##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended October 31, 2005                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 001-32239


COMMERCE ENERGY GROUP, INC.


(Exact name of registrant as specified in its charter)





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


þ o


o þ


o þ












---



##### 










COMMERCE ENERGY GROUP, INC.


Form 10-Q


For the Period Ended October 31, 2005


Index


|             |  |                                                                                                                                     |    |      |    | 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|             |  |                                                                                                                                     |    | Page |   
|             |  |                                                                                                                                     |    |      |   
|Part I      |  | Financial Information                                                                                                               |    |      | 2  | 
|Item 1.      |  | Financial Statements:                                                                                                               |    |      |    | 
|             |  | Condensed Consolidated Statements of
    Operations for the three months ended October 31, 2005 and
    October 31, 2004 (Restated) |    |      | 2  | 
|             |  | Condensed Consolidated Balance Sheets as of
    October 31, 2005 and July 31, 2005                                                  |    |      | 3  | 
|             |  | Condensed Consolidated Statements of Cash
    Flows for the three months ended October 31, 2005 and
    October 31, 2004 (Restated) |    |      | 4  | 
|             |  | Notes to Condensed Consolidated Financial
    Statements                                                                            |    |      | 5  | 
|Item 2.      |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                                           |    |      | 13 | 
|Item 3.      |  | Quantitative and Qualitative Disclosures About Market Risk                                                                          |    |      | 26 | 
|Item 4.      |  | Controls and Procedures                                                                                                             |    |      | 26 | 
|Part II     |  | Other Information                                                                                                                   |    |      | 26 | 
|Item 6.      |  | Exhibits                                                                                                                            |    |      | 26 | 
|Signatures   |  |                                                                                                                                     | 30 |     
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2





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##### Table of Contents



FORWARD-LOOKING INFORMATION










| |   |                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regulatory changes in the states in which we operate that could
    adversely affect our operations;                                                                                                                                                                                                                                                                  
|
| |  | our continued ability to obtain and maintain licenses from the
    states in which we operate;                                                                                                                                                                                                                                                                        
|
| |  | changes in the restructuring of retail markets which could
    prevent us from selling electricity and natural gas on a
    competitive basis;                                                                                                                                                                                                                        
|
| |  | our dependence upon a limited number of third-party suppliers of
    electricity and natural gas;                                                                                                                                                                                                                                                                     
|
| |  | our dependence upon a limited number of local electric and
    natural gas utilities to transmit and distribute the electricity
    and natural gas we sell to our customers;                                                                                                                                                                                         
|
| |  | fluctuations in market prices for electricity and natural gas;                                                                                                                                                                                                                                                                                                        
|
| |  | decisions by electricity and natural gas utilities not to raise
    their rates to reflect higher market cost of electricity and
    natural gas, thereby adversely affecting our competitiveness;                                                                                                                                                                    
|
| |  | our ability to successfully integrate businesses we may acquire;                                                                                                                                                                                                                                                                                                      
|
| |  | our ability to successfully compete in new electricity and
    natural gas markets that we enter;                                                                                                                                                                                                                                                                     
|
| |  | our ability to obtain and retain credit necessary to support
    both current operations and future growth and profitability;                                                                                                                                                                                                                                         
|
| |  | seasonal weather or force majeure events that adversely impact
    electricity and natural gas supply and infrastructure and which
    could prevent us from competitively servicing the demand
    requirements of our customers; and                                                                                                                                
|
| |  | our dependence upon independent system operators, regional
    transmission organizations, natural gas transmission companies,
    and local distribution companies to properly coordinate and
    manage their transmission grids and distribution networks, and
    to accurately and timely calculate and allocate the cost of
    services to market participants.



1



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##### Table of Contents






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,        |       
|                                    |                                       |                    |       
|                                    |                                       | 2005               |        |            | 2004 |  
|                                    |                                       |                    |        |            |      |  
|                                    |                                       |                    |        | (Restated) |     
|Net revenue                         |                                       | $                  | 64,368 |            |      | $ | 58,496 |       
|Direct energy costs                 |                                       |                    | 56,128 |            |      |   | 51,335 |       
|                                    |                                       |                    |        |            |      |  
|Gross profit                        |                                       |                    | 8,240  |            |      |   | 7,161  |       
|Selling and marketing expenses      |                                       |                    | 698    |            |      |   | 953    |       
|General and administrative expenses |                                       |                    | 7,609  |            |      |   | 5,007  |       
|                                    |                                       |                    |        |            |      |  
|Income (loss) from operations       |                                       |                    | (67    | )          |      |   | 1,201  |       
|Other income and expenses:          |                                       |                    |        |            |      |   |        |       
|                                    | Initial formation litigation expenses |                    |        |           |      |   |        | (1,439 | )
|                                    | Interest income, net                  |                    |        | 287        |      |   |        | 190    |  
|                                    |                                       |                    |        |            |      |  
|Net income (loss)                   |                                       | $                  | 220    |            |      | $ | (48    | )     
|                                    |                                       |                    |        |            |      |  
|Net income (loss) per common share: |                                       |                    |        |            |      |   |        |       
|                                    | Basic and diluted                     |                    | $      | 0.01       |      |   | $      | (0.00  | )
|                                    |                                       |                    |        |            |      |  



2



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##### Table of Contents






COMMERCE ENERGY GROUP, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


|                                     |                                                                                                                                                                              |                                            |        |        |          |  |        |        |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------ | -------- |  | ------ | ------ | ------- | 
|                                     |                                                                                                                                                                              | October 31,                                |        |        | July 31, | 
|                                     |                                                                                                                                                                              | 2005                                       |        |        | 2005     | 
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | (Unaudited)                                |        |        |         
|ASSETS                              
|Current assets:                      |                                                                                                                                                                              |                                            |        |        |          |  |        |       
|                                     | Cash and cash equivalents                                                                                                                                                    |                                            | $      | 21,233 |          |  | $      | 33,344 |        
|                                     | Accounts receivable, net                                                                                                                                                     |                                            |        | 27,565 |          |  |        | 27,843 |        
|                                     | Inventory                                                                                                                                                                    |                                            |        | 8,140  |          |  |        | 4,561  |        
|                                     | Prepaid expenses and other current assets                                                                                                                                    |                                            |        | 7,708  |          |  |        | 3,542  |        
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | Total current assets                       |        |        | 64,646   |  |        |        | 69,290  | 
|Restricted cash and cash equivalents |                                                                                                                                                                              |                                            | 8,313  |        |          |  | 8,222  |       
|Deposits                             |                                                                                                                                                                              |                                            | 13,201 |        |          |  | 11,347 |       
|Investments                          |                                                                                                                                                                              |                                            | 91     |        |          |  | 91     |       
|Property and equipment, net          |                                                                                                                                                                              |                                            | 2,251  |        |          |  | 2,007  |       
|Goodwill                             |                                                                                                                                                                              |                                            | 6,801  |        |          |  | 6,801  |       
|Other intangible assets              |                                                                                                                                                                              |                                            | 4,597  |        |          |  | 4,874  |       
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | Total assets                               |        | $      | 99,900   |  |        | $      | 102,632 | 
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                              |                                            |        |        |          |  |        |       
|                                     | Accounts payable                                                                                                                                                             |                                            | $      | 22,901 |          |  | $      | 25,625 |        
|                                     | Accrued liabilities                                                                                                                                                          |                                            |        | 6,664  |          |  |        | 6,946  |        
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | Total current liabilities                  |        |        | 29,565   |  |        |        | 32,571  | 
|Stockholders equity:                |                                                                                                                                                                              |                                            |        |        |          |  |        |       
|                                     | Common stock  150,000 shares authorized with
    $0.001 par value; 31,436 shares issued and outstanding
    at July 31, 2005 and 31,646 (unaudited) at
    October 31, 2005 |                                            |        | 62,609 |          |  |        | 62,609 |        
|                                     | Share-based compensation                                                                                                                                                     |                                            |        | 231    |          |  |        |       |        
|                                     | Other comprehensive income (loss)                                                                                                                                            |                                            |        | (177   | )        |  |        |       |        
|                                     | Retained earnings                                                                                                                                                            |                                            |        | 7,672  |          |  |        | 7,452  |        
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | Total stockholders equity                 |        |        | 70,335   |  |        |        | 70,061  | 
|                                     |                                                                                                                                                                              |                                            |        |        |          | 
|                                     |                                                                                                                                                                              | Total liabilities and stockholders equity |        | $      | 99,900   |  |        | $      | 102,632 | 
|                                     |                                                                                                                                                                              |                                            |        |        |          | 



3



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COMMERCE ENERGY GROUP, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)


|                                                                                                       |                                              |                                   |         |            |        |   |        |     |        |  
|------------------------------------------------------------------------------------------------------ | -------------------------------------------- | --------------------------------- | ------- | ---------- | ------ | - | ------ | --- | ------ | -
|                                                                                                       |                                              | Three Months Ended                |        
|                                                                                                       |                                              | October 31,                       |        
|                                                                                                       |                                              |                                   |        
|                                                                                                       |                                              | 2005                              |         |            | 2004   |  
|                                                                                                       |                                              |                                   |         |            |        |  
|                                                                                                       |                                              |                                   |         | (Restated) |       
|Cash Flows From Operating Activities                                                                   |                                              |                                   |         |            |        |   |        |    
|Net income (loss)                                                                                      |                                              | $                                 | 220     |            |        | $ | (48    | )  
|Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                              |                                   |         |            |        |   |        |    
|                                                                                                       | Depreciation                                 |                                   |         | 270        |        |   |        | 354 |       
|                                                                                                       | Amortization                                 |                                   |         | 277        |        |   |        | 168 |       
|                                                                                                       | Provision for doubtful accounts              |                                   |         | 344        |        |   |        | 548 |       
|                                                                                                       | Stock-based compensation expense             |                                   |         | 231        |        |   |        | 24  |       
|                                                                                                       | Changes in operating assets and liabilities: |                                   |         |            |        |   |        |     |       
|                                                                                                       |                                              | Accounts receivable, net          |         |            | (65    | ) |        |     | 3,119  |  
|                                                                                                       |                                              | Inventory                         |         |            | (3,579 | ) |        |     |       |  
|                                                                                                       |                                              | Prepaid expenses and other assets |         |            | (6,021 | ) |        |     | 554    |  
|                                                                                                       |                                              | Accounts payable                  |         |            | (2,724 | ) |        |     | (3,769 | )
|                                                                                                       |                                              | Accrued liabilities and other     |         |            | (459   | ) |        |     | (847   | )
|                                                                                                       |                                              |                                   |         |            |        |  
|Net cash provided by (used in) operating activities                                                    |                                              |                                   | (11,506 | )          |        |   | 103    |    
|Cash Flows From Investing Activities                                                                   |                                              |                                   |         |            |        |   |        |    
|Purchase of property and equipment                                                                     |                                              |                                   | (514    | )          |        |   | (151   | )  
|                                                                                                       |                                              |                                   |         |            |        |  
|Net cash used in investing activities                                                                  |                                              |                                   | (514    | )          |        |   | (151   | )  
|Cash Flows From Financing Activities                                                                   |                                              |                                   |         |            |        |   |        |    
|Increase in restricted cash and cash equivalents                                                       |                                              |                                   | (91     | )          |        |   | (260   | )  
|                                                                                                       |                                              |                                   |         |            |        |  
|Net cash used in financing activities                                                                  |                                              |                                   | (91     | )          |        |   | (260   | )  
|                                                                                                       |                                              |                                   |         |            |        |  
|Decrease in cash and cash equivalents                                                                  |                                              |                                   | (12,111 | )          |        |   | (308   | )  
|Cash and cash equivalents at beginning of period                                                       |                                              |                                   | 33,344  |            |        |   | 54,065 |    
|                                                                                                       |                                              |                                   |         |            |        |  
|Cash and cash equivalents at end of period                                                             |                                              | $                                 | 21,233  |            |        | $ | 53,757 |    
|                                                                                                       |                                              |                                   |         |            |        |  



4



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COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(In thousands, except per share amounts)




|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation





| |                                                                       
| | ----------------------------------------------------------------------
| | Preparation of Interim Condensed Consolidated Financial
    Statements





| |                  
| | -----------------
| | Uses of Estimates





| |                  
| | -----------------
| | Reclassifications



5



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)




| |                    
| | -------------------
| | Revenue Recognition



|                         |                         |                    |        |            |      |   |        |        | 
|------------------------ | ----------------------- | ------------------ | ------ | ---------- | ---- | - | ------ | ------ | 
|                         |                         | Three Months Ended |       
|                         |                         | October 31,        |       
|                         |                         |                    |       
|                         |                         | 2005               |        |            | 2004 |  
|                         |                         |                    |        |            |      |  
|                         |                         |                    |        | (Restated) |     
|Retail electricity sales |                         | $                  | 49,641 |            |      | $ | 52,089 |       
|Excess energy sales      |                         |                    | 5,350  |            |      |   | 5,806  |       
|                         |                         |                    |        |            |      |  
|                         | Total electricity sales |                    |        | 54,991     |      |   |        | 57,895 | 
|Retail natural gas sales |                         |                    | 8,930  |            |      |   |       |       
|Other                    |                         |                    | 447    |            |      |   | 601    |       
|                         |                         |                    |        |            |      |  
|                         | Net revenue             |                    | $      | 64,368     |      |   | $      | 58,496 | 
|                         |                         |                    |        |            |      |  





| |                         
| | ------------------------
| | Stock-Based Compensation

Share-Based Payments Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees.




|                                         |  |                    |        |            |      |  |        |  
|---------------------------------------- |  | ------------------ | ------ | ---------- | ---- |  | ------ | -
|                                         |  | Three Months Ended |       
|                                         |  | October 31,        |       
|                                         |  |                    |       
|                                         |  | 2005               |        |            | 2004 | 
|                                         |  |                    |        |            |      | 
|                                         |  |                    |        | (Restated) |     
|Weighted-average risk-free interest rate |  |                    | 3.8    | %          |      |  | 4.0    | %
|Average expected life in years           |  |                    | 5.68   |            |      |  | 6.0    |  
|Expected dividends                       |  |                    | None   |            |      |  | None   |  
|Volatility                               |  |                    | 0.8252 |            |      |  | 0.8252 |  

6



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)




|                               |  |                     |       |           |                |   |            |          |  |   |           |  |  |   |      | 
|------------------------------ |  | ------------------- | ----- | --------- | -------------- | - | ---------- | -------- |  | - | --------- |  |  | - | ---- | 
|                               |  | Options Outstanding |      
|                               |  |                     |      
|                               |  |                     |       | Weighted- |               
|                               |  |                     |       | Weighted  |                |   | Average    |         
|                               |  |                     |       | Average   |                |   | Fair Value |         
|                               |  | Number of           |       |           | Exercise Price |   |            | Exercise |  |   | of Common | 
|                               |  | Shares              |       |           | Per Share      |   |            | Price    |  |   | Stock     | 
|                               |  |                     |       |           |                |   |            |          |  |   |           | 
|Balance at July 31, 2005       |  |                     | 8,872 |           |                | $ | 0.05-$3.75 |          |  | $ | 2.24      |  |  |   |      | 
|Options granted:               |  |                     |       |           |                |   |            |          |  |   |           |  |  |   |      | 
|Other(1)                       |  |                     | 350   |           |                | $ | 1.67-$1.80 |          |  | $ | 1.78      |  |  | $ | 1.52 | 
|Options cancelled              |  |                     | (87   | )         |                | $ | 2.08       |          |  | $ | 2.08      |  |  |   |      | 
|                               |  |                     |       |           |                |   |            |          |  |   |           | 
|Balance at October 31, 2005(2) |  |                     | 9,135 |           |                | $ | 0.05-$3.75 |          |  | $ | 2.23      |  |  |   |      | 
|                               |  |                     |       |           |                |   |            |          |  |   |           | 






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options were granted with exercise prices greater than the fair
    value of the Companys common stock at the respective dates
    of grant.
|   
|(2) | Options exercisable as of October 31, 2005 were 8,810 with
    a weighted average exercise price of $2.24.                                   



Accounting for Stock
Issued to Employees Accounting for
Stock-Based Compensation,




| |           
| | ----------
| | Income Tax





| |                  
| | -----------------
| | Segment Reporting



7



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)




| |                         
| | ------------------------
| | Accounts Receivable, Net



|                                     |  |             |        |   |          |   |        |  
|------------------------------------ |  | ----------- | ------ | - | -------- | - | ------ | -
|                                     |  | October 31, |        |   | July 31, |  
|                                     |  | 2005        |        |   | 2005     |  
|                                     |  |             |        |   |          |  
|Billed                               |  | $           | 22,857 |   |          | $ | 22,017 |  
|Unbilled                             |  |             | 10,550 |   |          |   | 11,324 |  
|                                     |  |             |        |   |          |  
|                                     |  | $           | 33,407 |   |          | $ | 33,341 |  
|Less allowance for doubtful accounts |  |             | (5,842 | ) |          |   | (5,498 | )
|                                     |  |             |        |   |          |  
|Accounts receivable, net             |  | $           | 27,565 |   |          | $ | 27,843 |  
|                                     |  |             |        |   |          |  



| |          
| | ---------
| | Inventory





|   |                                                 
|-- | ------------------------------------------------
|2. | Basic and Diluted Income (Loss) per Common Share





|                                                                     |  |                    |        |            |      |   |        |  
|-------------------------------------------------------------------- |  | ------------------ | ------ | ---------- | ---- | - | ------ | -
|                                                                     |  | Three Months Ended |       
|                                                                     |  | October 31,        |       
|                                                                     |  |                    |       
|                                                                     |  | 2005               |        |            | 2004 |  
|                                                                     |  |                    |        |            |      |  
|                                                                     |  |                    |        | (Restated) |     
|Numerator:                                                           |  |                    |        |            |      |   |        |  
|Net income (loss) applicable to common stock  basic
    and diluted |  | $                  | 220    |            |      | $ | (48    | )
|                                                                     |  |                    |        |            |      |  
|Denominator:                                                         |  |                    |        |            |      |   |        |  
|Weighted-average outstanding common shares  basic                   |  |                    | 31,719 |            |      |   | 30,519 |  
|Effect of stock options                                              |  |                    | 280    |            |      |   |       |  
|                                                                     |  |                    |        |            |      |  
|Weighted-average outstanding common shares  diluted                 |  |                    | 31,999 |            |      |   | 30,519 |  
|                                                                     |  |                    |        |            |      |  





|   |                      
|-- | ---------------------
|3. | Market and Regulatory



8



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)






| |            
| | -----------
| | Electricity













9



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)








| |            
| | -----------
| | Natural Gas





|   |            
|-- | -----------
|4. | Investments



,




|   |             
|-- | ------------
|5. | Acquisitions





10



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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)




|   |              
|-- | -------------
|6. | Contingencies



| |           
| | ----------
| | Litigation





|   |                                 
|-- | --------------------------------
|7. | Derivative Financial Instruments











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##### Table of Contents



COMMERCE ENERGY GROUP, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(In thousands, except per share amounts)






|   |                  
|-- | -----------------
|8. | Subsequent Events



| |                                      
| | -------------------------------------
| | Termination of Sales Agency Agreement







| |                                           
| | ------------------------------------------
| | Settlement Agreements with Former Officers









12



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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.

Overview












Acquisitions




| |                       
| | ----------------------
| | ACN Energy Transaction





13



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| |                    
| | -------------------
| | Skipping Stone Inc.



Investments






Market and Regulatory






| |            
| | -----------
| | Electricity







14



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| |            
| | -----------
| | Natural Gas



Critical Accounting Policies and Estimates






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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

15



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 is no longer available
    of our Pennsylvania market, or the PJM-ISO. Accordingly, we
    designate forward physical delivery contracts entered into for
    the PJM-ISO, and certain other forward fixed price purchases and
    financial derivatives as cash flow hedges, whereby mark to
    market accounting gains or losses are deferred and reported as a
    component of Other Comprehensive Income (Loss) until the time of
    physical delivery and the fair value of the contracts 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
    Other Comprehensive Income (Loss) and subsequently reclassified
    as direct energy cost in our consolidated statement of
    operations as the power is delivered. To the extent that the
    hedges are not effective, the ineffective portion of the changes
    in fair market value is recorded currently in direct energy
    costs. We intend to continue to 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. Additionally, we utilize 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 sales
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | We determined that our documentation during fiscal 2005 was
    inadequate for the contracts that were designated for cash flow
    hedge accounting treatment pursuant to the provisions of
    SFAS No. 133, resulting in current period mark to
    market accounting for all of our electricity forward physical
    contracts and financial derivatives which had been designated as
    cash flow hedges in fiscal 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Independent System Operator Costs  Included in
    direct energy costs, along with electricity that we purchase,
    are scheduling coordination costs and other ISO fees and
    charges. The actual ISO costs are not finalized until a
    settlement process by the ISO is performed for each days
    activities for all grid participants. Prior to the completion of
    settlement (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 fees resulting in the need to
    adjust the previously estimated costs.
|
| |  | Transportation and Delivery Costs  Included in
    direct energy costs, along with natural gas that we purchase,
    are interstate pipeline costs and utility service charges. These
    fees are identified in the month incurred and settled in the
    following month.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Allowance for Doubtful Accounts  We maintain
    allowances for doubtful accounts for estimated losses resulting
    from non-payment of customer billings. If the financial
    condition of our customers were to deteriorate, resulting in an
    impairment of their ability to make payments, additional
    allowances may be required.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Unbilled Receivables  Our customers are billed
    monthly throughout the month on a sequential basis or on a meter
    read cycle. Unbilled receivables represent the amount of
    electricity and natural gas                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

16



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | delivered to customers at the end of a reporting period, but not
    yet billed. Unbilled receivables from sales are estimated by us
    to be the number of kilowatt-hours or dekatherms delivered, but
    not yet billed, multiplied by the current customer average sales
    price per kilowatt-hour or dekatherms as applicable.                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Inventory  Inventory represents natural gas in
    storage as required by state regulatory bodies and contractual
    obligations under customer choice programs. Inventory is stated
    at the lower of cost or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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.

Results of Operations




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Three Months Ended October 31, 2005 Compared to Three
    Months Ended October 31, 2004



|                                    |  |                                |        |   |           |            |     |         |  |   |           |  |  |  |     |  
|----------------------------------- |  | ------------------------------ | ------ | - | --------- | ---------- | --- | ------- |  | - | --------- |  |  |  | --- | -
|                                    |  | Three Months Ended October 31, |       
|                                    |  |                                |       
|                                    |  | 2005                           |        |   | 2004      |           
|                                    |  |                                |        |   |           |           
|                                    |  | Dollars                        |        |   | % Revenue |            |     | Dollars |  |   | % Revenue | 
|                                    |  |                                |        |   |           |            |     |         |  |   |           | 
|                                    |  |                                |        |   |           | (Restated) |    
|Retail electricity sales            |  | $                              | 49,641 |   |           |            | 77  | %       |  | $ | 52,089    |  |  |  | 89  | %
|Natural gas sales                   |  |                                | 8,930  |   |           |            | 14  | %       |  |   |          |  |  |  |    |  
|Excess energy sales                 |  |                                | 5,350  |   |           |            | 8   | %       |  |   | 5,806     |  |  |  | 10  | %
|Other                               |  |                                | 447    |   |           |            | 1   | %       |  |   | 601       |  |  |  | 1   | %
|                                    |  |                                |        |   |           |            |     |         |  |   |           | 
|Net revenue                         |  |                                | 64,368 |   |           |            | 100 | %       |  |   | 58,496    |  |  |  | 100 | %
|Direct energy costs                 |  |                                | 56,128 |   |           |            | 87  | %       |  |   | 51,335    |  |  |  | 88  | %
|                                    |  |                                |        |   |           |            |     |         |  |   |           | 
|Gross profit                        |  |                                | 8,240  |   |           |            | 13  | %       |  |   | 7,161     |  |  |  | 12  | %
|Selling and marketing expenses      |  |                                | 698    |   |           |            | 1   | %       |  |   | 953       |  |  |  | 2   | %
|General and administrative expenses |  |                                | 7,609  |   |           |            | 12  | %       |  |   | 5,007     |  |  |  | 8   | %
|                                    |  |                                |        |   |           |            |     |         |  |   |           | 
|Income (loss) from operations       |  | $                              | (67    | ) |           |            |    |         |  | $ | 1,201     |  |  |  | 2   | %
|                                    |  |                                |        |   |           |            |     |         |  |   |           | 



17



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##### Table of Contents





| |            
| | -----------
| | Net Revenue



|                          |                                     |                                |        |        |           |            |     |         |   |   |           |        |  |  |     |    |  
|------------------------- | ----------------------------------- | ------------------------------ | ------ | ------ | --------- | ---------- | --- | ------- | - | - | --------- | ------ |  |  | --- | -- | -
|                          |                                     | Three Months Ended October 31, |       
|                          |                                     |                                |       
|                          |                                     | 2005                           |        |        | 2004      |           
|                          |                                     |                                |        |        |           |           
|                          |                                     | Dollars                        |        |        | % Revenue |            |     | Dollars |   |   | % Revenue |       
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       
|                          |                                     |                                |        |        |           | (Restated) |    
|Retail Electricity Sales: |                                     |                                |        |        |           |            |     |         |   |   |           |        |  |  |     |   
|                          | California                          |                                | $      | 17,683 |           |            |     | 28      | % |   | $         | 18,788 |  |  |     | 32 | %
|                          | Pennsylvania/ New Jersey            |                                |        | 17,913 |           |            |     | 28      | % |   |           | 21,328 |  |  |     | 36 | %
|                          | Michigan                            |                                |        | 7,849  |           |            |     | 12      | % |   |           | 11,973 |  |  |     | 21 | %
|                          | All Other States, principally Texas |                                |        | 6,196  |           |            |     | 10      | % |   |           |       |  |  |     |   |  
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       
|                          | Total Retail Electricity Sales      |                                | $      | 49,641 |           |            |     | 78      | % |   | $         | 52,089 |  |  |     | 89 | %
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       
|Natural Gas Sales:        |                                     |                                |        |        |           |            |     |         |   |   |           |        |  |  |     |   
|                          | California                          |                                |        | 4,426  |           |            |     | 7       | % |   |           |       |  |  |     |   |  
|                          | Ohio                                |                                |        | 2,621  |           |            |     | 4       | % |   |           |       |  |  |     |   |  
|                          | Georgia                             |                                |        | 1,162  |           |            |     | 2       | % |   |           |       |  |  |     |   |  
|                          | All Other States                    |                                |        | 721    |           |            |     | 1       | % |   |           |       |  |  |     |   |  
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       
|                          | Total Natural Gas Sales             |                                |        | 8,930  |           |            |     | 14      | % |   |           |       |  |  |     |   |  
|Excess Energy Sales       |                                     |                                | 5,350  |        |           |            | 8   | %       |   |   | 5,806     |        |  |  | 10  | % 
|Other                     |                                     |                                | 447    |        |           |            |    |         |   |   | 601       |        |  |  | 1   | % 
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       
|Net Revenue               |                                     | $                              | 64,368 |        |           |            | 100 | %       |   | $ | 58,496    |        |  |  | 100 | % 
|                          |                                     |                                |        |        |           |            |     |         |   |   |           |       











18



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##### Table of Contents







| |                    
| | -------------------
| | Direct Energy Costs









| |                               
| | ------------------------------
| | Selling and Marketing Expenses





| |                                    
| | -----------------------------------
| | General and Administrative Expenses





| |                                      
| | -------------------------------------
| | Initial Formation Litigation Expenses





| |                          
| | -------------------------
| | Benefit from Income Taxes



Liquidity and Capital Resources




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| |                        
| | -----------------------
| | Contractual Obligations



Factors That May Affect Future Results




| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If competitive restructuring of the retail energy market
    is delayed or does not result in viable competitive market
    rules, our business will be adversely affected.





20



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##### Table of Contents











| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face many uncertainties that may cause substantial
    operating losses and we cannot assure stockholders that we can
    achieve and maintain profitability.





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to attract and to retain a critical mass of
    customers at a reasonable cost;                                                         
|
| |  | our ability to continue to develop and maintain internal
    corporate organization and systems;                                                    
|
| |  | the continued competitive restructuring of retail energy markets
    with viable competitive market rules;                                          
|
| |  | our ability to effectively manage our energy procurement and
    shaping requirements, and to sell our energy at a sufficient
    profit margin; and
|
| |  | our ability to obtain and retain necessary credit necessary to
    support future growth and profitability.                                         



| |                                                                       
| | ----------------------------------------------------------------------
| | We may have difficulty obtaining a sufficient number of
    customers.







| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend upon internally developed, and, in the future
    will rely on vendor-developed, systems and processes to provide
    several critical functions for our business, and the loss of
    these functions could materially adversely impact our
    business.



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##### Table of Contents







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







| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not utilize bank lines of credit at this time and
    may have limited access to additional credit from banks and
    commodity suppliers.





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



22



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##### Table of Contents





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Some suppliers of electricity have been experiencing
    deteriorating credit quality.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | We are required to rely on utilities with whom we compete
    to perform some functions for our customers.







| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | We are required to rely on utilities with whom we compete
    to provide us accurate and timely data.





| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to federal and state regulations in our
    electricity and natural gas marketing business and the rules and
    regulations of regional Independent System Operators, or ISOs,
    in our electricity business.







23



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##### Table of Contents







| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | In some markets, we are required to bear credit risk and
    billing responsibility for our customers.





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







| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | weather conditions, including hydrological conditions such as
    precipitation, snow pack and stream flow;                                                                                                 
|
| |  | seasonality;                                                                                                                                                                                                
|
| |  | unexpected changes in customer usage;                                                                                                                                                                       
|
| |  | transmission or transportation constraints or inefficiencies;                                                                                                                                               
|
| |  | planned and unplanned plant or transmission line outages;                                                                                                                                                   
|
| |  | demand for electricity;                                                                                                                                                                                     
|
| |  | natural gas, crude oil and refined products, and coal supply
    availability to generators from whom we purchase electricity;
    natural disasters, wars, embargoes and other catastrophic
    events; and
|
| |  | federal, state and foreign energy and environmental regulation
    and legislation.                                                                                                                         



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may experience difficulty in successfully integrating
    and managing acquired businesses and in realizing anticipated
    economic, operational and other benefits in a timely
    manner





| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to maintain an effective system of internal
    controls, we may not be able to accurately report our financial
    results or prevent fraud. As a result, current and potential
    stockholders could lose confidence in our financial reporting,
    which would harm our business and the trading price of our
    stock.



24



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##### Table of Contents









| |                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investor confidence and share value may be adversely
    impacted if our independent auditors are unable to provide us
    with the attestation of the adequacy of our internal controls
    over financial reporting as of July 31, 2006 or
    July 31, 2007, as applicable, as required by
    Section 404 of the Sarbanes-Oxley Act of 2002.



25



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##### Table of Contents








Item 3. Quantitative and Qualitative Disclosures
about Market Risk.









Item 4. Controls and Procedures.


Evaluation of Disclosure Controls and Procedures




Changes in Internal Control Over Financial Reporting







PART II  OTHER INFORMATION





Item 6. Exhibits.




|        |   |             |  |                                                                                                                                                                                                                                                                                                                                 
|------- | - | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 3 | .1          |  | Amended and Restated Certificate of Incorporation of Commerce
    Energy Group, Inc., previously filed with the Commission 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 Commission 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.

26



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##### Table of Contents



|                                                                                 |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                                                          |    |            
|Number                                                                           |    | Description
|                                                                                 |    |            
|                                                                                 | 3  | .3          |  | Amended and Restated Bylaws of Commerce Energy Group, Inc.,
    previously filed with the Commission on July 6, 2004 as
    Exhibit 3.6 to Commerce Energy Group, Inc.s
    Registration Statement on Form 8-A and incorporated herein
    by reference.                                                                                                                                                   
|Material Contracts Relating to Management Compensation Plans
    or Arrangements
|                                                                                
|                                                                                 | 10 | .1          |  | Employment Agreement between Commerce Energy Group, Inc. and
    Steven S. Boss dated August 1, 2005, previously filed with
    the Commission on August 2, 2005 as Exhibit 10.1 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                                  
|                                                                                 | 10 | .2          |  | Stock Option Agreement between Commerce Energy Group, Inc. and
    Steven S. Boss dated August 1, 2005, previously filed with
    the Commission on August 2, 2005 as Exhibit 10.2 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                                
|                                                                                 | 10 | .3          |  | Restricted Stock Agreement between Commerce Energy Group, Inc.
    and Steven S. Boss dated August 1, 2005, previously filed
    with the Commission on August 2, 2005 as Exhibit 10.3
    to Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                            
|                                                                                 | 10 | .4          |  | Indemnification Agreement between Commerce Energy Group, Inc.
    and Steven S. Boss dated August 1, 2005, previously filed
    with the Commission on August 2, 2005 as Exhibit 10.4
    to Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                             
|                                                                                 | 10 | .5          |  | Agreement for Consulting Services by and between Lawrence
    Clayton, Jr. and Commerce Energy Group, Inc. dated as of
    August 1, 2005, previously filed with the Commission on
    August 5, 2005 as Exhibit 10.1 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                                             
|                                                                                 | 10 | .6          |  | Extension of Agreement for Consulting Services by and between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    dated as of September 29, 2005, previously filed with the
    Commission on September 30, 2005 as Exhibit 10.1 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                       
|                                                                                 | 10 | .7          |  | Agreement Not to Engage in Prohibited Activities dated as of
    October 8, 2005 by and among Peter T. Weigand, Commerce
    Energy, Inc. and Commerce Energy Group, Inc., previously filed
    with the Commission on October 13, 2005 as
    Exhibit 10.1 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                           
|                                                                                 | 10 | .8          |  | Agreement Not to Engage in Prohibited Activities dated as of
    October 8, 2005 by and among Richard L. Boughrum, Commerce
    Energy, Inc. and Commerce Energy Group, Inc., previously filed
    with the Commission on October 13, 2005 as
    Exhibit 10.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                        
|                                                                                 | 10 | .9          |  | Letter from Thomas Ulry to Commerce Energy Group, Inc. dated
    October 28, 2005 regarding the Employment Offer Letter
    Agreement between Commerce Energy Group, Inc. and Thomas L. Ulry
    dated May 31, 2005, previously filed with the Commission on
    October 31, 2005 as Exhibit 10.31 to Commerce Energy
    Group, Inc.s Annual Report on Form 10-K and
    incorporated herein by reference.
|                                                                                 | 10 | .10         |  | Settlement Agreement and General Release dated November 17,
    2005 by and among Peter T. Weigand, Commerce Energy Group, Inc.
    and Commerce Energy, Inc., previously filed with the Commission
    on November 23, 2005 as Exhibit 99.1 to Commerce
    Energy Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                      
|                                                                                 | 10 | .11         |  | Promissory Note dated November 17, 2005 by and between
    Commerce Energy Group, Inc. and Peter T. Weigand, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                        
|                                                                                 | 10 | .12         |  | Voting and Standstill Agreement dated November 17, 2005, by
    and between Commerce Energy Group, Inc. and Pete T. Weigand,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.3 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                                                                    
|                                                                                 | 10 | .13         |  | Amendment No. 1 to Executive Employment Agreement dated
    November 17, 2005, by and among Commerce Energy Group,
    Inc., Commerce Energy, Inc. and Peter T. Weigand, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.4 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                            

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|                        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                 |    |            
|Number                  |    | Description
|                        |    |            
|                        | 10 | .14         |  | Amendment No. 1 to Agreement Not to Engage in Prohibited
    Activities dated November 17, 2005 by and among Commerce
    Energy Group, Inc., Commerce Energy, Inc. and Peter T. Weigand,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.5 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                        
|                        | 10 | .15         |  | Amendment No. 1 to Agreement Not to Compete dated
    November 17, 2005 by and among Commerce Energy Group, Inc.,
    Commerce Energy, Inc. and Pete T. Weigand, previously filed with
    the Commission on November 23, 2005 as Exhibit 99.6 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                     
|                        | 10 | .16         |  | Agreement and Release dated November 17, 2005, by and
    among, Commerce Energy Group, Inc., Commerce Energy, Inc., Paul,
    Hastings, Janofsky & Walker LLP, Eric G. Alam, Bruno
    Kvetinskas, Greg Lander and Peter T. Weigand, previously filed
    with the Commission on November 23, 2005 as
    Exhibit 99.7 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.
|                        | 10 | .17         |  | Settlement Agreement and General Release dated November 17,
    2005 by and among Richard L. Boughrum, Commerce Energy Group,
    Inc. and Commerce Energy, Inc., previously filed with the
    Commission on November 23, 2005 as Exhibit 99.8 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                    
|                        | 10 | .18         |  | Promissory Note dated November 17, 2005 by and between
    Commerce Energy Group, Inc. and Richard L. Boughrum, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.9 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                      
|                        | 10 | .19         |  | Voting and Standstill Agreement dated November 17, 2005, by
    and between Commerce Energy Group, Inc. and Richard L. Boughrum,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.10 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                                                                                
|                        | 10 | .20         |  | Amendment No. 1 to Executive Employment Agreement dated
    November 17, 2005, by and among Commerce Energy Group,
    Inc., Commerce Energy, Inc. and Richard L. Boughrum, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.11 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                         
|                        | 10 | .21         |  | Amendment No. 1 to Agreement Not to Engage in Prohibited
    Activities dated November 17, 2005 by and among Commerce
    Energy Group, Inc., Commerce Energy, Inc. and Richard L.
    Boughrum, previously filed with the Commission on
    November 23, 2005 as Exhibit 99.12 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                    
|                        | 10 | .22         |  | Settlement Agreement and General Release dated November 17,
    2005, by and among Commerce Energy Group, Inc., Commerce Energy,
    Inc. and Eric G. Alam, previously filed with the Commission on
    November 23, 2005 as Exhibit 99.13 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                                         
|                        | 10 | .23         |  | Employment Agreement, dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.1 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                       
|                        | 10 | .24         |  | Stock Option Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                      
|                        | 10 | .25         |  | Restricted Stock Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.3 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                  
|                        | 10 | .26         |  | Indemnification Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.4 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                   
|Other Material Contract

28



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .27         |  | First Amendment to Sales Agency Agreement dated
    November 10, 2005, by and among Commerce Energy, Inc. and
    American Communications Network, previously filed with the
    Commission on November 17, 2005 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 required by Rule
    13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                                                                          
|        | 31 | .2          |  | Principal Financial Officer Certification required by
    Rule 13a-14(a) of the Securities Exchange Act of Act of
    1934.                                                                                                                                                                                                               
|        | 32 | .1          |  | Principal Executive Officer Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                               
|        | 32 | .2          |  | Principal Financial Officer Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                               

29



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##### Table of Contents






SIGNATURES






| |                            
| | ---------------------------
| | COMMERCE ENERGY GROUP, INC.



|                        |     |                   
|----------------------- | --- | ------------------
|Date: December 15, 2005 | By: | /s/ STEVEN S. BOSS

| |                              
| | -----------------------------
| |                              
| | Steven S. Boss               
| | Chief Executive Officer      
| | (Principal Executive Officer)



|                        |     |                          
|----------------------- | --- | -------------------------
|Date: December 15, 2005 | By: | /s/ LAWRENCE CLAYTON, JR.

| |                              
| | -----------------------------
| |                              
| | Lawrence Clayton, Jr.        
| | Chief Financial Officer      
| | (Principal Financial Officer)

30



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##### Table of Contents



EXHIBIT INDEX




|                                                                                 |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                                                                          |    |            
|Number                                                                           |    | Description
|                                                                                 |    |            
|                                                                                 | 3  | .1          |  | Amended and Restated Certificate of Incorporation of Commerce
    Energy Group, Inc., previously filed with the Commission 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 Commission 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          |  | Amended and Restated Bylaws of Commerce Energy Group, Inc.,
    previously filed with the Commission on July 6, 2004 as
    Exhibit 3.6 to Commerce Energy Group, Inc.s
    Registration Statement on Form 8-A and incorporated herein
    by reference.                                                                                                                                                   
|Material Contracts Relating to Management Compensation Plans
    or Arrangements
|                                                                                
|                                                                                 | 10 | .1          |  | Employment Agreement between Commerce Energy Group, Inc. and
    Steven S. Boss dated August 1, 2005, previously filed with
    the Commission on August 2, 2005 as Exhibit 10.1 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                                  
|                                                                                 | 10 | .2          |  | Stock Option Agreement between Commerce Energy Group, Inc. and
    Steven S. Boss dated August 1, 2005, previously filed with
    the Commission on August 2, 2005 as Exhibit 10.2 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                                
|                                                                                 | 10 | .3          |  | Restricted Stock Agreement between Commerce Energy Group, Inc.
    and Steven S. Boss dated August 1, 2005, previously filed
    with the Commission on August 2, 2005 as Exhibit 10.3
    to Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                            
|                                                                                 | 10 | .4          |  | Indemnification Agreement between Commerce Energy Group, Inc.
    and Steven S. Boss dated August 1, 2005, previously filed
    with the Commission on August 2, 2005 as Exhibit 10.4
    to Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                                                             
|                                                                                 | 10 | .5          |  | Agreement for Consulting Services by and between Lawrence
    Clayton, Jr. and Commerce Energy Group, Inc. dated as of
    August 1, 2005, previously filed with the Commission on
    August 5, 2005 as Exhibit 10.1 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                                             
|                                                                                 | 10 | .6          |  | Extension of Agreement for Consulting Services by and between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    dated as of September 29, 2005, previously filed with the
    Commission on September 30, 2005 as Exhibit 10.1 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                       
|                                                                                 | 10 | .7          |  | Agreement Not to Engage in Prohibited Activities dated as of
    October 8, 2005 by and among Peter T. Weigand, Commerce
    Energy, Inc. and Commerce Energy Group, Inc., previously filed
    with the Commission on October 13, 2005 as
    Exhibit 10.1 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                           
|                                                                                 | 10 | .8          |  | Agreement Not to Engage in Prohibited Activities dated as of
    October 8, 2005 by and among Richard L. Boughrum, Commerce
    Energy, Inc. and Commerce Energy Group, Inc., previously filed
    with the Commission on October 13, 2005 as
    Exhibit 10.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                        
|                                                                                 | 10 | .9          |  | Letter from Thomas Ulry to Commerce Energy Group, Inc. dated
    October 28, 2005 regarding the Employment Offer Letter
    Agreement between Commerce Energy Group, Inc. and Thomas L. Ulry
    dated May 31, 2005, previously filed with the Commission on
    October 31, 2005 as Exhibit 10.31 to Commerce Energy
    Group, Inc.s Annual Report on Form 10-K and
    incorporated herein by reference.
|                                                                                 | 10 | .10         |  | Settlement Agreement and General Release dated November 17,
    2005 by and among Peter T. Weigand, Commerce Energy Group, Inc.
    and Commerce Energy, Inc., previously filed with the Commission
    on November 23, 2005 as Exhibit 99.1 to Commerce
    Energy Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                      

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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .11         |  | Promissory Note dated November 17, 2005 by and between
    Commerce Energy Group, Inc. and Peter T. Weigand, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                         
|        | 10 | .12         |  | Voting and Standstill Agreement dated November 17, 2005, by
    and between Commerce Energy Group, Inc. and Pete T. Weigand,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.3 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                                                                                     
|        | 10 | .13         |  | Amendment No. 1 to Executive Employment Agreement dated
    November 17, 2005, by and among Commerce Energy Group,
    Inc., Commerce Energy, Inc. and Peter T. Weigand, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.4 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                             
|        | 10 | .14         |  | Amendment No. 1 to Agreement Not to Engage in Prohibited
    Activities dated November 17, 2005 by and among Commerce
    Energy Group, Inc., Commerce Energy, Inc. and Peter T. Weigand,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.5 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                        
|        | 10 | .15         |  | Amendment No. 1 to Agreement Not to Compete dated
    November 17, 2005 by and among Commerce Energy Group, Inc.,
    Commerce Energy, Inc. and Pete T. Weigand, previously filed with
    the Commission on November 23, 2005 as Exhibit 99.6 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                     
|        | 10 | .16         |  | Agreement and Release dated November 17, 2005, by and
    among, Commerce Energy Group, Inc., Commerce Energy, Inc., Paul,
    Hastings, Janofsky & Walker LLP, Eric G. Alam, Bruno
    Kvetinskas, Greg Lander and Peter T. Weigand, previously filed
    with the Commission on November 23, 2005 as
    Exhibit 99.7 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.
|        | 10 | .17         |  | Settlement Agreement and General Release dated November 17,
    2005 by and among Richard L. Boughrum, Commerce Energy Group,
    Inc. and Commerce Energy, Inc., previously filed with the
    Commission on November 23, 2005 as Exhibit 99.8 to
    Commerce Energy Group, Inc.s Current Report on
    Form 8-K and incorporated herein by reference.                                                                    
|        | 10 | .18         |  | Promissory Note dated November 17, 2005 by and between
    Commerce Energy Group, Inc. and Richard L. Boughrum, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.9 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                      
|        | 10 | .19         |  | Voting and Standstill Agreement dated November 17, 2005, by
    and between Commerce Energy Group, Inc. and Richard L. Boughrum,
    previously filed with the Commission on November 23, 2005
    as Exhibit 99.10 to Commerce Energy Group, Inc.s
    Current Report on Form 8-K and incorporated herein by
    reference.                                                                                                
|        | 10 | .20         |  | Amendment No. 1 to Executive Employment Agreement dated
    November 17, 2005, by and among Commerce Energy Group,
    Inc., Commerce Energy, Inc. and Richard L. Boughrum, previously
    filed with the Commission on November 23, 2005 as
    Exhibit 99.11 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                         
|        | 10 | .21         |  | Amendment No. 1 to Agreement Not to Engage in Prohibited
    Activities dated November 17, 2005 by and among Commerce
    Energy Group, Inc., Commerce Energy, Inc. and Richard L.
    Boughrum, previously filed with the Commission on
    November 23, 2005 as Exhibit 99.12 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                    
|        | 10 | .22         |  | Settlement Agreement and General Release dated November 17,
    2005, by and among Commerce Energy Group, Inc., Commerce Energy,
    Inc. and Eric G. Alam, previously filed with the Commission on
    November 23, 2005 as Exhibit 99.13 to Commerce Energy
    Group, Inc.s Current Report on Form 8-K and
    incorporated herein by reference.                                                                         
|        | 10 | .23         |  | Employment Agreement, dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.1 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                                                                                                       

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##### Table of Contents



|                        |    |             |  |                                                                                                                                                                                                                                                                                                                                           
|----------------------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit                 |    |            
|Number                  |    | Description
|                        |    |            
|                        | 10 | .24         |  | Stock Option Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.2 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                   
|                        | 10 | .25         |  | Restricted Stock Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.3 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                               
|                        | 10 | .26         |  | Indemnification Agreement dated December 1, 2005 between
    Lawrence Clayton, Jr. and Commerce Energy Group, Inc.,
    previously filed with the Commission on December 6, 2005 as
    Exhibit 99.4 to Commerce Energy Group, Inc.s Current
    Report on Form 8-K and incorporated herein by reference.                                
|Other Material Contract
|                       
|                        | 10 | .27         |  | First Amendment to Sales Agency Agreement dated
    November 10, 2005, by and among Commerce Energy, Inc. and
    American Communications Network, previously filed with the
    Commission on November 17, 2005 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 required by Rule
    13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                                                                          
|                        | 31 | .2          |  | Principal Financial Officer Certification required by
    Rule 13a-14(a) of the Securities Exchange Act of Act of
    1934.                                                                                                                                                                                                               
|                        | 32 | .1          |  | Principal Executive Officer Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                               
|                        | 32 | .2          |  | Principal Financial Officer Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                               

33