
        (b)
        otherwise properly brought before the meeting by or at the direction of the
        Board of Directors; (c) otherwise properly brought before an annual meeting
        by a
        stockholder. For business (other than the nomination of directors, which
        is
        governed by the Nomination Bylaw) to be properly brought before an annual
        meeting by a stockholder, the stockholder must have given timely notice thereof
        in writing to the Secretary of the Company.
 
 To
        be
        timely, a stockholder’s notice must be delivered to or mailed and received at
        our principal executive offices not less than 90 days nor more than 120 days
        prior to the anniversary date of the immediately preceding annual meeting
        of
        stockholders; provided, however, that if the annual meeting is not held within
        30 days before or 70 days after such anniversary date, then for the notice
        by
        the stockholder to be timely, it must be so received no earlier than 120
        days
        before such annual meeting nor later than 90 days before such annual meeting
        or
        the 10th day following the date on which the notice of the meeting was mailed
        or
        such public disclosure was made, whichever occurs first. Under the Stockholder
        Proposal Bylaw, in order to be timely for the Annual Meeting, a stockholder’s
        notice regarding a proposal must have been delivered to or mailed and received
        at our principal executive offices not earlier than September 27, 2007 and
        not
        later than October 27, 2007.
 25
 If
        you
        want us to consider including a proposal in the Company’s proxy materials
        relating to the Annual Meeting in accordance with SEC Rule 14a-8, you must
        submit such proposal to the Company no later than December 31, 2007. If such
        proposal is in compliance with all of the requirements of Rule 14a-8, and
        not
        otherwise excludable under Rule 14a-8, we will include it in the proxy statement
        and set it forth on the form of proxy issued for such annual meeting of
        stockholders. As the rules of the SEC make clear, simply submitting a proposal
        does not guarantee that it will be included. You should direct any such
        stockholder proposal to the attention of the Secretary of the Company at
        our
        address set forth on the first page of this proxy statement.
 26
 **Item
        6.*****Exhibits.***
 
 The
        exhibits listed below are hereby filed with the SEC as part of this
        Report.
 
 **Exhibit**
                **Number**
              **Description**3.1
              Amended
                  and Restated Certificate of Incorporation of Commerce Energy Group,
                  Inc.,
                  previously filed with the SEC on July 6, 2004 as Exhibit 3.3 to
                  Commerce
                  Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated
                  herein by reference.3.2
              Certificate
                  of Designation of Series A Junior Participating Preferred Stock
                  of
                  Commerce Energy Group, Inc. dated July 1, 2004, previously filed
                  with the
                  SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.’s
                  Registration Statement on Form 8-A and incorporated herein by
                  reference.3.3
              Second
                  Amended and Restated Bylaws of Commerce Energy Group,
                  Inc.4.1
              Rights
                  Agreement, dated as of July 1, 2004, entered into between Commerce
                  Energy
                  Group, Inc. and Computershare Trust Company, as rights agent, previously
                  filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce
                  Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated
                  herein by reference.4.2
              Form
                  of Rights Certificate, previously filed with the Commission on
                  July 6,
                  2004 as Exhibit 10.2 to Commerce Energy Group, Inc.’s Registration
                  Statement on Form 8-A and incorporated herein by
                  reference.10.1
              Fifth
                  Amendment to Loan and Security Agreement and Waiver dated August 1,
                  2007 among Commerce Energy Group, Inc., Commerce Energy, Inc.,
                  Wachovia
                  Capital Finance Corporation (Western) and The CIT Group/Business
                  Credit,
                  Inc., previously filed with the SEC on August 2, 2007 as
                  Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
                  Form 8-K and incorporated herein by reference.10.2
              Letter
                  Agreement, dated September 20, 2007, by and among Commerce Energy
                  Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance Corporation
                  (Western), as Agent and Lender and The CIT Group/Business Credit,
                  Inc., as
                  Lender, previously filed with the SEC on September 25, 2007 as
                  Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
                  Form 8-K and incorporated herein by reference.10.3*
              Amendment
                  No. 1 to Employment Agreement dated October 5, 2007 by and
                  between Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
                  filed with the SEC on October 29, 2007 as Exhibit 10.53 to Commerce
                  Energy
                  Group, Inc.’s Annual Report on Form 10-K and incorporated herein by
                  reference.10.4*
              Separation
                  Agreement and General Release dated October 5, 2007 by and between
                  Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
                  filed with
                  the SEC on October 29, 2007 as Exhibit 10.57 to Commerce Energy
                  Group,
                  Inc.’s Annual Report on Form 10-K and incorporated herein by
                  reference.10.5
              Sixth
                  Amendment to Loan and Security Agreement, dated November 16, 2007, by
                  and among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia
                  Capital Finance Corporation (Western), as Agent and Lender and
                  The CIT
                  Group/Business Credit, Inc., as Lender, previously filed with the
                  SEC on
                  November 20, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current
                  Report on Form 8-K and incorporated herein by
                  reference.10.6*
              Settlement
                  Agreement and General Release, dated November 29, 2007, by and
                  among
                  Commerce Energy, Inc., Commerce Energy Group, Inc. and Lawrence
                  Clayton,
                  Jr., previously filed with the SEC on December 4, 2007 as Exhibit
                  99.1 to
                  Commerce Energy Group, Inc.’s Current Report on Form 8-K and
                  incorporated herein by reference.31.1
              Principal
                  Executive Officer Certification pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Principal
                  Financial Officer Certification pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Principal
                  Executive Officer Certification pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              Principal
                  Financial Officer Certification pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
 *      Indicates
        management contract or compensatory plan.


27





**SIGNATURES**





Pursuant
      to the requirements 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.





COMMERCE
      ENERGY GROUP,
      INC.





Date:
      December 17,
      2007                                                                           By:          
/s/ STEVEN S. BOSS


Steven
      S. Boss


Chief
      Executive
      Officer


(Principal
      Executive
      Officer)





Date:
      December 17,
      2007                                                                           By:      /s/
      J. ROBERT HIPPS


J.
      Robert Hipps


Interim
      Chief Financial
      Officer


(Principal
      Financial
      Officer)


28


**EXHIBIT
        INDEX**
 
 **Exhibit**
                **Number**
              **Description**3.1
              Amended
                  and Restated Certificate of Incorporation of Commerce Energy Group,
                  Inc.,
                  previously filed with the SEC on July 6, 2004 as Exhibit 3.3 to
                  Commerce
                  Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated
                  herein by reference.3.2
              Certificate
                  of Designation of Series A Junior Participating Preferred Stock
                  of
                  Commerce Energy Group, Inc. dated July 1, 2004, previously filed
                  with the
                  SEC on July 6, 2004 as Exhibit 3.4 to Commerce Energy Group, Inc.’s
                  Registration Statement on Form 8-A and incorporated herein by
                  reference.3.3
              Second
                  Amended and Restated Bylaws of Commerce Energy Group,
                  Inc.4.1
              Rights
                  Agreement, dated as of July 1, 2004, entered into between Commerce
                  Energy
                  Group, Inc. and Computershare Trust Company, as rights agent, previously
                  filed with the Commission on July 6, 2004 as Exhibit 10.1 to Commerce
                  Energy Group, Inc.’s Registration Statement on Form 8-A and incorporated
                  herein by reference.4.2
              Form
                  of Rights Certificate, previously filed with the Commission on
                  July 6,
                  2004 as Exhibit 10.2 to Commerce Energy Group, Inc.’s Registration
                  Statement on Form 8-A and incorporated herein by
                  reference.10.1
              Fifth
                  Amendment to Loan and Security Agreement and Waiver dated August 1,
                  2007 among Commerce Energy Group, Inc., Commerce Energy, Inc.,
                  Wachovia
                  Capital Finance Corporation (Western) and The CIT Group/Business
                  Credit,
                  Inc., previously filed with the SEC on August 2, 2007 as
                  Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
                  Form 8-K and incorporated herein by reference.10.2
              Letter
                  Agreement, dated September 20, 2007, by and among Commerce Energy
                  Group, Inc., Commerce Energy, Inc., Wachovia Capital Finance Corporation
                  (Western), as Agent and Lender and The CIT Group/Business Credit,
                  Inc., as
                  Lender, previously filed with the SEC on September 25, 2007 as
                  Exhibit 99.1 to Commerce Energy Group, Inc.’s Current Report on
                  Form 8-K and incorporated herein by reference.10.3*
              Amendment
                  No. 1 to Employment Agreement dated October 5, 2007 by and
                  between Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
                  filed with the SEC on October 29, 2007 as Exhibit 10.53 to Commerce
                  Energy
                  Group, Inc.’s Annual Report on Form 10-K and incorporated herein by
                  reference.10.4*
              Separation
                  Agreement and General Release dated October 5, 2007 by and between
                  Commerce Energy Group, Inc. and Erik A. Lopez, Sr., previously
                  filed with
                  the SEC on October 29, 2007 as Exhibit 10.57 to Commerce Energy
                  Group,
                  Inc.’s Annual Report on Form 10-K and incorporated herein by
                  reference.10.5
              Sixth
                  Amendment to Loan and Security Agreement, dated November 16, 2007, by
                  and among Commerce Energy, Inc., Commerce Energy Group, Inc., Wachovia
                  Capital Finance Corporation (Western), as Agent and Lender and
                  The CIT
                  Group/Business Credit, Inc., as Lender, previously filed with the
                  SEC on
                  November 20, 2007 as Exhibit 99.1 to Commerce Energy Group, Inc.’s Current
                  Report on Form 8-K and incorporated herein by
                  reference.10.6*
              Settlement
                  Agreement and General Release, dated November 29, 2007, by and
                  among
                  Commerce Energy, Inc., Commerce Energy Group, Inc. and Lawrence
                  Clayton,
                  Jr., previously filed with the SEC on December 4, 2007 as Exhibit
                  99.1 to
                  Commerce Energy Group, Inc.’s Current Report on Form 8-K and
                  incorporated herein by reference.31.1
              Principal
                  Executive Officer Certification pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Principal
                  Financial Officer Certification pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Principal
                  Executive Officer Certification pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              Principal
                  Financial Officer Certification pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 ____________
 
 ·
              Indicates
                  management contract or compensatory
                  plan.


29




**Exhibit
        31.1**
 
 **CERTIFICATION
        PURSUANT TO 17 CFR 240.13a-14(a)**
 **PROMULGATED
        UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**
 
 I,
        Steven
        S. Boss, Chief Executive Officer of Commerce Energy Group, Inc., certify
        that:
 
 1.
        I have
        reviewed this quarterly report on Form 10-Q for the quarter ended October
        31,
        2007 of Commerce Energy Group, Inc.;
 
 2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
 
 3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report;
 
 4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 (a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared;
 
 (c)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
 
 (d)
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter that has materially affected, or is reasonably likely to materially
        affect, the registrant’s internal controls over financial reporting;
        and
 
 5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
 
 (a)
        all
        significant deficiencies and material weaknesses in the design or operation
        of
        internal controls over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
 
 (b)
        any
        fraud, whether or not material, that involves management or other employees
        who
        have a significant role in the registrant’s internal controls over financial
        reporting.


Date:
      December 17,
      2007                                                                           By:             /s/
      STEVEN S. BOSS


Steven
      S. Boss


Chief
      Executive
      Officer


(Principal
      Executive
      Officer)


30


**Exhibit
        31.2**
 
 **CERTIFICATION
        PURSUANT TO 17 CFR 240.13a-14(a)**
 **PROMULGATED
        UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**


I,
        J.
        Robert Hipps, Interim Chief Financial Officer of Commerce Energy Group, Inc.,
        certify that:
 
 1.
        I have
        reviewed this quarterly report on Form 10-Q for the quarter ended October
        31,
        2007 of Commerce Energy Group, Inc.;
 
 2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
 
 3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report;
 
 4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 (a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared;
 
 (c)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
 
 (d)
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter that has materially affected, or is reasonably likely to materially
        affect, the registrant’s internal controls over financial reporting;
        and
 
 5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
 
 (a)
        All
        significant deficiencies and material weaknesses in the design or operation
        of
        internal controls over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
 
 (b)
        Any
        fraud, whether or not material, that involves management or other employees
        who
        have a significant role in the registrant’s internal controls over financial
        reporting.


Date:
      December
      17, 2007                                                                           By:          /s/
      J. ROBERT HIPPS


J.
      Robert Hipps


Interim
      Chief Financial
      Officer


(Principal
      Financial
      Officer)


31


**Exhibit
      32.1**





**CERTIFICATION
      PURSUANT TO**


**RULE
      13(a)-14(b) AND 18 U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO**


**SECTION
      906 OF THE SARBANES-OXLEY ACT OF 2002**





In
      connection with the Quarterly Report of Commerce Energy Group, Inc. (the
“Company”) on Form 10-Q for the quarterly period ended October 31, 2007, as
      filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Steven S. Boss, Chief Executive Officer of the Company, hereby
      certify pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002, that, to my knowledge:





1.
            The
                Report fully complies with the requirements of section 13(a) or 15(d)
                of
                the Securities Exchange Act of 1934;
                and





2.
            The
                information contained in the Report fairly presents, in all material
                respects, the financial condition and results of operations of the
                Company.





Date:
      December 17,
      2007                                                                           By:             /s/
      STEVEN S. BOSS


Steven
      S. Boss


Chief
      Executive
      Officer


(Principal
      Executive
      Officer)


32


**Exhibit
      32.2**





**CERTIFICATION
      PURSUANT TO**


**RULE
      13(a)-14(b) AND 18 U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO**


**SECTION
      906 OF THE SARBANES-OXLEY ACT OF 2002**





In
        connection with the Quarterly Report of Commerce Energy Group, Inc. (the
        “Company”) on Form 10-Q for the quarterly period ended October 31, 2007, as
        filed with the Securities and Exchange Commission on the date hereof (the
        “Report”), I, J. Robert Hipps, Interim Chief Financial Officer of the Company,
        hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
        906
        of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
 1.
              The
                  Report fully complies with the requirements of Section 13(a) or
                  15(d) of
                  the Securities Exchange Act of 1934;
                  and
 
 2.
              The
                  information contained in the Report fairly presents, in all material
                  respects, the financial condition and results of operations of
                  the
                  Company.





Date:
      December
      17, 2007                                                                           By:         /s/
      J. ROBERT HIPPS


J.
      Robert Hipps


Interim
      Chief Financial
      Officer


(Principal
      Financial
      Officer)


33