10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number		Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone Number	I.R.S. Employer Identification Number
001-31403		PEPCO HOLDINGS, INC. ("Pepco Holdings," a Delaware   corporation) 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	52-2297449
001-1072		POTOMAC ELECTRIC POWER COMPANY ("Pepco," a District of   Columbia and Virginia   corporation) 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	53-0127880
001-13895		CONECTIV ("Conectiv," a Delaware   corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0377417
001-1405		DELMARVA POWER & LIGHT COMPANY ("DPL," a Delaware and   Virginia corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0084283
001-3559		ATLANTIC CITY ELECTRIC COMPANY ("ACE," a New Jersey   corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	21-0398280
333-59558		ATLANTIC CITY ELECTRIC   TRANSITION FUNDING LLC ("ACE Funding," a New Jersey   corporation) 800 King Street, P.O. Box 231 Wilmington, Delaware Telephone: (202)872-2000	51-0408521
Continued
Securities registered pursuant to Section 12(b) of the Act:
Registrant	Title of Each Class		Name of Each Exchange on Which Registered
Pepco Holdings	Common Stock, $.01 par value		New York Stock    Exchange
Pepco	Guarantee by Pepco of the 7-3/8% Trust Originated Preferred Securities issued by Potomac Electric Power Company Trust I		New York Stock    Exchange
DPL	Guarantee by DPL of the 8.125% Cumulative Trust Preferred Capital Securities of Delaware Power Financing I		New York Stock    Exchange
ACE	Guarantee by ACE of the 7-3/8% Cumulative Quarterly Income Preferred Securities, issued by Atlantic Capital II		New York Stock    Exchange
Securities registered pursuant to Section 12(g) of the Act:      None.
Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X . No    .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X .
Conectiv, DPL, ACE and ACE Funding meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with reduced disclosure format specified in General Instruction I(2) of Form 10-K.
Indicate by check mark whether Pepco Holdings is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X  .    No      .
None of Pepco, Conectiv, DPL, ACE or ACE Funding is an accelerated filer.

Registrant	Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 28, 2002	Number of Shares of Common Stock of the Registrant Outstanding at June 28, 2002
Pepco Holdings	$2.3 billion	($.01 par value)
Pepco	None (a)	100 ($.01 par value)
Conectiv	None (a)	100 ($.01 par value)
DPL	None (b)	1,000 ($2.25 par value)
ACE	None (b)	18,320,937 ($3 par value)
ACE Funding	None (c)

(a)	As of August 1, 2002, all voting and non-voting common equity is owned by Pepco Holdings. However, as of June 28, 2002 Pepco had 107,125,976 common shares outstanding with an aggregate market value of $2.3 billion and Conectiv had 83,067,713 common shares and 5,742,315 Class A common shares outstanding with an aggregate market value of $2.3 billion.
(b)	All voting and non-voting common equity is owned by Conectiv.
(c)	All voting and non-voting common equity is owned by ACE.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Pepco Holdings, Inc. definitive proxy statement for the 2003 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on March 6, 2003 are incorporated by reference into Part III of this report.

     THIS COMBINED FORM 10-K IS SEPARATELY FILED BY PEPCO HOLDINGS, PEPCO, CONECTIV, DPL, ACE, AND ACE FUNDING. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

TABLE OF CONTENTS
PART I			Page
Item 1.	-	Business	1
Item 2.	-	Properties	5
Item 3.	-	Legal Proceedings	7
Item 4.	-	Submission of Matters to a Vote of    Security Holders	9
PART II
Item 5.	-	Market for Registrant's Common Equity and    Related Stockholder Matters	10
Item 6.	-	Selected Financial Data	11
Item 7.	-	Management's Discussion and Analysis of    Financial Condition and Results of    Operations	13
Item 7A.	-	Quantitative and Qualitative Disclosures    About Market Risk	86
Item 8.	-	Financial Statements and    Supplementary Data	88
Item 9.	-	Changes in and Disagreements with    Accountants on Accounting and Financial    Disclosure	306
PART III
Item 10.	-	Directors and Executive Officers    of the Registrant	306
Item 11.	-	Executive Compensation	309
Item 12.	-	Security Ownership of Certain Beneficial Owners    and Management and Related Stockholder Matters	317
Item 13.	-	Certain Relationships and    Related Transactions	319
Item 14.	-	Controls and Procedures	319
PART IV
Item 15.	-	Exhibits, Financial Statement Schedules,    and Reports on Form 8-K	322
Schedule II  -		Valuation and Qualifying Accounts	322
Exhibit 11   -		Statements Re. Computation of Earnings    Per Common Share	339
Exhibit 12   -		Statements Re. Computation of Ratios	339
Exhibit 21   -		Subsidiaries of the Registrant	345
Exhibit 23   -		Consents of Independent Accountants	346
Report of Independent Accountants on Consolidated        Financial Statement Schedule			352
Signatures			357
Principal Executive Officer and Principal Financial Officer Certifications			360

THIS PAGE LEFT BLANK INTENTIONALLY

Item 1.    BUSINESS

WEBSITE ACCESS TO REPORTS

     Pepco Holdings and Pepco make available free of charge on Pepco Holdings' website (www.pepcoholdings.com) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These reports can be found at www.pepcoholdings.com/investors/index_secfilings.html.

ORGANIZATION

     Pepco Holdings, Inc. (Pepco Holdings or the Company, formerly New RC, Inc.), a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting Potomac Electric Power Company's (Pepco) acquisition of Conectiv. In accordance with the terms of the merger agreement, upon the consummation of the merger on August 1, 2002, Pepco and Conectiv became wholly owned subsidiaries of Pepco Holdings. Additionally, Pepco, through a series of transactions, transferred its ownership interests in its pre-merger subsidiaries Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services) to Pepco Holdings and PCI transferred its ownership interest in its pre-merger subsidiary Pepco Communications, Inc. (Pepcom) to Pepco Holdings. These transactions resulted in PCI, Pepco Energy Services, and Pepcom becom ing wholly owned subsidiaries of Pepco Holdings. Additionally, PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries and therefore, Pepco Holdings has a subsidiary service company that provides a variety of support services to Pepco Holdings and its subsidiaries. The costs of the service company are directly assigned or allocated to Pepco Holdings' or its subsidiaries based on prescribed allocation factors listed in the service agreement filed with, and approved by, the Securities and Exchange Commission (SEC). Pepco Holdings manages its operations as described below.

Power Delivery

     The largest component of Pepco Holdings' business is power delivery, which is conducted through its subsidiaries Pepco, Delmarva Power & Light Company (DPL), and Atlantic City Electric Company (ACE). Pepco, DPL and ACE are all regulated public utilities in the jurisdictions in which they serve customers. The operations of DPL and ACE collectively are referred to as "Conectiv Power Delivery."

Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements entered into with regulatory authorities, Pepco is required to provide electricity supply at specified rates (referred to as "default service") to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices tha t are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would have to find alternative sources of supply at rates then prevailing.

Conectiv Power Delivery

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides gas distribution service in northern Delaware. Under regulatory settlements, DPL is required to provide default electricity service in Maryland until July 2003 for non-residential customers and until July 2004 for residential customers, to customers in Delaware until May 2006 and to customers in Virginia until January 2004 (which may be extended to July 2007). Conectiv Energy (described below) supplies all of DPL's default service load requirements under a supply agreement that ends May 31, 2006. The terms of the supply agreement are structured to coincide with DPL's load requirements under each of its regulatory settlements. Conectiv Energy's resources for supplying DPL's default service load include electricity generated by Conectiv Energy's plants and electricity purchased under long-term agreements for the spo t market. DPL purchases gas supplies for its customers from marketers and producers in the spot market and under short-term and long-term agreements.

     ACE is engaged in the generation, transmission, and distribution of electricity in southern New Jersey. ACE has default service obligations, known as Basic Generation Service (BGS), for approximately 20 percent of the electricity supply to its customers. ACE expects to fulfill these obligations through the generation output from its fossil fuel-fired generating plants and through existing purchase power agreements with non-utility generators (NUG). As discussed in Note 14. Commitments and Contingencies to the Pepco Holdings Consolidated Financial Statements, in January 2003, ACE terminated its competitive bidding process to sell these generation assets.

     ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) during 2001. ACE Transition Funding, which is discussed in Note 14. Commitments and Contingencies to the Pepco Holdings Consolidated Financial Statements, is a wholly owned subsidiary of ACE.

Competitive Energy

     This component of the Company's business is conducted through subsidiaries of Conectiv Energy Holding Company (collectively referred to herein as Conectiv Energy) and Pepco Energy Services. Conectiv Energy Holding Company and Pepco Energy Services are subsidiaries of Pepco Holdings.

Conectiv Energy

     Conectiv Energy supplies power to DPL and provides wholesale power and ancillary services to the PJM power pool. Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility, multi-fuel capability and low capital requirements that can quickly change their output level on an economic basis. Mid-merit plants generally are operated during times when demand for electricity rises and prices are higher. Until March 3, 2003, Conectiv Energy also engaged in energy trading to take advantage of price fluctuations and arbitrage opportunities.

     As of December 31, 2002, Conectiv Energy owned and operated electric generating plants with 2,727 MW of capacity. In January 2002 Conectiv Energy began construction of a 1,100 MW combined cycle plant with six combustion turbines at a site in Bethlehem, Pennsylvania that is expected to become fully operational in stages. A total of 306 MW were added in 2002 at this site and an additional 794 MW of capacity will be added in 2003. In addition, Conectiv Energy has ordered seven combustion turbines which, with additional equipment, could be configured into up to three combined cycle plants with approximately 550 MW of capacity each.   Through December 31, 2002 a total of $192.3 million has been paid for these turbines.  The total cost to purchase the combustion turbines is approximately $235 million.  In August of 2002, as part of the acquisition of Conectiv by Pepco Holdings, the book value of these combustion turbines was adjusted down to the then fair market value of $153 million (approximately 35% lower than the purchase cost). This fair market value adjustment was recorded by Pepco Holdings and was not pushed down to, and recorded by, Conectiv. Construction of these additional plants is subject to market and other conditions but is currently scheduled to occur in phases to be completed in 2007 and 2008. In light of continuing declines in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv Energy is considering all of its options including further delaying delivery of equipment, delaying construction, selling the equipment and canceling equipment orders.

Pepco Energy Services

     Pepco Energy Services provides retail electricity and natural gas to residential, commercial, industrial and governmental customers in the District of Columbia and states in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management solutions to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, equipment operation and maintenance, fuel management, and appliance service agreements. In addition, Pepco Energy Services owns electricity generation plants with approximately 800 MW of peaking capacity, the output of which is sold in the wholesale market. Pepco Energy Services also purchases and sells electricity and natural gas in the wholesale markets to support its commitments to its retail customers.

Other Non-Regulated

     This component of Pepco Holdings' business is conducted through its subsidiaries PCI and Pepcom.

PCI

     PCI manages a portfolio of financial investments and strategic operating businesses that are designed to provide supplemental earnings and cash flow. PCI has been redirecting its investment operations to focus on investments that are related to the energy industry, such as energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets, located outside of the United States, that are designed to provide a long-term, stable stream of cash flow and earnings. PCI has reduced its previous concentration of investments in the aircraft industry from 33 aircraft in 1995 to three aircraft currently. PCI also owns a ten-story, 360,000 square foot office building in downtown Washington, D.C., which is leased to Pepco and serves as Pepco Holdings' and Pepco's corporate headquarters.

     PCI's utility industry products and services are provided through various operating companies. Its underground electric services company, W.A. Chester, provides high voltage construction and maintenance services to utilities and to other customers throughout the United States. PCI also owns Severn Cable, which provides low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

Pepcom

     Pepcom owns a 50% interest in Starpower Communications, LLC, a joint venture with RCN Corporation, which provides cable and telecommunication services to households in the Washington, D.C. area.

ENVIRONMENTAL MATTERS

     The information required by this Item relating to environmental matters for each registrant, which is included elsewhere in this document as follows, in incorporated by reference herein.

Registrant	10-K Item No.	Section
Pepco Holdings	Item 7.	Regulatory and Other Matters
Pepco	Item 7.	Regulatory and Other Matters
Conectiv	Item 8.	Note 24. Commitments and Contingencies
DPL	Item 8.	Note 17. Commitments and Contingencies
ACE	Item 8.	Note 19. Commitments and Contingencies
ACE Funding	None	None

NUMBER OF EMPLOYEES
Pepco Holdings has the following number of employees, by business operation, at December 31, 2002:
	Employees
Power Delivery*	4,346
Competitive Energy	897
Other non-regulated	70
Corporate	765
Total Employees	6,078
* Includes 1,982 Pepco employees

Item 2.     PROPERTIES

Pepco Holdings

Electric Generating Station		Location	Generating  Capacity   (kilowatts)
Coal-Fired
	Edge Moor	Wilmington, DE	260,000
	B L England	Beesley's Pt., NJ	284,000
	Conemaugh	New Florence, PA	65,000
	Keystone	Shelocta, PA	42,000
	Deepwater	Pennsville, NJ	80,000
			731,000
Oil-Fired
	Edge Moor	Wilmington, DE	445,000
	B L England	Beesley's Pt., NJ	155,000
	Deepwater	Pennsville, NJ	86,000
			686,000
Combustion Turbines/Combined Cycle
	Hay Road Units 1-4	Wilmington, DE	521,000
	Hay Road Units 5-8	Wilmington, DE	545,000
	Bethlehem Units 1-3	Bethlehem, PA	306,000
	Buzzard Point	Washington, DC	256,000
	Cumberland	Millville, NJ	84,000
	Sherman Avenue	Vineland, NJ	81,000
	Middle	Rio Grande, NJ	77,000
	Carll's Corner	Upper Deerfield Twp., NJ	73,000
	Cedar	Cedar Run, NJ	68,000
	Missouri Avenue	Atlantic City, NJ	60,000
	Mickleton	Mickleton, NJ	59,000
	Christiana	Wilmington, DE	45,000
	Deepwater	Pennsville, NJ	19,000
	Edge Moor	Wilmington, DE	13,000
	Madison Street	Wilmington, DE	11,000
	West	Marshallton, DE	15,000
	Delaware City	Delaware City, DE	16,000
	Tasley	Tasley, VA	26,000
			2,275,000
Diesel Units
	Crisfield	Crisfield, MD	10,000
	Bayview	Bayview, VA	12,000
	B L England	Beesley's Pt., NJ	8,000
	Keystone	Shelocta, PA	300
	Conemaugh	New Florence, PA	400
			30,700
Steam Generation
	Benning Road	Washington, DC	550,000
Total Electric Generating Capacity			4,272,700

     The electric properties of Pepco Holdings' subsidiaries are located in New Jersey, Delaware, Maryland, Virginia, Pennsylvania, and Washington, D.C. The above table sets forth the summer electric generating capacity of the electric generating plants owned by Pepco Holdings' subsidiaries.

     Substantially all of Pepco Holdings' utility plant and properties are subject to liens of the Mortgages under which First Mortgage Bonds are issued.

     At December 31, 2002 Pepco's principal assets are used to engage in the transmission and distribution of electric energy in the Washington, D.C., metropolitan area. Pepco's electric transmission and distribution systems include approximately 495 transmission poleline miles of overhead lines, 426 transmission cable miles of underground cables, 4,962 distribution poleline miles of overhead lines, and 23,394 distribution cable miles of underground cables.

     On a combined basis, the electric transmission and distribution systems of ACE and DPL include 2,661 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 13,655 distribution poleline miles of overhead lines, and 7,684 distribution cable miles of underground cables.

     DPL has a liquefied natural gas plant located in Wilmington, Delaware, with a storage capacity of 3.045 million gallons and an emergency sendout capability of 45,000 Mcf per day. DPL also owns eight natural gas city gate stations at various locations in its gas service territory. These stations have a total sendout capacity of 215,000 Mcf per day.

     The following table sets forth DPL's gas pipeline miles:

Transmission Mains	111 *
Distribution Mains	1,675
Service Lines	1,217
---------------------------------- * Includes 7.2 miles of joint-use gas pipeline that is used     10% for gas operations and 90% for electric generation.

     Additionally, Pepco Holdings and its subsidiaries own and occupy a number of properties and buildings that are used for office, service, and other purposes.

Pepco

     At December 31, 2002 Pepco's principal assets are used to engage in the transmission and distribution of electric energy in the Washington, D.C., metropolitan area. Pepco's electric transmission and distribution systems include approximately 495 transmission poleline miles of overhead lines, 426 transmission cable miles of underground cables, 4,962 distribution poleline miles of overhead lines, and 23,394 distribution cable miles of underground cables.

     Management is of the opinion that a discussion of properties of Conectiv and ACE Funding is not necessary to an understanding of the business of either registrant and, therefore, pursuant to General Instruction I(2)(d) of Form 10-K, such information is omitted.

Item 3.    LEGAL PROCEEDINGS

Pepco Holdings

     The legal proceedings for Pepco Holdings consist solely of those of its subsidiaries, described below.

Pepco

     During 1993, Pepco was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City and Baltimore County), in separate ongoing, consolidated proceedings each denominated, "In re: Personal Injury Asbestos Case." Pepco (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their Complaints. While the pleadings are not entirely clear, it appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, Pepco was served, in September 1993, with a third-party complaint by Owens Corning Fibergl ass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against Pepco on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third-party complaint against Pepco, seeking contribution for the same plaintiffs involved in the Owens Corning third-party complaint. Since the initial filings in 1993, approximately 90 additional individual suits have been filed against Pepco. The third-party complaints involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore City Court during 1994 without any payment by Pepco. As of December 31, 2002, approximately 200 cases were pending against Pepco. Of the 200 remaining asbestos cases pending against Pepco, approximately 35 of those cases have been tendered to Mirant for defense and indemnification pursuant to the Asset Purchase and Sale Agr eement which was executed in December 2000. While the aggregate amount specified in the remaining suits would exceed $400 million, Pepco believes the amounts are greatly exaggerated, as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial position. However, an unfavorable decision rendered against Pepco could have a material adverse effect on results of operations in the year in which a decision is rendered.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP, an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property. As a result of the oil spill, eleven class action lawsuits and two additional lawsuits on behalf of a number of Southern Maryland residents, businesses and watermen were filed against Pepco. On November 27, 2001, Pepco and ST Services entered into a Settlement Agreement with the various plaintiffs to settle all pending class action litigation stemming from the oil spill. Under the Settlement Agreement, a tota l of $2.25 million was placed in an escrow account to be distributed to watermen and property owner class members pursuant to a Plan of Distribution filed with the Court. On December 27, 2001, the Court entered an "Order Certifying Settlement Classes and Preliminarily Approving Proposed Settlement," which was approved in April 2002. In April 2002, the Claims Administrator provided the Court with a list of those members of the Settlement Classes which had timely excluded themselves from the Settlement Agreement. Approximately 80 class members elected to exclude themselves from the terms of the November 27, 2001 Settlement Agreement.

     Pepco is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.

Conectiv

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by Delmarva and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provisions of the mas ter power purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe that the Co mpany has material financial exposure related to the Enron bankruptcy.

     Conectiv, through its subsidiaries, is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on Conectiv's financial position or results of operations.

DPL

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by DPL and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provisions of the master p ower purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe that the Company has material financial exposure related to the Enron bankruptcy.

     DPL is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on its financial position or results of operations.

ACE

     ACE is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on its financial position or results of operations.

ACE Funding

     None.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Pepco Holdings - None.

Pepco - None.

     INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR CONECTIV, DPL, ACE, AND ACE FUNDING AS THEY MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND THEREFORE ARE FILING THIS FORM WITH A REDUCED FILING FORMAT.

Part II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

     The following table presents the dividends per share of Common Stock and the high and low of the daily Common Stock transaction prices as reported in The Wall Street Journal during each period. The New York Stock Exchange is the principal market on which Pepco Holding's Common Stock is traded.

Period	Dividends     Per Share	Price Range    High         Low
2002:
First Quarter	$ .25	$23.69	$21.70
Second Quarter	.25	23.83	19.10
Third Quarter	.25	21.88	15.37
Fourth Quarter	.25	21.08	18.30
	$1.00
2001:
First Quarter	$ .415	$24.90	$20.20
Second Quarter	.250	23.84	20.08
Third Quarter	.250	22.78	20.61
Fourth Quarter	.250	22.95	20.62
	$1.165

     Pepco's acquisition of Conectiv was consummated on August 1, 2002. All amounts prior to that date presented above represent Pepco amounts.

     The number of record holders of Common Stock was 88,719 at March 26, 2003, and 88,361 at December 31, 2002.

     There were 170,081,788 shares of the Company's $.01 par value Common Stock outstanding at March 26, 2003 and 169,982,361 outstanding at December 31, 2002. A total of 400 million shares is authorized.

     Pepco and Conectiv - The information required by this item is not applicable as all these companies' common stock is held by Pepco Holdings.

     DPL and ACE - The information required by this item is not applicable as all these companies' common stock is held by Conectiv.

     ACE Funding - The information required by this item is not applicable as all its common stock is held by ACE.

Item 6.    SELECTED FINANCIAL DATA

PEPCO HOLDINGS CONSOLIDATED FINANCIAL HIGHLIGHTS
		2002 (a)	2001	2000	1999	1998
	(In Millions, except Per Share Data)
Consolidated Operating Results
Total Operating Revenue	$	4,324.5	2,400.5	2,989.3	2,443.7	2,194.2
Total Operating Expenses	$	3,778.9	2,034.1	2,094.2	1,900.3	1,659.9
Operating Income	$	545.6	366.4	895.1	543.4	534.3
Other Expenses	$	190.4	105.3	192.7	172.6	180.0
Preferred Stock Dividend Requirements   of Subsidiaries	$	20.6	14.2	14.7	17.1	17.1
Income Tax Expense	$	124.1	83.5	341.2	114.5	122.3
Net Income	$	210.5	163.4	346.5	239.2	214.9
Redemption Premium/Expenses on   Preferred Stock	$	- -	- -	- -	1.0	6.6
Earnings Available for Common Stock	$	210.5	163.4	346.5	238.2	208.3
Common Stock Information
Basic Earnings Per Share of Common Stock	$	1.61	1.51	3.02	2.01	1.76
Diluted Earnings Per Share of Common Stock	$	1.61	1.50	2.96	1.98	1.73
Basic Common Shares Outstanding (Average)		131.1	108.5	114.9	118.5	118.5
Diluted Common Shares Outstanding (Average)		131.1	108.8	118.3	122.6	124.2
Cash Dividends Per Share of Common Stock	$	1.00	1.165	1.66	1.66	1.66
Year-End Stock Price	$	19.39	22.57	24.71	22.94	26.31
Book Value per Common Share	$	17.62	17.00	16.82	16.12	15.84
Other Information
Investment in Property, Plant and Equipment	$	10,625.0	4,361.9	4,284.7	6,784.3	6,657.8
Net Investment in Property, Plant   and Equipment	$	6,798.0	2,753.4	2,721.8	4,524.4	4,521.2
Total Assets	$	12,861.7	5,285.9	7,027.3	6,910.6	6,574.1
Capitalization
Short-term Debt (b)	$	812.7	350.2	211.6	199.5	191.7
Long-term Debt (c)	$	5,277.5	1,710.1	2,674.8	2,860.0	2,621.1
Redeemable Preferred Securities (d)	$	290.0	125.0	125.0	125.0	125.0
Preferred Stock	$	110.7	84.8	90.3	100.0	150.0
Shareholders' Equity	$	2,995.8	1,823.2	1,862.5	1,910.3	1,877.4
Total Capitalization and Short-term Debt	$	9,486.7	4,093.3	4,964.2	5,194.8	4,965.2

(a)	As a result of the acquisition of Conectiv that was completed on August 1, 2002, the Company's 2002 amounts include the operating results of Conectiv and its subsidiaries from August 1, 2002 through December 31, 2002, and therefore are not comparable with the prior years presented. For additional information, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations "Overview" and "Consolidated Results of Operations - Lack of Comparability of Operating Results with Prior Years" sections, herein.
(b)	Excludes current maturities of long-term debt, capital lease obligations due within one year, and the 2002 balance excludes $158.4 million of Conectiv's Variable Rate Demand Bonds (which on the accompanying 2002 consolidated balance sheet are included in short-term debt).
(c)	Excludes capital lease obligations. Includes current maturities of long-term debt and the 2002 balance includes the $158.4 million of Variable Rate Demand Bonds (which on the accompanying 2002 consolidated balance sheet are included in short-term debt).
(d)	Company obligated mandatorily redeemable preferred securities of subsidiary trust which holds solely parent junior subordinated debentures.

PEPCO CONSOLIDATED FINANCIAL HIGHLIGHTS
		2002 (a)	2001	2000	1999	1998
	(In Millions, except Per Share Data)
Consolidated Operating Results
Total Operating Revenue	$	1,988.0	2,400.5	2,989.3	2,443.7	2,194.2
Total Operating Expenses	$	1,633.1	2,034.1	2,094.2	1,900.3	1,659.9
Operating Income	$	324.9	366.4	895.1	543.4	534.3
Other Expenses	$	96.3	105.3	192.7	172.6	180.0
Distributions on Preferred Securities   of Subsidiary Trust	$	9.2	9.2	9.2	9.2	5.7
Income Tax Expense	$	80.3	83.5	341.2	114.5	122.3
Net Income	$	139.1	168.4	352.0	247.1	226.3
Dividends on Preferred Stock	$	5.0	5.0	5.5	7.9	11.4
Redemption Expenses on Preferred Stock		-	-	-	1.0	6.6
Earnings Available for Common Stock	$	134.1	163.4	346.5	238.2	208.3
Common Stock Information
Basic Earnings Per Share of Common Stock	$	-	1.51	3.02	2.01	1.76
Diluted Earnings Per Share of Common Stock	$	-	1.50	2.96	1.98	1.73
Basic Common Shares Outstanding (Average)		-	108.5	114.9	118.5	118.5
Diluted Common Shares Outstanding (Average)		-	108.8	118.3	122.6	124.2
Cash Dividends Per Share of Common Stock	$	1.00	1.165	1.66	1.66	1.66
Year-End Stock Price	$	-	22.57	24.71	22.94	26.31
Book Value per Common Share	$	-	17.00	16.82	16.12	15.84
Other Information
Investment in Property, Plant and Equipment	$	4,550.0	4,361.9	4,284.7	6,784.3	6,657.8
Net Investment in Property, Plant   and Equipment	$	2,810.3	2,753.4	2,721.8	4,524.4	4,521.2
Total Assets	$	3,536.4	5,285.9	7,027.3	6,910.6	6,574.1
Capitalization
Short-term Debt (b)	$	40.0	350.2	211.6	199.5	191.7
Long-term Debt (c)	$	1,133.5	1,710.1	2,674.8	2,860.0	2,621.1
Redeemable Preferred Securities (d)	$	125.0	125.0	125.0	125.0	125.0
Preferred Stock	$	82.8	84.8	90.3	100.0	150.0
Shareholders' Equity	$	975.4	1,823.2	1,862.5	1,910.3	1,877.4
Total Capitalization and Short-term Debt	$	2,356.7	4,093.3	4,964.2	5,194.8	4,965.2

(a)	In accordance with the terms of the merger agreement with Conectiv, on August 1, 2002 ownership of Pepco's pre-merger subsidiaries (PCI and Pepco Energy Services) was transferred to Pepco Holdings, Inc., Pepco's new parent company. Accordingly, the 2002 amounts above are not comparable with the prior years presented. For additional information, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations "Overview" and "Consolidated Results of Operations - Lack of Comparability of Operating Results with Prior Years" sections, herein.
(b)	Excludes current maturities of long-term debt and capital lease obligations due within one year.
(c)	Excludes capital lease obligations and includes current maturities of long-term debt.
(d)	Company obligated mandatorily redeemable preferred securities of subsidiary trust which holds solely parent junior subordinated debentures.

     INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR CONECTIV, DPL, ACE, AND ACE FUNDING AS THEY MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND THEREFORE ARE FILING THIS FORM WITH A REDUCED FILING FORMAT.

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

     The information required by this item is contained herein, as follows:

Registrants	Page No.
Pepco Holdings	15
Pepco	55
Conectiv	69
DPL	76
ACE	81
ACE Funding	85

THIS PAGE LEFT INTENTIONALLY BLANK.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS

PEPCO HOLDINGS, INC.

OVERVIEW

     Pepco Holdings, Inc. (Pepco Holdings or the Company, formerly New RC, Inc.), a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting Potomac Electric Power Company's (Pepco) acquisition of Conectiv, which was consummated on August 1, 2002. Upon the completion of the merger, Pepco and Conectiv became wholly owned subsidiaries of Pepco Holdings. Additionally, Pepco, through a series of transactions, transferred its ownership interests in its pre-merger subsidiaries Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services) to Pepco Holdings and PCI transferred its ownership interests in its pre-merger subsidiary Pepco Communications, Inc. (Pepcom) to Pepco Holdings. These transactions resulted in PCI, Pepco Energy Services, and Pepcom becoming wholly owned subsidiaries of Pepco Holdings. Pepco Holdings manages the operations of its subsidiaries as described below.

Power Delivery

     The largest component of Pepco Holdings' business is power delivery, which is conducted through its subsidiaries Pepco, Delmarva Power & Light Company (DPL), and Atlantic City Electric Company (ACE). Pepco, DPL and ACE are all regulated public utilities in the jurisdictions in which they serve customers. The operations of DPL and ACE collectively are referred to as "Conectiv Power Delivery."

Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. As of December 31, 2002, Pepco delivered power to approximately 722,000 customers. Under settlements entered into with regulatory authorities, Pepco is required to provide electricity supply at specified rates (referred to as "default service") to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to ful fill its supply obligations, Pepco would have to find alternative sources of supply at rates then prevailing.

Conectiv Power Delivery

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides gas distribution service in northern Delaware. As of December 31, 2002, DPL delivered electricity to approximately 485,100 customers and gas to approximately 115,400 customers. Under regulatory settlements, DPL is required to provide default service to customers in Maryland until July 2004, to customers in Delaware until May 2006, and to customers in Virginia until January 2004 (which may be extended to July 2007). Conectiv Energy (described below) supplies all of DPL's default service load requirements under a supply agreement that ends May 31, 2006. The terms of the supply agreement are structured to coincide with DPL's load requirements for each of its regulatory settlements. Conectiv Energy's resources for supplying DPL's default service load include electricity generated by Conectiv Energy's plants and electri city purchased under long-term agreements. DPL purchases gas supplies for its customers from marketers and producers in the spot market and under short-term and long-term agreements.

     ACE is engaged in the generation, transmission, and distribution of electricity in southern New Jersey. As of December 31, 2002, ACE delivered electricity to approximately 514,300 customers. ACE has default service obligations, known as Basic Generation Service (BGS), for approximately 20 percent of the electricity supply to its customers. ACE expects to fulfill these obligations through the generation output from its fossil fuel-fired generating plants and through existing purchase power agreements with non-utility generators (NUG). As discussed in the "Regulatory and Other Matters" section herein, in January 2003, ACE terminated its competitive bidding process to sell these generation assets.

     ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) during 2001. ACE Transition Funding, which is discussed in the "Regulatory and Other Matters" section below, is a wholly owned subsidiary of ACE.

Competitive Energy

     This component of the Company's business is conducted through subsidiaries of Conectiv Energy Holding Company (collectively referred to herein as Conectiv Energy) and Pepco Energy Services. Conectiv Energy Holding Company and Pepco Energy Services are subsidiaries of Pepco Holdings.

Conectiv Energy

     Conectiv Energy supplies power to DPL, under a power sales contract, and provides wholesale power and ancillary services to the Pennsylvania/New Jersey/Maryland (PJM) power pool. Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility, multi-fuel capability and low capital requirements that can quickly change their output level on an economic basis. Mid-merit plants generally are operated during times when demand for electricity rises and prices are higher. Until March 3, 2003, Conectiv Energy also engaged in energy trading intended to take advantage of price fluctuations and arbitrage opportunities.

     As of December 31, 2002, Conectiv Energy owned and operated electric generating plants with 2,600 MW of capacity. In January 2002 Conectiv Energy began construction of a 1,100 MW combined cycle plant with six combustion turbines at a site in Bethlehem, Pennsylvania that is expected to become fully operational in stages adding 360 MW in 2002 and an additional 740 MW of capacity in 2003. In addition, Conectiv Energy has ordered seven combustion turbines which, with additional equipment, could be configured into up to three combined cycle plants with approximately 550 MW of capacity each. Through December 31, 2002 a total of $192.3 million has been paid for these turbines. The total cost to purchase the combustion turbines is approximately $235 million. In August of 2002, as part of the acquisition of Conectiv by Pepco, the book value of these combustion turbines was adjusted down to the then fair market value of $153 million (approximately 35% lo wer than the purchase cost). Construction of these additional plants is subject to market and other conditions but is currently scheduled to occur in phases to be completed in 2007 and 2008. In light of continuing declines in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv Energy is considering all of its options including delaying delivery of equipment, delaying construction, selling the equipment and canceling equipment orders.

Pepco Energy Services

     Pepco Energy Services provides retail electricity and natural gas to residential, commercial, industrial and governmental customers in the District of Columbia and states in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management solutions to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, equipment operation and maintenance, fuel management, and appliance service agreements. In addition, Pepco Energy Services owns electricity generation plants with approximately 800 MW of peaking capacity, the output of which is sold in the wholesale market. Pepco Energy Services also purchases and sells electricity and natural gas in the wholesale markets to support its commitments to its retail customers.

Other Non-Regulated

     This component of Pepco Holdings' business is conducted through its subsidiaries PCI and Pepcom.

PCI

     PCI manages a portfolio of financial investments and strategic operating businesses that are designed to provide supplemental earnings and cash flow. PCI has been redirecting its investment operations to focus on investments that are related to the energy industry, such as energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets, located outside of the United States, that are designed to provide a long-term, stable stream of cash flow and earnings. PCI has reduced its previous concentration of investments in the aircraft industry from 33 aircraft in 1995 to three aircraft currently. PCI also owns a ten-story, 360,000 square foot office building in downtown Washington, D.C., which is leased to Pepco and serves as Pepco Holdings' and Pepco's corporate headquarters.

     PCI's utility industry products and services are provided through various operating companies. Its underground electric services company, W.A. Chester, provides high voltage construction and maintenance services to utilities and to other customers throughout the United States. PCI also owns Severn Cable, which provides low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

Pepcom

     Pepcom owns a 50% interest in Starpower Communications, LLC (Starpower) a joint venture with RCN Corporation, which provides cable and telecommunication services to households in the Washington, D.C. area.

CRITICAL ACCOUNTING POLICIES

     The U.S. Securities and Exchange Commission (SEC) has defined a company's most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, Pepco Holdings has identified the critical accounting policies and judgments as addressed below.

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Pepco Holdings and its wholly owned subsidiaries. All intercompany balances and transactions between subsidiaries have been eliminated. Investments in entities in which Pepco Holdings has a 20% to 50% interest are accounted for using the equity method. Under the equity method, investments are initially carried at cost and subsequently adjusted for the Company's proportionate share of the investees' undistributed earnings or losses and dividends.

Accounting Policy Choices

     Pepco Holdings' management believes that based on the nature of the businesses that its subsidiaries operate the Company has very little choice regarding the accounting policies it utilizes. For instance, approximately 70% of Pepco Holdings' business consists of its regulated utility operations, which are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation." However, in the areas that Pepco Holdings is afforded accounting policy choices, management does not believe that the application of different accounting policies than those that it chose would materially impact its financial position or results of operations.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Examples of estimates used by the Company include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, pension assumptions, fair values used in the purchase method of accounting and the resulting goodwill balance. Although Pepco Holdings believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may d iffer significantly from these estimates.

Revenue Recognition

     Power Delivery revenues primarily include revenues from the supply and delivery of electricity to the customers of Pepco, DPL, and ACE. Revenues from the supply and delivery of natural gas to DPL's customers are also included in Power Delivery. Competitive Energy revenues are primarily derived from electricity and natural gas trading activities and strategic generation, which is the sale of electricity, capacity, and ancillary services from deregulated electric generating plants. It also includes revenues from wholesale and retail sales of electricity and natural gas to customers that are supplied by purchases in wholesale markets and revenues from energy management products, and services. Other Non-Regulated revenues are provided by Pepco Holdings' non-utility subsidiary PCI.

     The Power Delivery businesses recognize revenues for the supply and delivery of electricity and gas upon delivery to the customer, including amounts for services rendered, but not yet billed. Conectiv Energy recognizes revenue when delivery is substantially complete for non-trading activities, and on a mark-to-market basis for trading activities. Pepco Energy Services recognizes revenue for its wholesale and retail commodity business upon delivery to customers. Revenues for Pepco Energy Services' energy efficiency construction business is recognized using the percentage-of-completion method of revenue recognition and revenues from its operation and maintenance and other products and services contracts are recognized when earned. Revenues from the Other Non-Regulated business lines are principally recognized when services are performed or products are delivered; however, revenue from PCI's utility industry services contracts is recognized using the percentage-of-completion method of revenue recognition, which recognizes revenue as work progresses on the contract.

Accounting For the Effects of Certain Types of Regulation

     The requirements of SFAS No. 71 apply to the Power Delivery businesses of Pepco, DPL, and ACE. SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management's assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. Should existing facts or circumstances change in the future to indicate that a regulatory asset is not probable of recovery, then the regulatory asset would be charged to earnings.

Accounting for Goodwill and Certain Other Intangibles

     Effective January 1, 2002, Pepco Holdings and its subsidiaries adopted the full provisions of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets apart from goodwill. SFAS 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. Additionally, because Pepco Holdings completed the net asset valuation and determination of goodwill process in August 2002, the Company did not test for impairment in 2002 and therefore intends to test for impairment during 2003.

Accounting For Derivatives

     SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires derivative instruments to be measured at fair value. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholders' equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. If a forecasted transaction is no longer probable, the deferred gain or loss in accumulated other comprehensive income is immediately reclassified to earnings. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged; to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately.

     In June 2002, Pepco Holdings entered into several treasury lock transactions in anticipation of the issuance of several series of fixed rate debt commencing in July 2002. These treasury lock transactions, which were designated as qualified cash flow hedges in accordance with the provisions of SFAS 133, were intended to offset the changes in future cash flows attributable to fluctuations in interest rates. Upon the closing of the sale of the debt on September 6, 2002, the net loss on the settlement of the treasury lock transactions of $63.4 million (after tax) was recorded as accumulated other comprehensive loss and began to be amortized into interest expense over the life of the related debt. Additionally, the fair value of the liability of $106.1 million (pre-tax) was paid by Pepco Holdings on September 4, 2002, the hedge settlement date.

     Conectiv Energy engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodities (natural gas, petroleum, coal and electricity). The majority of these hedges relate to the procurement of fuel for its power plants, fixing the cash flows from the plant output, and securing power for electric load service. Conectiv Energy's hedging activities are conducted using derivative instruments designated as cash flow hedges, which are designed to reduce the variability in future cash flows. Conectiv Energy's commodity hedging objectives, in accordance with its risk management policy, are primarily the assurance of stable and known cash flows and the fixing of favorable prices and margins when they become available.

     Conectiv Bethlehem, LLC (CBI), a subsidiary of Conectiv Energy, entered into an interest rate swap agreement for the purpose of managing its overall borrowing rate and limiting its interest rate risk associated with debt it has incurred. CBI currently hedges 75% of the interest rate payments for its variable rate debt. CBI formally designated its interest rate swap agreements as a cash flow hedge.

     Pepco Energy Services purchases natural gas futures and electricity forward contracts to hedge price risk in connection with the purchase of physical natural gas and electricity for delivery to customers in future months. Pepco Energy Services accounts for its natural gas futures and electricity forward contracts as cash flow hedges of forecasted transactions.

     PCI has entered into interest rate swap agreements for the purpose of managing its overall borrowing rate and limiting its interest rate risk associated with debt it has issued. PCI currently hedges 100% of its variable rate debt and approximately 24% of its fixed rate debt for the Medium Term Note program. PCI formally designated its interest rate swap agreements as both cash flow hedge and fair value hedge instruments, as appropriate.

     On October 25, 2002, the Emerging Issues Task Force (EITF) rescinded Issue No. 98-10 (EITF 98-10) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." The Company's interpretation of EITF 98-10 is consistent with the current rules that are being applied under SFAS No. 133 and therefore management does not believe that rescinding EITF 98-10 will impact its financial position or results of operations.

Energy Trading Activities

     In 2002, a pronouncement was issued by the EITF entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenue and expense associated with "energy trading book" contracts on a gross vs. net basis. Previously the EITF concluded that gross presentation was acceptable, but with the issuance of EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, net presentation is required. Conectiv Energy and Pepco Energy Services enter into transactions that are subject to the provisions of this pronouncement and both historically have classified these contracts on a gross basis.

     Conectiv Energy and Pepco Energy Services have completed their evaluation of the financial statement reclassification required by EITF 02-3. Beginning with July 2002, all of their trades were recorded net and therefore no reclassification was required for activities after July 2002. Accordingly, since Conectiv Energy's operating results that are included in Pepco Holdings' results herein consist only of the post-merger months of August 2002 through December 2002, no revenue or expense reclassifications are required for Conectiv Energy's portion of Pepco Holdings' results. However, based on the provisions of EITF 02-3, Pepco Energy Services' results during the period January 2002 through June 2002 required a reclassification adjustment that reduced its revenues by $22.6 million. Additionally, Pepco Energy Services' revenues decreased from $643.9 million to $541.5 million and from $234.9 million to $212.4 million, for the years ended December 31, 2001 and 2000, respectively. There is no impact on Conectiv Energy's or Pepco Energy Services' overall financial position or net results of operations as a result of the implementation of EITF 02-3.

Leasing Activities

     Pepco Holdings accounts for leases entered into by its subsidiaries in accordance with the provisions of SFAS No. 13, "Accounting for Leases." Income from investments in direct financing leases and leveraged lease transactions, in which PCI is an equity participant, is accounted for using the financing method. In accordance with the financing method, investments in leased property are recorded as a receivable from the lessee to be recovered through the collection of future rentals. For direct financing leases, unearned income is amortized to income over the lease term at a constant rate of return on the net investment. Income including investment tax credits, on leveraged equipment leases, is recognized over the life of the lease at a constant rate of return on the positive net investment. Investments in equipment under operating leases are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the equipment's estimated useful life.

Pension and Other Post Employment Benefit Plans

     Pepco Holdings has a noncontributory retirement plan (the Plan) that covers substantially all employees of Pepco, DPL, ACE, and certain employees of other Pepco Holdings' subsidiaries. Following the consummation of the acquisition of Conectiv by Pepco on August 1, 2002, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan on December 31, 2002. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan. In addition to providing pension benefits, Pepco Holdings also provides certain health care and life insurance benefits for eligible employees (OPEBS).

     The Company accounts for the Plan in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and its OPEBS in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company's financial statement disclosures were prepared in accordance with SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (the Company's first quarter 2003 financial statements). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. The Company has completed its assessment of the provisions of SFAS No. 143 and believes that although the implementation of the Statement will result in certain account reclassifications it will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in Pepco Holdings' Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," which is effective for interim periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 "Accounting for Stock Based Compensation" to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Pepco Holdings currently accounts for its stock based compensation plan using the provisions of Accounting Principles Board (APB) Opinion No. 2 5, "Accounting for Stock Issued to Employees." The Company believes that the implementation of SFAS 148 will not have a material impact on its financial position or results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). The Company is in the process of assessing the provisions of FIN 45 in order to determine its impact on the Company's financial position and results of operations.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Pepco Holdings is in the process of assessing the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations.

CONSOLIDATED RESULTS OF OPERATIONS

LACK OF COMPARABILITY OF OPERATING RESULTS WITH PRIOR YEARS

     As a result of the merger transaction on August 1, 2002, Pepco Holdings' accompanying consolidated balance sheet and consolidated statements of shareholders' equity as of December 31, 2002 include the accounts of Pepco Holdings and its subsidiaries (discussed in Note (1) Organization, herein), after giving effect to the merger transaction and resulting purchase accounting entries discussed in Note (2) Merger Transaction, herein. Since Pepco was the acquiring company, in accordance with the purchase method of accounting, Pepco represents the "predecessor" company. Accordingly, the accompanying consolidated balance sheet as of December 31, 2001, and the consolidated statements of shareholders' equity as of December 31, 2001, and 2000, respectively, as previously reported by Pepco, include only the consolidated accounts of Pepco and its pre-merger subsidiaries, PCI and Pepco Energy Services.

     The accompanying consolidated statements of earnings, consolidated statements of comprehensive income, and consolidated statement of cash flows for the year ended December 31, 2002 include Pepco's and its pre-merger subsidiaries' operating results for the full year consolidated with Conectiv and its subsidiaries operating results for the five months of August 1, 2002, the date the merger was consummated, through December 31, 2002. The accompanying consolidated statements of earnings, consolidated statements of comprehensive income, and consolidated statement of cash flows for the years ended December 31, 2001 and 2000, as previously reported by Pepco, include only the consolidated operations of Pepco and its pre-merger subsidiaries.

     Accordingly, due to the application of the purchase method of accounting that was used to record the merger transaction, the consolidated balances included in the accompanying consolidated financial statements as of and for the years ended December 31, 2002, 2001, and 2000 are not comparable.

OPERATING REVENUE

Results for 2002 Compared to 2001

     Total consolidated operating revenue for the year ended December 31, 2002, was $4,324.5 million compared to $2,400.5 million for 2001. Intercompany revenue has been eliminated for purposes of this analysis. An detail of these amounts is as follows:

	2002	2001	Change
Pepco	$1,533.5	$1,723.5	(190.0)
Conectiv Power Delivery	996.2	-	996.2
Conectiv Energy	850.2	-	850.2
Pepco Energy Services	826.7	541.5	285.2
Other Non-Regulated	117.9	106.2	11.7
Gain on divestiture of   generation assets	-	29.3	(29.3)
Total	$4,324.5	$2,400.5

     The decrease in Pepco's operating revenue during 2002 primarily resulted from a decrease of $206.9 million in standard offer service revenue due to increased customer migration to alternate suppliers during 2002. Retail access to a competitive market for generation services was made available to all Maryland customers on July 1, 2000 and to D.C. customers on January 1, 2001. At December 31, 2002, 16% of Pepco's Maryland customers and 13% of its D.C. customers have chosen alternate suppliers. These customers accounted for 1,175 megawatts of load in Maryland (of Pepco's total load of 3,369) and 1,140 megawatts of load in D.C. (of Pepco's total load of 2,326). The decrease in standard offer service revenue was partially offset by a $26.3 million increase in delivery revenue due to higher delivered kilowatt hour sales from more favorable weather than experienced in 2001.

     The amounts for Conectiv Power Delivery and Conectiv Energy represented their post-merger operations for the five months of August 2002 through December 2002.

     The increase in Pepco Energy Services' operating revenue during 2002 primarily resulted from growth in its retail commodity business for sales of electricity and natural gas to new customers.

     The increase in Other Non-Regulated operating revenue during 2002 was mainly due to higher lease portfolio income derived from new energy leveraged leases entered into in late 2001 and throughout 2002.

     The prior year results included a $29.3 million net gain that resulted from the sale of Pepco's interest in the Conemaugh generating station in January 2001.

Results for 2001 Compared to 2000

     Total consolidated operating revenue for the year ended December 31, 2001, was $2,400.5 million compared to $2,989.3 million for 2000. Intercompany revenue has been eliminated for purposes of this analysis. A detail of these amounts is as follows:

	2001	2000	Change
Pepco	$1,723.5	$2,220.6	(497.1)
Conectiv Power Delivery	-	-	-
Conectiv Energy	-	-	-
Pepco Energy Services	541.5	212.4	329.1
Other Non-Regulated	106.2	132.5	(26.3)
Gain on divestiture of    generation assets	29.3	423.8	(394.5)
Total	$2,400.5	$2,989.3

     The decrease in Pepco's operating revenue during 2001 resulted from decreases of $466.9 million in standard offer service revenue and $30.2 million in delivery revenue primarily due to increased customer migration to alternative suppliers during 2001. Retail access to competitive markets for generation services was made available to all Maryland customers on July 1, 2000 and to D.C. customers on January 1, 2001. At December 31, 2001, 12% of Pepco's Maryland customers and 4% of its D.C. customers had chosen alternate suppliers. These customers accounted for 800 megawatts of load in Maryland (of our total load of 3,369) and 1,026 megawatts of load in D.C. (of our total load of 2,326).

     The increase in Pepco Energy Services' operating revenue during 2001 primarily resulted from increases of $283.2 million in commodity revenues and $44.3 million in services revenues due to growth in its retail commodity business.

     The decrease in Other Non-Regulated operating revenue during 2001 primarily resulted from the fact that in 2000 PCI recorded a pre-tax gain of approximately $19.7 million ($11.8 million after-tax) from the sale of its 50% interest in the Cove Point liquefied natural gas storage facility.

     The gain on divestiture of generation assets of $29.3 million in 2001 resulted from the sale of Pepco's interest in the Conemaugh generating station in January 2001. The 2001 gain on divestiture also includes certain adjustments resulting from the 2000 Mirant divestiture transaction. The gain of $423.8 million in 2000 resulted from Pepco's sale of substantially all of its generating assets to Mirant Corp. in December 2000.

OPERATING EXPENSES

Results for 2002 Compared to 2001

     Total consolidated operating expenses for the year ended December 31, 2002, were $3,778.9 million compared to $2,034.1 million for 2001. Intercompany expenses have been eliminated for purposes of this analysis. A detail of these amounts is as follows:

	2002	2001	Change
Pepco	$1,219.7	$1,363.7	(144.0)
Conectiv Power Delivery	649.2	-	649.2
Conectiv Energy	1,071.8	-	1,071.8
Pepco Energy Services	809.6	524.1	285.5
Other Non-Regulated	53.7	146.3	(92.6)
Corporate and Other	(25.1)	-	(25.1)
Total	$3,778.9	$2,034.1

     The decrease in Pepco's operating expenses during 2002 resulted primarily from a $179.7 million decrease in fuel and purchased energy expense due to less energy purchased because of increased customer migration. This decrease was partially offset by an increase in other operation and maintenance expense of $13.8 million due mainly to an increase in employee benefits and vacation liability accrual as well as from a general increase in power delivery expenses, an increase in other taxes of $11.7 million due to higher Maryland property and delivery taxes, and an increase of $8.5 million in depreciation expense.

     The amounts for Conectiv Power Delivery and Conectiv Energy represented their post-merger operations for the five months of August 2002 through December 2002.

     The increase in Pepco Energy Services' operating expenses during 2002 primarily resulted from growth in its retail commodity business and due to the fact that 2002 reflected a full year of operations from businesses acquired in 2001.

     The decrease in Other Non-Regulated operating expenses during 2002 primarily resulted from lower depreciation expense incurred as a result of fewer aircraft on operating leases in 2002 and due to the fact that in 2001 PCI recognized a total of $65.5 million (pre-tax) in impairment write-downs related to its aircraft portfolio and other investments.

     "Corporate and Other" primarily includes severance costs of $25.4 million (pre-tax) recorded during 2002 related to Pepco and Conectiv. Additionally, this line item includes unallocated Pepco Holdings' operating expenses, such as the acquisition financing and the amortization of "purchase accounting" related adjustments to the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002.

     Additionally, process improvements may result in potential savings of $45 million for Pepco Holdings over the next 5 years.

Results for 2001 Compared to 2000

     Total consolidated operating expenses for the year ended December 31, 2001, were $2,034.1 million compared to $2,094.2 million for 2000. Intercompany expenses have been eliminated for purposes of this analysis. A detail of these amounts is as follows:

	2001	2000	Change
Pepco	$1,363.7	$1,794.8	(431.1)
Conectiv Power Delivery	-	-	-
Conectiv Energy	-	-	-
Pepco Energy Services	524.1	228.9	295.2
Other Non-Regulated	146.3	70.5	75.8
Total	$2,034.1	$2,094.2

     The decrease in Pepco's operating expenses during 2001 primarily resulted from a $180.6 million decrease in fuel and purchased energy expense, a $105.3 million decrease in other operation and maintenance expense, an $84 million decrease in depreciation expense, and a $20.9 million decrease in other taxes. The decreases in these expenses primarily resulted from the fact that in January 2001 Pepco completed its plan to exit the generation business by divesting of its interest in the Conemaugh generating station. Additionally, the remaining decrease in operating expenses in 2001 results from the fact that the 2000 results included an impairment loss recorded on Pepco's Benning Road and Buzzard Point generating plants of $40.3 million (pre-tax). These plants were subsequently transferred to Pepco Energy Services.

The increase in Pepco Energy Services' operating expenses during 2001 resulted from growth in its retail commodity business.

     The increase in Other Non-Regulated operating expenses during 2001 primarily resulted from a total of $65.5 million (pre-tax) in impairment write-downs recognized by PCI in 2001 related to its aircraft portfolio and other investments.

OTHER INCOME (EXPENSES)

Results for 2002 Compared to 2001

     Total consolidated other (expenses) for the year ended December 31, 2002, were ($190.4) million compared to ($105.3) million for 2001. A detail of these amounts is as follows:

	2002	2001	Change
Pepco	$ (71.6)	$ (48.8)	22.8
Conectiv Power Delivery	(25.9)	-	25.9
Conectiv Energy	(5.0)	-	5.0
Pepco Energy Services	(1.0)	1.4	2.4
Other Non-Regulated	(52.0)	(57.9)	(5.9)
Corporate and Other	(34.9)	-	34.9
Total	$(190.4)	$(105.3)

     The increase in Pepco's other (expenses) during 2002 primarily resulted from a $37.1 million decrease in interest income earned due to lower proceeds remaining to invest from Pepco's generating asset divestitures. This increase was partially offset by a decrease of $21.8 million in interest expense due to lower debt balances outstanding during 2002.

     The amounts for Conectiv Power Delivery and Conectiv Energy represented their post-merger operations for the five months of August 2002 through December 2002.

     The decrease in Other Non-Regulated other (expenses) during 2002 primarily resulted from reduced losses on Pepcom's investment in Starpower due to its improved margins, lower selling, general and administrative expenses, and the favorable impact of the termination of the requirement to amortize goodwill.

     "Corporate and Other" in 2002 primarily represents unallocated Pepco Holdings' capital costs, such as the acquisition financing and the amortization of "purchase accounting" related adjustments to the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002. Additionally, this amount includes the write-off of certain Pepco software costs related to software that was no longer being used.

Results for 2001 Compared to 2000

     Total consolidated other (expenses) for the year ended December 31, 2001, were ($105.3) million compared to ($192.7) million for 2000. A detail of these amounts is as follows:

	2001	2000	Change
Pepco	$ (48.8)	$(138.6)	(89.8)
Conectiv Power Delivery	-	-	-
Conectiv Energy	-	-	-
Pepco Energy Services	1.4	3.0	1.6
Other Non-Regulated	(57.9)	(57.1)	.8
Total	$(105.3)	$(192.7)

     The decrease in Pepco's other (expenses) during 2001 primarily resulted from a $40.6 million increase in interest income due to proceeds invested from the Company's divestiture transactions and due to a decrease of $52.2 million in interest expense due to reductions in the level of Pepco's debt outstanding. A portion of the divestiture proceeds were used to pay off Pepco's outstanding debt.

INCOME TAX EXPENSE (BENEFIT)

Results for 2002 Compared to 2001

     Total consolidated income tax expense for the year ended December 31, 2002, was $124.1 million compared to $83.5 million for 2001. A detail of these amounts is as follows:

	2002	2001	Change
Pepco	$ 81.7	$130.9	$(49.2)
Conectiv Power Delivery	20.1	-	20.1
Conectiv Energy	19.4	-	19.4
Pepco Energy Services	3.8	8.5	(4.7)
Other Non-Regulated	(7.3)	(55.9)	48.6
Corporate and Other	6.4	-	6.4
Total	$124.1	$ 83.5

     The decrease in Pepco's income tax expense during 2002 resulted from lower taxes as a result of lower interest income and due to the fact that the 2001 amount included taxes incurred on Pepco's generating plant divestiture.

     The amounts for Conectiv Power Delivery and Conectiv Energy represented their post-merger operations for the five months of August 2002 through December 2002.

     Income tax expense for Pepco Energy Services remained relatively stable between years.

     The decrease in Other Non-Regulated income tax (benefit) during 2002 primarily resulted from the benefit derived in 2001 from one-time impairment write-downs associated with the aircraft portfolio and other investments.

Results for 2001 Compared to 2000

     Total consolidated income tax expense for the year ended December 31, 2001, was $83.5 million compared to $341.2 million for 2000. A detail of these amounts is as follows:

	2001	2000	Change
Pepco	$130.9	$352.9	(222.0)
Conectiv Power Delivery	-	-	-
Conectiv Energy	-	-	-
Pepco Energy Services	8.5	(4.7)	13.2
Other Non-Regulated	(55.9)	(7.0)	(48.9)
Total	$ 83.5	$341.2

     The decrease in Pepco's income tax expense during 2001 primarily resulted from the fact that the 2000 tax expense included taxes resulting from the gain on the divestiture of its generating plants in December 2000.

     The increase in Pepco Energy Services' income tax expense during 2001 resulted from improved operating results in its retail commodity and wholesale generation business along with an increase in the effective tax rate.

     The increase in Other Non-Regulated income tax (benefit) during 2001 principally resulted from the write-down of the aircraft portfolio and other investments.

CAPITAL RESOURCES AND LIQUIDITY

Sources of Liquidity

     Due to $805.5 million of cash provided by operating activities, $1,920.4 million of cash used by investing activities, and $698.2 million of cash provided by financing activities, cash and cash equivalents decreased by $416.7 million during the year ended December 31, 2002. This decrease primarily results from the fact that $1,075.6 million in cash was used to acquire Conectiv (net of Conectiv cash acquired).

     Pepco Holdings relies on access to bank and capital markets as a significant source of liquidity for capital requirements not satisfied by cash provided by its subsidiaries' operations. Pepco Holdings generates no operating income on its own. Accordingly, Pepco Holdings' ability to pay dividends to its common shareholders will depend on dividends received from its subsidiaries. The ability of Pepco Holdings and its subsidiaries to borrow funds or issue securities and its financing costs are affected by the issuing company's credit ratings. In addition to their future financial performance, the ability of the subsidiaries to pay dividends to Pepco Holdings is subject to the limits imposed by: state corporate and regulatory laws, which contain limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, may require the prior approval of the relevant utility regulatory commissions before dividends can be paid; PU HCA, which prohibits the payment of dividends by a registered holding company or any of its subsidiaries, not afforded an exemption, out of capital or unearned surplus without the prior approval of the SEC; the provisions of their respective charters and bylaws; and the prior rights of holders of existing and future preferred stock, mortgage bonds and other long-term debt issued by the subsidiaries, and other restrictions in connection with other liabilities.

PUHCA Restrictions

     Because the Company is a holding company registered under PUHCA, it must obtain SEC approval to issue securities. Under PUHCA, Pepco Holdings may not pay dividends on the shares of common stock from an accumulated deficit or from paid-in-capital without SEC approval. PUHCA also prohibits Pepco Holdings from borrowing from its subsidiaries. Under an SEC Financing Order dated July 31, 2002 (the "Financing Order"), Pepco Holdings is authorized to issue equity, preferred securities and debt securities in an aggregate amount not to exceed $3.5 billion through the authorization period ending June 30, 2005. The external financing limit includes a short-term debt outstanding limitation of $2.5 billion. Pepco Holdings is also authorized to enter into guarantees to third parties or otherwise provide credit support with respect to obligations of its subsidiaries for up to $3.5 billion. The Financing Order requires that, in order to iss ue debt or equity securities, the Company must maintain a ratio of common stock equity to total capitalization (consisting of common stock, preferred stock, if any, long-term debt and short-term debt) of at least 30 percent. If this ratio falls below 30 percent (and the Company does not obtain from the SEC an amended order permitting it to maintain a lower ratio), the Company will not have the authority to issue either debt or equity securities, including additional commercial paper issued to refinance maturing commercial paper. At December 31, 2002, the Company's common equity ratio was 31.6 percent or approximately $149.8 million in excess of the 30 percent threshold. The Company intends to take such actions as necessary to prevent the common equity ratio from dropping below 30 percent, including the sale of additional shares of common stock. In this regard, the Company issued 5,750,000 shares of common stock in December 2002, as described below. The Company may also request an amendmen t to the SEC order that would permit the common equity ratio to temporarily drop below 30 percent for a period of time. However, the Company can give no assurance as to the timely receipt of such amendment.

     In connection with the merger with Conectiv, the SEC required PCI to divest itself of its marketable securities portfolio, its remaining aircraft, and certain real estate by July 31, 2005. Pepco Holdings does not believe that this requirement will have a material impact on its financial position or results of operations.

Issuance of Common Stock

     In December 2002, Pepco Holdings sold 5,750,000 shares of common stock at $19.13 per share. Proceeds received on the transaction, net of issuance costs of $4.3 million, were $105.7 million. All of the proceeds were used to pay down outstanding commercial paper.

Financing

     On June 25, 2002, CBI entered into a Credit Agreement (CBI Credit Agreement) with various banks and financial institutions. CBI is constructing new mid-merit power plants in Bethlehem, Pennsylvania. Under the CBI Credit Agreement, CBI may borrow up to $365 million as a construction loan and convert the construction loan to a term loan after completing construction of the two 545 MW combined cycle power plants (CBI Project). Borrowings under the CBI Credit Agreement are secured by a lien on CBI and all tangible, intangible, and real property of CBI. As of December 31, 2002, the balance of CBI's outstanding borrowings under the CBI Credit Agreement was $161.8 million (5.4% effective interest rate). CBI expects to convert the construction loan to a term loan on one of the following dates: February 27, 2004, April 30, 2004, June 30, 2004, August 31, 2004 or September 30, 2004 (the actual date on which the construction loan is converted is refe rred to herein as the Term Loan Conversion Date), as provided for in the CBI Credit Agreement. CBI is required to repay any portion of the construction loan not converted to a term loan at the Term Loan Conversion Date or no later than September 30, 2004. Four semi-annual principal payments begin six months after the Term Loan Conversion Date. Depending on the Term Loan Conversion Date, the amount of the term loan principal, which is repaid by the total of the four semi-annual payments, is approximately 12.89% to 14.7%. The remaining principal of the term loan (and any unpaid accrued interest or fees) is due upon the loan's maturity, which is the later of June 25, 2006, or the second anniversary of the Term Loan Conversion Date.

     On July 15, 2002, Pepco redeemed $66.2 million 8.50% First Mortgage Bonds due May 15, 2027 at a call price of 103.21%. The redemption totaled $69.3 million.

     Pepco Holdings entered into a $1.1 billion short term bridge facility on August 1, 2002 and borrowed the full amount to fund $700 million of the merger cash consideration, and repay commercial paper and Conectiv bank loans due upon merger closing. The facility was repaid in full on September 6, 2002 with proceeds from Pepco Holdings' note offering.

     On August 1, 2002, Pepco Holdings, Pepco, DPL, and ACE established a $1.5 billion 364-day revolving credit facility with various financial institutions. Pepco Holdings' borrowing sublimit under the agreement is $1 billion. Pepco, DPL, and ACE have an aggregate sublimit of $500 million, with no individual borrower entitled to borrow more than $300 million. The $1.5 billion facility includes a $300 million letter of credit sublimit. As of December 31, 2002, $103 million in letters of credit were outstanding. The facility will primarily be used to back up the commercial paper programs, which are discussed herein.

     Pepco Holdings established a $1 billion commercial paper program effective August 1, 2002. This program replaced the Conectiv and PCI commercial paper programs, which were terminated at the end of August 2002. Pepco, DPL, and ACE have $300 million, $275 million, and $250 million commercial paper programs, respectively.

     On September 3, 2002, Pepco redeemed $2 million or 40,000 shares of its $3.40 Serial Preferred Stock Series of 1992, pursuant to mandatory sinking fund provisions.

     On September 6, 2002, Pepco Holdings issued $1.35 billion of unsecured notes: $350 million of 5.50% notes due August 15, 2007, $750 million of 6.45% notes due August 15, 2012, and $250 million of 7.45% notes due August 15, 2032. The net proceeds from the offering totaled $1.34 billion. Pepco Holdings offered the notes in an unregistered transaction. The proceeds from the sale of the notes were used to repay approximately $1.1 billion of indebtedness outstanding under a short-term bridge facility entered into on August 1, 2002 in connection with the merger, and to repay approximately $240 million of Pepco Holdings' outstanding commercial paper, including approximately $106.1 million of commercial paper issued to fund the settlement of treasury lock transactions entered into in June 2002 in anticipation of the offering of the notes.

     On September 19, 2002, Pepco Holdings issued an additional $150 million of the 5.5% notes due August 15, 2007 (which were consolidated to form a single series with the $350 million 5.5% notes due 2007, issued by Pepco Holdings on September 6). The net proceeds from the offering totaled $151.7 million. Pepco Holdings offered the notes in an unregistered transaction. The proceeds from the sale of the notes were used to repay outstanding commercial paper.

     The Company is obligated to cause an exchange offer of notes registered under the Securities Act of 1933 with identical terms to the notes issued on September 6 and 19, 2002 to be consummated by June 3, 2003.

     On September 20, 2002, the New Jersey Board of Public Utilities (NJBPU) issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. A subsidiary of ACE issued Transition Bonds totaling $440 million on December 19, 2002, in accordance with this Financing Order. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buy down of the American Ref-Fuel NUG contract. Also included in the amount authorized was $20 million of transaction costs and capital reduction costs.

     On October 1, 2002, DPL redeemed at maturity $30 million of 6.95% First Mortgage Bonds and $12 million of 6.59% Medium Term Notes.

     On November 15, 2002, DPL redeemed at maturity $3 million of its 9.26% Medium Term Notes A and $1 million of its 9.29% Medium Term Notes A.

     On December 19, 2002, ACE redeemed at maturity a term loan in the amount of $171.4 million.

     On December 30, 2002, DPL redeemed at par 316,500 shares of its $25 par preferred stock with an annual dividend rate of 7.75%.

     On January 15, 2003, Pepco Holdings issued $300 million of 3.75% notes due February 15, 2006. The net proceeds from the offering totaled $298.4 million. The Company used the proceeds to redeem a $200 million Conectiv Floating Rate Note with an original maturity of February 28, 2003, that was called on January 28, 2003, and to repay outstanding commercial paper.

     On February 28, 2003, ACE redeemed 2,800,000 shares of 8.25% cumulative quarterly income preferred stock of Atlantic Capital I at $25 per share plus accrued and unpaid interest.

     ACE will redeem on March 24, 2003, Secured Medium Term Notes totaling $58 million with interest rates ranging from 7.125% to 7.98%.

Money Pool

     Pepco Holdings has received PUHCA authorization to establish the Pepco Holdings System money pool. Certain direct and indirect subsidiaries of Pepco Holdings are eligible to participate in the money pool. Eligible subsidiaries with surplus cash may deposit those funds in the money pool. Eligible subsidiaries with cash deficits may borrow from the money pool. Pepco Holdings deposits funds in the money pool to the extent that the pool has insufficient funds to meet the borrowing needs of its participants. Pepco Holdings may not borrow from the money pool. Borrowings from the money pool are unsecured. Deposits in the money pool are guaranteed by Pepco Holdings. Depositors in the money pool receive and borrowers from the money pool pay an interest rate based primarily on Pepco Holdings' short-term borrowing rate. Pepco Holdings' external borrowing requirement fluctuates based on the amount of funds deposited in the money pool.

Pension Funding

     Pepco and Conectiv's pension assets did not achieve the level of returns assumed in the determination of their pension expense accruals during 2002. As a result, Pepco contributed $35 million to its pension plan in December 2002 to exceed a funding level of 100% with respect to its accrued benefit obligation. Conectiv's pension plan did not require a contribution in December 2002 to exceed 100% of its accrued benefit obligation. Pepco contributed $25 million to its pension plan in 2001 and $50 million in 2000.

     Effective December 31, 2002, as a result of the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Pepco Holdings Retirement Plan. Pepco Holdings adopted the Pepco and Conectiv benefit plans. The provisions and benefits of the merged plan are identical to those of the original Pepco and Conectiv Plans.

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. Pepco Holdings expects to review, and may change the actuarial assumptions of the plan for 2003.

     Due to lower asset values than expected in its pension plan and the potential need to modify the assumptions used to value its pension liabilities, Pepco Holdings could experience a substantially higher level of pension expense in the near term and until the investment return of the plan assets improves.

Shareholder Dividend Reinvestment Plan and Employee Benefit Plans

     Under the Company's Shareholder Dividend Reinvestment Plan and under various employee benefit plans of the Company and its subsidiaries, the Company can satisfy its obligations to supply Company common stock for the plans either by selling newly issued shares to the plans or by contributing cash that the plan administrators then use to purchase common stock in the open market. From August 1, 2002 to December 31, 2002, the Company issued an aggregate of approximately 630,000 shares of its common stock to fund its obligations under the plans.

Dividend Policy and Restrictions

     The Company's annual dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments which may affect the Company's income and cash flows. The Company's Board of Directors declared a quarterly dividend per share of common stock of 25 cents payable on December 31, 2002 to holders of record on December 10, 2002. Previously, the Board declared a "pro-rata" period dividend of $.16576079 per share following the August 1 merger which was paid September 30, 2002 to holders of record on September 10, 2002. Under PUHCA, Pepco Holdings may not pay dividends on the shares of common stock from an accumulated deficit or paid-in-capital without SEC approval. Pepco Holdings' common dividends paid to stockholders are currently funded from the common dividends that Pepco, DPL, and ACE pay to Pepco Holdings. Under PUHCA, Pepco, DPL, and ACE are prohibited from paying a dividend from an accumulated deficit or paid-in-capital, unless SEC approval is obtained. Also, the certificates of incorporation of Pepco, DPL, and ACE have certain other limitations on the payment of common dividends to Pepco Holdings.

Working Capital

     At December 31, 2002, current assets totaled $1.7 billion versus current liabilities of $2.6 billion. Current liabilities include $406.3 million in long-term debt due within one year. Although the Company currently has in place a $1.5 billion working capital facility, it intends to lower its current liabilities over the next twelve months through a combination of long-term financing strategies.

Construction Expenditures

     Pepco Holdings construction expenditures totaled $503.8 million in 2002. For the five-year period 2003 through 2007, construction expenditures are projected to total approximately $2.2 billion, of which approximately $1.7 billion is related to the regulated power delivery business.

Disclosures About Contractual Obligations And Commercial Commitments

     Summary information about Pepco Holdings' consolidated contractual obligations and commercial commitments at December 31, 2002, is as follows:

	Contractual Maturity
Obligation	Total	Less than 1 Year	1-3   Years	4-5   Years	After  5 Years
	(Dollars in Millions)
Short-term debt	$  812.7	$   812.7	$      -	$      -	$      -
Variable rate demand bonds	158.4	-	-	-	158.4
Long-term debt	5,119.1	406.3	732.1	976.8	3,003.9
Preferred stock subject to   mandatory redemption	47.5	2.5	5.0	40.0	-
Preferred trust securities	290.0	70.0	-	-	220.0
Capital and operating   leases	349.2	37.7	68.8	68.4	174.3
Purchase power contracts	1,572.7	384.3	682.6	505.8	-
Partnership contributions	14.7	7.2	6.5	1.0	-
Total	$8,364.3	$1,720.7	$1,495.0	$1,592.0	$3,556.6

COMMITTEE OF CHIEF RISK OFFICERS RECOMMENDED RISK MANAGEMENT DISCLOSURES

     The Committee of Chief Risk Officers (CCRO) was formed to provide guidance and enhance consistency for risk management practices in the energy industry. On November 19, 2002, the CCRO released white papers representing recommended best practices in four areas of risk management for its membership of 31 merchant energy companies. Conectiv Energy and Pepco Energy Services are members of the CCRO. The white papers that were issued included a series of additional risk management disclosures in tabular format. The CCRO recommended that merchant energy companies include these tabular disclosures in Securities and Exchange Commission filings beginning in the first calendar quarter of 2003.

     The following tables present the combined risk management disclosures of Conectiv Energy and Pepco Energy Services for the year ended December 31, 2002. Information presented in the accompanying tables includes Conectiv Energy data for the five post-merger months of August 2002 through December 2002, combined with Pepco Energy Services data for the entire year. Forward-looking data represents 100% of the combined positions of Conectiv Energy and Pepco Energy Services.

Table 1

Statement of Competitive Energy Gross Margin For the Year Ended December 31, 2002 (Dollars in Millions)
Mark to Market Activities	Proprietary Trading (1)	Other Energy  Commodity (2)	Non-Commodity    Energy (3)	Total
Unrealized Marked-to-market ("MTM") Gain (Loss)
Unrealized gain (loss) at inception	$   -	$      -	$      -	$      -
Changes in unrealized fair value prior     to settlements	16.3	(.3)	-	16.0
Changes in valuation techniques and     assumptions	-	-	-	-
Reclassification to realized at     settlement of contracts	(40.6)	(.3)	-	(40.9)
Total changes in unrealized fair value	(24.3)	(.6)	-	(24.9)
Realized Net Settlement of Transactions   Subject to MTM	40.6	.3	-	40.9
Total Gain (Loss) on MTM activities	16.3	(.3)	-	16.0
Transaction-related expenses associated   with MTM activity	(4.3)	-	-	(4.3)
Total MTM activities gross margin	12.0	(.3)	-	11.7
Accrual Activities
Accrual activities revenues	N/A	1,868.5	113.7	1,982.2
Hedge gains (losses) reclassified from OCI	N/A	42.2	-	42.2
Cash flow hedge ineffectiveness recorded   in income statement	N/A	(.2)	-	(.2)
Total revenue-accrual activities revenues	N/A	1,910.5	113.7	2,024.2
Fuel and Purchased Power	N/A	(1,686.0)	(14.1)	(1,700.1)
Hedges of fuel and purchased power   reclassified from OCI	N/A	(58.9)	-	(58.9)
Cash flow hedge ineffectiveness recorded   in income statement	N/A	-	-	-
Other transaction-related expenses	N/A	(12.8)	(72.5)	(85.3)
Total accrual activities gross margin	N/A	152.8	27.1	179.9
Total Gross Margin	$12.0	$   152.5	$    27.1	$   191.6

Notes:
(1) Includes all derivative contracts held for trading and MTM under SFAS No. 133.

(2) Includes generation line of business, provider of last resort services, origination business,
       unregulated wholesale and retail commodity business.

(3) Includes Conectiv Thermal, Conectiv Operating Services Company, and Pepco Energy Services' energy-
      efficiency and other services business.

Table 2

Roll-forward of Mark-to-Market Energy Contract Net Assets For the Year Ended December 31, 2002 (Dollars in Millions)
	Proprietary Trading (1)	Other Energy Commodity (2)	Total
Total Market-to-market ("MTM") Energy Contract Net Assets   at December 31, 2001	$   1.0	$     -	$   1.0
Total change in unrealized fair value excluding     reclassification to realized at settlement of contracts	16.3	-	16.3
Reclassification to realized at settlement of contracts	(43.6)	4.8	(38.8)
Effective portion of changes in fair value - recorded in OCI	-	28.7	28.7
Ineffective portion of charges in fair value -     recorded in earnings	-	(.2)	(.2)
Purchase/sale of existing contracts or portfolios     subject to MTM	42.1	(11.6)	30.5
Total MTM Energy Contract Net Assets at December 31, 2002 (a)	$  15.8	$  21.7	$  37.5
Detail of MTM Energy Contract Net Assets at December 31, 2002 (above)			Total
Current Assets			$ 138.4
Noncurrent Assets			27.2
Total MTM Energy Assets			165.6
Current Liabilities			(113.7)
Noncurrent Liabilities			(14.4)
Total MTM Energy Contract Liabilities			(128.1)
Total MTM Energy Contract Net Assets			$  37.5

Notes:

(1) Includes all derivative contracts held for trading and MTM under SFAS No. 133.

(2) Includes all derivative contracts classified as cash flow hedges under SFAS No. 133.

Table 3

Maturity and Source of Fair Value of Mark-to-Market Energy Contract Net Assets As of December 31, 2002 (Dollars are Pre-Tax and in Millions)
	Fair Value of Contracts at December 31, 2002
	Maturities
Source of Fair Value		2003	2004	2005	In Excess of     3 Years	Total Fair Value
Proprietary Trading (1)
Actively Quoted (i.e., exchange-traded) prices		$ (.7)	$ 6.8	$  .8	-	$ 6.9
Prices provided by other external sources (2)		7.5	1.4	-	-	8.9
Modeled		-	-	-	-	-
Total		$ 6.8	$ 8.2	$  .8	-	$15.8
Other Unregulated (3)
Actively Quoted (i.e., exchange-traded) prices		$24.6	$ 8.0	$ 1.0	-	$33.6
Prices provided by other external sources (2)		(7.2)	(4.7)	-	-	(11.9)
Modeled		-	-	-	-	-
Total		$17.4	$ 3.3	$ 1.0	-	$21.7

(1) Proprietary Trading includes all derivative contracts held for trading and marked-to-market
      under SFAS No. 133.

(2) Prices provided by other external sources - Reflects information obtained from
      over-the-counter brokers, industry services, or multiple-party on-line platforms.

(3) Other Unregulated Contracts includes all derivative contracts classified as cash flow
      hedges under SFAS No. 133.

Table 4

Selected Competitive Energy Gross Margin Information For the Year Ended December 31, 2002 (Dollars in Millions)
	Energy Trading (1)	Other Energy Commodity (2)	Non- Commodity Energy (3)	Total
Total Gross Margin	$12.0	$152.5	$27.1	$191.6
Less: Total Change in Unrealized         Fair Value	24.3	.6	-	24.9
Gross Margin Adjusted for   Unrealized Marked-to-market ("MTM")   Gain/Loss	$36.3	$153.1	$27.1	$216.5
Add/Deduct Noncash Realized   Amortization	-	-	-	8.2
Cash Component of Gross Margin   (Accrual Basis)	-	-	-	$224.7
Net Change in Cash Collateral	-	-	-	$(13.4)

(1) Includes all derivative contracts held for trading and marked-to-market under SFAS No. 133.

(2) Includes Generation line of business, Provider of Last Resort services, Origination
        businesses, and unregulated wholesale and retail commodity business.

(3) Includes Conectiv Thermal, Conectiv Operating Services Company, and Pepco Energy Services'
        energy-efficiency and other services business.

     The above table presents details of merchant energy cash flows from gross margin, adjusted for cash provided or used by option premiums and collateral requirements. This is not intended to present a statement of cash flows in accordance with GAAP.

Table 5

Cash Flow Hedges Included in Accumulated Other Comprehensive Income As of December 31, 2002 (Dollars in Millions)
Contracts	Accumulated Other Comprehensive Income ("OCI")  Loss After Tax		Portion Expected to be Reclassified to Earnings during the Next     12 Months			Maximum Term
Merchant Energy (Non-Trading)	$ 14.1		$10.9			36 months
Interest Rate	(75.7)		(.4)			40 months
Foreign Currency	-		-
Other	(.2)		-
Total	$(61.8)		$10.5
Total Other Comprehensive Income Activity For the Year Ended December 31, 2002 (After-Tax)
		Merchant Hedge    Contracts		Non-Merchant    Hedges	Total
Accumulated OCI, December 31, 2001		$  -		$    -	$  -
Changes in fair value		1.6		(67.9)	(66.3)
Reclasses from OCI to net income		4.5		-	4.5
Accumulated OCI derivative gain/loss,   December 31, 2002		$ 6.1		$(67.9)	$(61.8)

Note: The information presented in Table 6 is contained in the "Quantitative and Qualitative Disclosures about Market Risk - Credit and Nonperformance Risk" section, herein.

Table 7

Merchant Plant Owned Assets Hedging Information Estimated Next Three Years
	2003	2004	2005
Estimated Plant Output Hedged	100%	76%	57%
Estimated Plant Fuel Requirements Hedges	83%	96%	60%

Note:
The percentages above are based on modeled requirements using data available at
  December 31, 2002.

Table 8

Value at Risk ("VaR") Associated with Energy Contracts
For the Year Ended December 31, 2002
(Dollars in Millions)

     Pepco Holdings uses a value-at-risk model to assess the market risk of its electricity, gas, coal, and petroleum product commodity activities. The model includes physical forward contracts used for hedging and trading, and commodity derivative instruments. Value-at-risk represents the potential gain or loss on instruments or portfolios due to changes in market factors, for a specified time period and confidence level. Pepco Holdings estimates value-at-risk across its power, gas, coal, and petroleum products commodity business using a delta-gamma variance/covariance model with a 95 percent, one-tailed confidence level and assuming a one-day holding period. Since value-at-risk is an estimate, it is not necessarily indicative of actual results that may occur.

	Proprietary Trading         VaR (1)	VaR for Energy Derivative Contracts (2)
95% confidence level, one-day holding period,      one-tailed (3)
Period end	$ 3.4	$ 4.0
Average for the period	3.4	5.9
High	5.6	17.2
Low	.9	2.5

Notes:
(1)	Includes all derivative contracts held for trading and marked-to-market under SFAS No. 133.
(2)	Includes all derivative contracts under SFAS No. 133, including trading positions and cash flow hedges.
(3)	VaR calculations are shown in a standard delta or delta/gamma closed form 95% 1-day holding period 1-tail normal distribution form. Traditional statistical and financial methods can be employed to reconcile prior 10K and 10Q VaRs to the above approach. In this case, 5-day VaRs divided by the square root of 5 equal 1-day VaRs; and 99% 1-tail VaRs divided by 2.326 times 1.645 equal 95% 1-tail VaRs. Note that these methods of conversion are not valid for converting from 5-day or less holding periods to over 1 month holding periods and should not be applied to "non-standard closed form" VaR calculations in any case.

REGULATORY AND OTHER MATTERS

Termination of Agreements for Sale of ACE Electric Generating Plants

     Under the terms of agreements between ACE and NRG Energy, Inc. (NRG) for the sale of ACE's fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station) the agreements were subject to termination by either party after February 28, 2002. NRG delivered notice to Conectiv on April 1, 2002 terminating these agreements. On January 13, 2003, the Company announced the termination of a second competitive bidding process initiated on May 23, 2002 to sell these ACE-owned fossil fuel-fired electric generating plants. The Company noted that while the competitive bidding process identified a number of interested parties, current conditions in the electric energy market prevented ACE from reaching agreements for the sale of these generating assets. The Company remains interested in selling these assets on acceptable terms, but cannot predict whether or not any or all of the plants will be sold, whe ther the NJBPU will grant the required approval of any sales agreements, or any related impacts upon recoverable stranded costs.

Basic Generation Service

     Under the provisions of New Jersey's 1999 Electric Discount and Energy Competition Act (the New Jersey Act) and the NJBPU's Final Decision and Order concerning restructuring ACE's electric utility business, ACE was obligated to provide Basic Generation Service (BGS) through July 31, 2002, which entailed supplying electricity to customers in ACE's service area who do not choose an alternative supplier. The Final Decision and Order provides for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from NUGs, and the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACE's customers for BGS, the under-recovered costs are defe rred as a regulatory asset. Pursuant to the terms of the 1999 restructuring of ACE's electric generation business, during 2000-2002, the under-recovered costs were first applied to a deferred energy cost liability that was eliminated and then a regulatory asset was established ($153.0 million as of December 31, 2002). After the initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the under-recovered cost balance over a reasonable period of time to be determined by the NJBPU. ACE's recovery of the deferred costs is subject to review by the NJBPU.

     On August 1, 2002, in accordance with the provisions of the New Jersey Act and the NJBPU's Final Decision and Order, ACE petitioned the NJBPU for a $71.6 million, or 8.4%, annualized increase in electric rates, effective August 1, 2003. This proposed rate increase is intended to recover ACE's deferred cost balance as of August 1, 2003 over a four-year period and reset ACE's rates such that an under-recovery of certain costs is no longer embedded in rates. ACE's recovery of the deferred costs is subject to review by the NJBPU, which will determine the amount of cost recovery in accordance with the New Jersey Act. The outside auditing firm selected by the NJBPU has completed its review and audit of the deferral balance of ACE. A draft report has been provided to ACE, and ACE has responded to the NJBPU and the auditors with factual comments. A final report was released on February 24, 2003.

     BGS electricity supply beyond July 31, 2002 was provided for by a BGS auction held in February 2002, which awarded about 1,900 MW, or 80% of ACE's BGS load to four suppliers for the period from August 1, 2002 to July 31, 2003. The remaining 20% of ACE's BGS load is supplied utilizing ACE's electric supply, consisting of its fossil fuel-fired electric generating plants (excluding Deepwater), which are used first to meet such BGS load, and its NUG contracts, to the extent such electric generating plants are not sufficient to satisfy such load.

     Any portion of ACE's electric supply that exceeds the load requirement of the BGS customers is sold in the wholesale market. In addition, if any of the four suppliers awarded 80% of ACE's BGS load default on performance, ACE will offer the defaulted load to the other winning bidders. If they are not interested, ACE will then procure the needed supply from the wholesale market. Any costs related to this new supply that are not covered by remuneration from the supplier in default will be included in the calculation of deferred electric service costs, which are subject to NJBPU review and future recovery in customer rate increases.

     By Decision and Order dated December 18, 2002, the NJBPU approved the process for the procurement of BGS supply for the period starting August 1, 2003. The decision included holding two separate but simultaneous auctions to procure BGS supply. The first auction will be for the supply needed to serve large commercial and industrial customers who will be paying an hourly energy price. There are approximately 50 customers in this group for ACE. The auction will determine the capacity price to be paid by these customers. The period covered by this auction is August 1, 2003 through May 31, 2004. The second auction will be for the supply needs of the remainder of the BGS customers, and would be for full requirements service (energy, capacity, transmission, and ancillary services) for these customers. In this auction, two-thirds of the needs will be procured for the same period as the first auction, while the remaining one-third of the needs will be p rocured for a period of 34 months. The results of these auctions will be used to set the rates paid by the customers in each group. The decision also established working groups to deal with metering issues and customer education. The auctions were conducted February 3 and 4, 2003. The NJBPU approved the results of the auctions on February 5, 2003. ACE has entered into BGS Supplier Agreements with the winning bidders. If any of the winning bidders were to default on their commitments, ACE will offer the defaulted load to other winning bidders, or will make arrangements to purchase the needed supply from PJM-administered markets.

Securitization

     Under the New Jersey Act, up to 100% of recovery-eligible stranded costs related to electric generating plants and the costs to affect buyouts or buy downs of NUG contracts may be recovered through customer rates. On September 9, 2002, New Jersey enacted an amendment (Amendment) to the New Jersey Act. The Amendment permits the NJBPU to authorize the securitization of deferred balances of electric public utilities resulting from the provisions of the New Jersey Act. The NJBPU may authorize the issuance of transition bonds by an electric public utility or other financing entity in order to (i) recover stranded costs deemed eligible for rate recovery in a stranded cost recovery order; (ii) recover rate reduction requirements determined by the NJBPU to be necessary under the provisions of the New Jersey Act; or (iii) recover basic generation service transition costs. The NJBPU may approve transition bonds with scheduled amortization of up to fiftee n years if related to stranded cost recoveries or recoveries of basic generation service transition costs, or the remaining term of a purchase power agreement if related to the buyout or buy down of long-term purchase power contracts with NUGs.

     On September 20, 2002, the NJBPU issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. A subsidiary of ACE issued Transition Bonds totaling $440 million on December 19, 2002, in accordance with this Financing Order. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buy down of the American Ref-Fuel NUG contract. Also included in the amount authorized was $20 million of transaction costs and capital reduction costs.

     ACE formed ACE Transition Funding during 2001 as a special purpose entity (SPE) for the sole purpose of purchasing and owning the bondable transition property (BTP), issuing transition bonds (Bonds), pledging ACE Transition Funding's interest in BTP and other collateral to the bond trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Proceeds from the sale of Bonds were transferred to ACE in consideration for the BTP, and ACE will repurchase debt and/or equity related to the stranded costs and NUG contracts noted above. The Bonds of ACE Transition Funding are included in the accompanying Consolidated Balance Sheets.

     On January 31, 2003, ACE filed a petition seeking from the NJBPU an administrative valuation of a portion of the B.L. England Station stranded costs and a finding that such costs may be included as part of the principal amount of transition bonds for which ACE may seek approval under the New Jersey Act. Management anticipates that the necessary approvals will be received from the NJBPU and that a bondable stranded costs rate petition will ultimately be approved, leading to the issuance of additional transition bonds.

Rate Increase

     On February 3, 2003, ACE filed a petition with the NJBPU to increase its electric distribution rates and the Regulatory Asset Recovery Charge in New Jersey. The request, if approved, will increase ACE's annual revenues by approximately $68.4 million. The petition was filed in accordance with the NJBPU's Final Order in restructuring, which mandated that ACE file a plan to set rates that will be in place when the New Jersey Act's transition period ends July 31, 2003.

Pepco Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether th e IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing payments to D.C. customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. It is a certainty that some party or parties will appeal the Hearing Examiner's Proposed Order to the Maryland Commission. The principal issue in the case is the same normalization issue that was raised in the D.C. case. On March 4, 2003, the IRS issued a NOPR that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential als o exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the Hearing Examiner or the Maryland Commission will issue their decisions.

     In Maryland, in accordance with the terms of an agreement approved by the Maryland Commission, customers who are unable to receive generation services from another supplier, or who do not select another supplier, are entitled to receive services from Pepco until July 1, 2004 (Standard Offer Service or SOS). Pepco has entered into a settlement in Phase I of Maryland Case No. 8908 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The Settlement provides for SOS to be procured from the wholesale marketplace and th at Pepco will be able to recover its costs of procurement and a return.

Full Requirements Contract with Mirant

     Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would have to find alternative sources of supply at rates then prevailing.

Environmental Matters

     The Company through its subsidiaries is subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. The Company's subsidiaries may incur costs to clean up facilities found to be contaminated due to current and past disposal practices. The Company's subsidiaries' liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including wh ether a Pepco Holdings subsidiary or a corporate predecessor is responsible for conditions on a particular parcel). The Company's current liabilities include approximately $22.7 million as of December 31, 2002, for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a potentially responsible party, alleged to be a third-party contributor, or has made a decision to clean up contamination on its own property. The accrued liability as of December 31, 2002, included $11.2 million for remediation and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with the Delaware Department of Natural Resources and Environmental Control during 2001. As a result of discontinuing the second competitive bidding process for ACE's fossil fuel-fired generating stations, ACE's anticipated $7 million costs to clean up the Deepwater gen erating station is included in the previously stated $22.7 million liability. The costs of cleaning up ACE's B.L. England generating station have not yet been quantified but may exceed $2 million. The Company does not expect such future costs to have a material effect on the Company's financial position or results of operations.

     In April 2002, EPA proposed regulations addressing best technology available for minimizing environmental impact from existing power production cooling water intake structures. The ACE Deepwater electric generating station's New Jersey Pollution Discharge Elimination System (NJPDES) renewal permit, effective through September 30, 2007 will require a study to evaluate the efficiency of recent changes to the intake structure and other biological impact studies that will be submitted with a permit renewal application in 2007. The NJPDES permit for the B.L. England Station expired in December 1999, but has been administratively extended, through submittal of a renewal application, and the plant continues to operate under the conditions of the existing permit until a renewal permit is issued by the New Jersey Department of Environmental Protection (NJDEP).

     A Conectiv subsidiary holds a National Pollution Discharge Elimination System (NPDES) permit for the Edge Moor Power Plant. Studies to determine impacts on aquatic organisms by the plant's intake structures, required by the existing permit which expires in October 2003, were completed in 2002. The results of these studies and additional site specific studies on alternative technologies are expected to determine whether changes to intake structures are required to comply with any final rule that EPA adopts.

     On May 4, 2002, ACE, Conectiv Atlantic Generation, LLC (CAG), and the NJDEP entered into an Administrative Consent Order (ACO) to address ACE's and CAG's inability to procure Discrete Emission Reductions (DER) credits to comply with New Jersey's NO_x Reasonable Available Control Technology (RACT) requirements and NJDEP's allegations that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The ACO eliminates requirements for ACE and CAG to purchase DER credits for certain ACE and CAG electric generating units through May 1, 2005 and provides, among other things, for installation of new controls on CAG's electric generating units ($7 million estimated cost), a $1.0 million penalty, a $1.0 million contribution to promote, develop and enhance an urban airshed reforestation project, and operating hour limits at ACE's Deepwater Unit N o. 4.

     On July 11, 2001, the NJDEP denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a number of stays of the denial to authorize ACE to operate Unit 1 with the current fuel until May 29, 2003. NJDEP also issued addendums to the permit/certificate to operate for Unit 1 authorizing trial burns of coal with a sulfur content less than 2.6%. ACE is requesting an extension of the current stay of the denial and submitted final wrap-up reports on the results of its test burns to NJDEP on January 28, 2003. Management is not able to predict the outcome of ACE's appeal, including the effects, if any, of trial burn results on NJDEP's position with regard to the denial or the appeal.

     In February 2000, the United States Environmental Protection Agency (USEPA) and NJDEP requested information from ACE regarding the operation of coal-fired boilers at ACE's B.L. England and Deepwater generating stations. As of December 2002, in responding to this request and numerous subsequent requests, ACE has provided more than 24,000 pages of documents covering activities at B.L. England and Deepwater since 1978 to USEPA and NJDEP. USEPA has sought this information pursuant to its authority under Clean Air Act Section 114, and the ACE requests are similar to those that USEPA has made of other electric utilities to determine compliance with New Source Review (NSR) Prevention of Significant Deterioration (PSD) and non-attainment NSR requirements. Similar inquiries have resulted in the filing of federal lawsuits against utilities in the South and Midwest. A number of settlements of litigation brought as a result of such inquiries alleging viola tions of NSR standards have been announced. In January 2002, the Department of Justice completed its review of the USEPA's enforcement actions and concluded that the USEPA has a reasonable basis on which to pursue NSR enforcement. On December 31, 2002, EPA published an NSR reform package including both proposed and final rules. The proposed rule offers options for clarifying the routine maintenance, repair and replacement exclusion to the NSR rules. It is unclear how EPA's proposed reform rules will ultimately impact the on-going NSR enforcement actions; however, EPA officials have indicated their intention to continue with the NSR enforcement initiative targeting alleged past violations under the current rules. ACE met with EPA and NJDEP in May 2002 to discuss NSR issues. Since then, ACE entered into a confidentiality agreement with the government agencies. The Company does not believe that it has violated NSR requirements. Management cannot predict the impact of the USEPA/NJDEP inquiries or proposal on B.L . England or Deepwater operations.

     In October 1995, Pepco received notice from the EPA that it, along with several hundred other companies, may be a potentially responsible party (PRP) in connection with the Spectron Superfund Site located in Elkton, Maryland.

     The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. In August 2001, Pepco entered into a Consent Decree for de minimis parties with EPA to resolve its liability at this site. Pursuant to the consent decree, in return for a de minimis payment by Pepco to the United States and a group of PRPs, those parties covenant not to sue Pepco for past and future costs of remediation at the site and the United States will also provide contribution protection against third party claims related to response actions at the site. Natural resource damages, if any, are not covered by the Consent Decree. Court approval of the Consent Decree is pending. Pepco believes that its liability at this site, pursuant to the terms of the Consent Decree, will not have a material adverse effect on its financial position or results of operations.

     In June 1992, EPA identified ACE as a PRP at the Bridgeport Rental and Oil Services (BROS) superfund site in Logan Township, New Jersey. In September 1996, ACE along with other PRPs signed a consent decree with EPA and NJDEP to address remediation of the Site. ACE's liability is limited to 0.232 percent and ACE has made contributions of approximately $105,000. The Phase 2 Remedial Investigation/Feasibility Study (RI/FS) to address groundwater and wetlands contamination is scheduled to be completed in September 2003. ACE believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     In November 1991, NJDEP identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with other PRPs, signed an Administrative Consent Order (ACO) with NJDEP to remediate the Site. The soil cap remedy for the Site has been completed and the NJDEP conditionally approved the Remedial Action Report in January 2003. The results of groundwater monitoring over the next year will help to determine the extent of post-remedy operation and maintenance costs.

     In December 1987, Pepco was notified by the EPA that it, along with several other utilities and nonutilities, is a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination of a Philadelphia, Pennsylvania, site owned by a nonaffiliated company. In the early 1970s, Pepco sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the site. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a ROD that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In June 1998, the EPA issued a unilateral Administrative Order to Pepco and 12 other PRPs to conduct the design and actions called for in the ROD. At December 31, 2002, Pepco has accrued $1.7 million for its share of these costs. The Company be lieves that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     Pepco's Benning Service Center facility operates under a National Pollutant Discharge Elimination System (NPDES) permit. The EPA issued an NPDES permit for this facility in November 2000. Pepco has filed a petition with the EPA Environmental Appeals Board seeking review and reconsideration of certain provisions of the EPA's permit determination. In May 2001, Pepco and the EPA reached a settlement on Pepco's petition, pursuant to which the EPA withdrew certain contested provisions of the permit and agreed to issue a revised draft permit for public comment. As of December 31, 2002, the EPA has not issued a revised permit and Pepco is operating pursuant to the November 2000 permit absent the withdrawn conditions in accordance with the settlement agreement.

     In the late 1980's DPL was identified by EPA as a PRP at the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. The PRP Group determined that in 1987 and 1988 DPL sent 440 gallons of waste paint to the site. DPL paid $290.40 in connection with a Consent Agreement as a Non-Performing Settling Party to resolve its liability for Phase I activities at the site. In September 1991, DPL made an additional $500 payment pursuant to a second Administrative Consent Order initiating Phase II activities. The site was added to the National Priorities List in 1994. In February 2003, the PRP Group informed DPL that DPL was a de micromis party at the Site because its 440 gallon contribution to the Site was less than EPA's 890 gallon threshold for de minimis status and that DPL has no further liability for contribution to the Site's remediation fund.

     In the late 1980's, DPL was notified by the EPA that it, along with several other utilities and nonutilities was a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination at the Metal Bank/Cottman Avenue site located in Philadelphia, Pennsylvania at which the Site owner, from 1968 to 1972, drained oil from used transformers to reclaim copper. Based on the PRP group's determination that DPL sent 102 transformers to the Site, DPL was allocated responsibility for 0.24 percent of remediation costs. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a Record of Decision (ROD) that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In 1999, DPL entered into a de minimis settlement with EPA and paid approximately $107,000 to resolve its liability for clea nup costs at the Site. The de minimis settlement did not resolve DPL's responsibility for natural resource damages, if any, at the Site. DPL believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

Litigation

     During 1993, Pepco was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City and Baltimore County), in separate ongoing, consolidated proceedings each denominated, "In re: Personal Injury Asbestos Case." Pepco (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their Complaints. While the pleadings are not entirely clear, it appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, Pepco was served, in September 1993, with a third-party complaint by Owens Corning Fiberglass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against Pepco on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third-party complaint against Pepco, seeking contribution for the same plaintiffs involved in the Owens Corning third-party complaint. Since the initial filings in 1993, approximately 90 additional individual suits have been filed against Pepco. The third-party complaints involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore City Court during 1994 without any payment by Pepco. As of December 31, 2002, approximately 200 cases were pending against Pepco. Of the 200 remaining asbestos cases pending against Pepco, approximately 35 of those cases have been tendered to Mirant for defense and indemnification pursuant to the Asset Purchase and Sale Agreement wh ich was executed in December 2000. While the aggregate amount specified in the remaining suits would exceed $400 million, Pepco believes the amounts are greatly exaggerated, as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, the Company does not believe these suits will have a material adverse effect on its financial position. However, an unfavorable decision rendered against Pepco could have a material adverse effect on results of operations in the year in which a decision is rendered.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP, an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property. As a result of the oil spill, eleven class action lawsuits and two additional lawsuits on behalf of a number of Southern Maryland residents, businesses and watermen were filed against Pepco. On November 27, 2001, Pepco and ST Services entered into a Settlement Agreement with the various plaintiffs to settle all pending class action litigation stemming from the oil spill. Under the Settlement Agreement, a total of $ 2.25 million was placed in an escrow account to be distributed to watermen and property owner class members pursuant to a Plan of Distribution filed with the Court. On December 27, 2001, the Court entered an "Order Certifying Settlement Classes and Preliminarily Approving Proposed Settlement," which was approved in April 2002. In April 2002, the Claims Administrator provided the Court with a list of those members of the Settlement Classes which had timely excluded themselves from the Settlement Agreement. Approximately 80 class members elected to exclude themselves from the terms of the November 27, 2001 Settlement Agreement.

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by Delmarva and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provision s of the master power purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe that the Company has material financial exposure related to the Enron bankruptcy.

     The Company, through its subsidiaries, is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.

Third Party Guarantees

     At December 31, 2002, Pepco Holdings and its subsidiaries guaranteed $416.5 million of third party obligations. The detail of these guarantees is summarized below.

	Guarantor
	PHI	Conectiv	PCI	Total
	(Dollars in Millions)
Energy trading obligations of   Conectiv Energy	$ 80.7	$136.3	-	$217.0
Energy trading obligations of   Pepco Energy Services	36.9	-	-	36.9
Construction performance guarantees	85.3	36.6	-	121.9
Other	-	28.2	12.5	40.7
Total	$202.9	$201.1	$12.5	$416.5

     Pepco Holdings and the above referenced significant subsidiaries guarantee payments to counter-parties related to routine energy trading obligations, including requirements under BGS contracts for ACE. A portion of Conectiv's Mid-merit plant program and the energy management programs of Pepco Energy Services contains construction payment guarantees. Pepco Holdings also has investments in partnerships and joint ventures, which are accounted for under the equity method of accounting. Pepco Holdings and its subsidiaries guarantee certain payment and performance obligations associated with these unconsolidated entities.

FORWARD LOOKING STATEMENTS

     Some of the statements contained in this Annual Report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding the Company's intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause our or our industry's actual re sults, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

     The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond the Company's control and may cause actual results to differ materially from those contained in forward-looking statements:

· Prevailing governmental policies and regulatory actions affecting the energy industry, including with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power expenses, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs);

· Changes in and compliance with environmental and safety laws and policies;

· Weather conditions;

· Population growth rates and demographic patterns;

· Competition for retail and wholesale customers;

· General economic conditions, including potential negative impacts resulting from an economic downturn;

· Growth in demand, sales and capacity to fulfill demand;

· Changes in tax rates or policies or in rates of inflation;

· Changes in project costs;

· Unanticipated changes in operating expenses and capital expenditures;

· Capital market conditions;

· Restrictions imposed by the Public Utility Holding Company Act of 1935;

· Competition for new energy development opportunities and other opportunities;

· Legal and administrative proceedings (whether civil or criminal) and settlements that influence our business and profitability;

· Pace of entry into new markets;

· Success in marketing services;

· Trading counterparty credit risk;

· Ability to secure electric and natural gas supply to fulfill sales commitments at favorable prices;

· Volatility in market demand and prices for energy, capacity and fuel;

· Operating performance of power plants;

· Interest rate fluctuations and credit market concerns; and

· Effects of geopolitical events, including the threat of domestic terrorism.

     Any forward-looking statements speak only as to the date of this Annual Report and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of such factors, nor can the Company assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

     The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exhaustive.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS

POTOMAC ELECTRIC POWER COMPANY

OVERVIEW

     On August 1, 2002, Potomac Electric Power Company (Pepco or the Company) closed on its acquisition of Conectiv for a combination of cash and stock valued at approximately $2.2 billion. In accordance with the terms of the merger agreement, both Pepco and Conectiv became subsidiaries of Pepco Holdings, Inc. (Pepco Holdings) a registered holding company under the Public Utility Holding Company Act of 1935. Pepco Holdings was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting the merger. As part of the merger transaction, holders of Pepco's common stock immediately prior to the August 1, 2002 merger received in exchange for their Pepco shares approximately 107,125,976 shares of Pepco Holdings common stock, par value $.01 per share. Additionally, Pepco issued 100 shares of common stock, par value $.01, all of which is owned by Pepco Holdings.

     Since August 1, 2002, Pepco has been engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements entered into with regulatory authorities, Pepco is required to provide electricity supply at specified rates (referred to as "default service") to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation (Mirant) of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would hav e to find alternative sources of supply at rates then prevailing.

     Until August 1, 2002, Pepco was also engaged in the management of a diversified financial investments portfolio and the supply of energy products and services in competitive retail markets. These activities were performed through the Company's wholly owned unregulated subsidiary at that time, POM Holdings, Inc. (POM) which until August 1, 2002, was the parent company of two wholly owned subsidiaries, Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services). PCI managed the Company's financial investment portfolio and Pepco Energy Services provided competitive energy products and services. PCI's investment in Starpower Communications, LLC, which provides cable and telecommunication services in the Washington, D.C. area, is owned by its wholly owned subsidiary Pepco Communications, Inc. (Pepcom). After the merger, the stock of PCI, Pepco Energy Services, and Pepcom was distributed as a dividend to P epco Holdings, which resulted in Pepco Holdings becoming the new parent company of PCI, Pepco Energy Services, and Pepcom.

     Additionally, Pepco has a wholly owned Delaware statutory business trust, Potomac Electric Power Company Trust I, and a wholly owned Delaware Investment Holding Company, Edison Capital Reserves Corporation.

     At December 31, 2002, Pepco had 2,442 total employees.

CRITICAL ACCOUNTING POLICIES

     The U.S. Securities and Exchange Commission (SEC) has defined a company's most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, Pepco has identified the critical accounting policies and judgments as addressed below.

Accounting Policy Choices

     Pepco's management believes that based on the nature of its business it has very little choice regarding the accounting policies it utilize as Pepco's business consists of its regulated utility operations, which are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation." However, in the areas that Pepco is afforded accounting policy choices, management does not believe that the application of different accounting policies than those that it chose would materially impact its financial position or results of operations.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Examples of estimates used by the Company include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, and pension assumptions. Pepco believes that its estimates and assumptions are reasonable; they are based upon information presently available. Actual results may differ significantly from these estimates.

Revenue Recognition

    Pepco's revenue for services rendered but unbilled as of the end of each month is accrued and included in the accounts receivable balance on the accompanying balance sheets.

Accounting For the Effects of Certain Types of Regulation

     Based on the regulatory framework in which it has operated, Pepco has historically applied, and in connection with its transmission and distribution business continues to apply, the provisions of SFAS No. 71. SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management's assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. Should existing facts or circumstances change in the future to indicate that a regulatory asset is not probable of recovery, and then the regulatory asset would be charged to earnings.

Pension and Other Post Employment Benefit Plans

     Pepco Holdings has a noncontributory retirement plan (the Plan) that covers substantially all employees of Pepco, DPL, ACE, and certain employees of other Pepco Holdings' subsidiaries. Following the consummation of the acquisition of Conectiv by Pepco on August 1, 2002, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan on December 31, 2002. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan. In addition to providing pension benefits, Pepco Holdings also provides certain health care and life insurance benefits for eligible employees (OPEBS).

     The Company accounts for the Plan in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and it's OPEBS in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company's financial statement disclosures were prepared in accordance with SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (the Company's first quarter 2003 financial statements). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. The Company has completed its assessment of the provisions of SFAS No. 143 and believes that although the implementation of the Statement will result in certain account reclassifications it will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in Pepco's Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). The Company is in the process of assessing the provisions of FIN 45 in order to determine its impact on the Company's financial position and results of operations.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Pepco is in the process of assessing the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations.

CONSOLIDATED RESULTS OF OPERATIONS

LACK OF COMPARABILITY OF OPERATING RESULTS WITH PRIOR YEARS

     As discussed in the "Overview" section herein, on August 1, 2002, in accordance with the terms of the merger agreement, Pepco transferred its ownership of PCI and Pepco Energy Services to Pepco Holdings. Accordingly, the accompanying consolidated balance sheet and consolidated statement of shareholders' equity as of December 31, 2002 include only Pepco's operations. The consolidated balance sheet as of December 31, 2001, and the consolidated statements of shareholders' equity as of December 31, 2001 and 2000, respectively, as previously reported by Pepco, include the consolidated accounts of Pepco and its pre-merger wholly owned subsidiaries, PCI and Pepco Energy Services.

     The accompanying consolidated statements of earnings and the consolidated statements of cash flows for the year ended December 31, 2002 include Pepco's operations for the entire year consolidated with its pre-merger subsidiaries operations for the seven months of January 2002 through July 2002. The accompanying consolidated statements of earnings and consolidated statements of cash flows for the years ended December 31, 2001 and 2000, as previously reported by Pepco, include the consolidated operations of Pepco and its pre-merger subsidiaries, for the entire year presented.

     Accordingly, the 2002 balances included in the accompanying consolidated financial statements referred to above are not comparable with the 2001 and 2000 balances.

OPERATING REVENUE

Results for 2002 Compared to 2001

     Total consolidated operating revenue decreased during 2002 by $412.5 million ($1,988 million vs. $2,400.5 million). This decrease consists of a $189.6 million decrease in Utility operating revenue and a $193.6 million decrease in operating revenues for PCI and PES. The remaining decrease results from the fact that 2001 included a net gain of $29.3 million that resulted from the sale in January 2001 of the Company's interest in the Conemaugh generating station.

     The decrease in Pepco's operating revenue during 2002 primarily resulted from a decrease of $206.9 million in standard offer service revenue due to increased customer migration to alternate suppliers during 2002. Retail access to a competitive market for generation services was made available to all Maryland customers on July 1, 2000 and to D.C. customers on January 1, 2001. At December 31, 2002, 16% of Pepco's Maryland customers and 13% of its D.C. customers have chosen alternate suppliers. These customers accounted for 1,175 megawatts of load in Maryland (of Pepco's total load of 3,369) and 1,140 megawatts of load in D.C. (of Pepco's total load of 2,326). The decrease in standard offer service revenue was partially offset by a $26.3 million increase in delivery revenue due to higher delivered kilowatt hour sales from more favorable weather than experienced in 2001.

     The decrease in PCI and PES' operating revenue during 2002 results from the fact that Pepco's consolidated 2002 results only include the operating results from PCI and PES for seven months (January 2002 through July 2002), compared to a full year during 2001.

Results for 2001 Compared to 2000

     Total consolidated operating revenue decreased during 2001 by $588.8 million ($2,400.5 million vs. $2,989.3 million). This decrease consists of a $497.1 million decrease in Utility operating revenue partially offset by a $302.8 million increase in operating revenues for PCI and PES. The remaining decrease results from the fact that 2000 included a net gain of $423.8 million related to the December 2000 divestiture of substantially all of Pepco's generating assets to Mirant versus 2001 which included a net gain of $29.3 million that resulted from the sale in January 2001 of the Company's interest in the Conemaugh generating station.

     The decrease in Pepco's operating revenue during 2001 resulted from decreases of $466.9 million in standard offer service revenue and $30.2 million in delivery revenue primarily due to increased customer migration to alternative suppliers during 2001. Retail access to competitive markets for generation services was made available to all Maryland customers on July 1, 2000 and to D.C. customers on January 1, 2001. At December 31, 2001, 12% of Pepco's Maryland customers and 4% of its D.C. customers had chosen alternate suppliers. These customers accounted for 800 megawatts of load in Maryland (of our total load of 3,369) and 1,026 megawatts of load in D.C. (of our total load of 2,326).

     Pepco Energy Services' operating revenue increased during 2001 primarily resulted from increases of $283.2 million in commodity revenues and $44.3 million in services revenues due to growth in its retail commodity business. These increases were partially offset by a decrease in operating revenues by PCI primarily due to the fact that in 2000 PCI recorded a pre-tax gain of approximately $19.7 million from the sale of its 50% interest in the Cove Point liquefied natural gas storage facility.

OPERATING EXPENSES

Results for 2002 Compared to 2001

     Total consolidated operating expenses decreased during 2002 by $371 million ($1,663.1 million vs. $2,034.1 million). This decrease consists of a $128.3 million decrease in Utility operating expenses and a $242.7 million decrease in operating expenses for PCI and PES.

     The decrease in Utility operating expense during 2002 results from a $179.7 million decrease in fuel and purchased energy expense due to less energy purchased due to higher customer migration. This decrease was partially offset by an increase of $31.2 million in O&M expenses due to an increase in severance costs recorded compared to the corresponding period last year; an increase of $8.5 million in depreciation expense; and an increase of $11.7 million in other taxes due to higher Maryland property taxes and higher delivery taxes and Pennsylvania property taxes.

     The decrease in PCI and PES' operating expense during 2002 results from the fact that Pepco's consolidated three months ended December 31, 2002 results include only the operating results from PCI and PES for seven months (January 2002 through July 2002), compared to a full year during 2001.

Results for 2001 Compared to 2000

     Total consolidated operating expenses decreased during 2001 by $60.1 million ($2,034.1 million vs. $2,094.2 million). This decrease consists of a $431.1 million decrease in Utility operating expenses partially offset by a $371 million increase in operating expenses for PCI and PES.

     The decrease in Pepco's operating expenses during 2001 primarily resulted from a $180.6 million decrease in fuel and purchased energy expense, a $105.3 million decrease in other operation and maintenance expense, an $84 million decrease in depreciation expense, and a $20.9 million decrease in other taxes. The decreases in these expenses primarily resulted from the fact that in January 2001 Pepco completed its plan to exit the generation business by divesting of its interest in the Conemaugh generating station. Additionally, the remaining decrease in operating expenses in 2001 results from the fact that the 2000 results included an impairment loss recorded on Pepco's Benning Road and Buzzard Point generating plants of $40.3 million (pre-tax). These plants were subsequently transferred to Pepco Energy Services.

     The increase in Pepco Energy Services' operating expenses during 2001 resulted from growth in its retail commodity business. The increase in PCI's operating expenses during 2001 primarily resulted from a total of $65.5 million (pre-tax) in impairment write-downs recognized by PCI in 2001 related to its aircraft portfolio and other investments.

OTHER INCOME (EXPENSES)

Results for 2002 Compared to 2001

     Total consolidated other expenses decreased during 2002 by $9 million ($96.3 million vs. $105.3 million). This decrease consists of a $28.7 million increase in Utility other (expenses) offset by a $37.7 million decrease in other (expenses) for PCI and PES.

     The increase in Utility other (expenses) during 2002 primarily results from a $37.1 million decrease in interest income primarily due to lower proceeds remaining to invest from the Company's generation asset divestitures, and due to a decrease of $21.8 million in interest expense as a result of lower interest expense incurred on commercial paper and other debt outstanding due to the payoff of debt.

     The decrease in PCI and PES' other (expenses) during 2002 results from the fact that Pepco's consolidated 2002 results include only the operating results from PCI and PES for seven months (January 2002 through July 2002), compared to a full year during 2001.

Results for 2001 Compared to 2000

     Total consolidated other (expenses) decreased during 2001 by $87.4 million ($105.3 million vs. $192.7 million). This decrease consists of an $89.8 million decrease in Utility other (expenses) offset by a $2.4 million increase in other expenses for PCI and PES.

     The decrease in Pepco's other (expenses) during 2001 primarily resulted from a $40.6 million increase in interest income due to proceeds invested from Pepco's divestiture transactions and due to a decrease of $52.2 million in interest expense due to reductions in the level of Pepco's debt outstanding. A portion of the divestiture proceeds were used to pay off Pepco's outstanding debt.

INCOME TAX EXPENSE

Results for 2002 Compared to 2001

     Total consolidated income tax expense decreased during 2002 by $3.2 million ($80.3 million vs. $83.5 million). This decrease consists of a $49.2 million decrease in Utility income tax expense and a $46 million decrease in income tax benefits for PCI and PES.

     The decrease in Utility income tax expense during 2002 results from lower taxes as a result of lower interest income and due to the fact that 2001 included taxes incurred on the Company's generating plant divestitures.

     The decrease in PCI and PES' income tax benefits during 2002 results from the fact that Pepco's consolidated 2002 results include only the operating results from PCI and PES for seven months January 2002 through July 2002), compared to a full year during 2001.

Results for 2001 Compared to 2000

     Total consolidated income tax expense decreased during 2001 by $257.7 million ($83.5 million vs. $341.2 million). This decrease consists of a $222.0 million decrease in Utility income tax expense and a $35.7 million decrease in income tax benefits for PCI and PES.

     The decrease in Pepco's income tax expense during 2001 primarily resulted from the fact that the 2000 tax expense included taxes resulting from the gain on the divestiture of its generating plants in December 2000.

     PCI's income tax (benefit) increased during 2001 primarily due to the write-down of its aircraft portfolio and other investments. This was partially offset by an increase in Pepco Energy Services' income tax expense during 2001 due to improved operating results in its retail commodity and wholesale generation business along with an increase in the effective tax rate.

CAPITAL RESOURCES AND LIQUIDITY

Financing

     On July 15, 2002, Pepco redeemed $66.2 million 8.50% First Mortgage Bonds due May 15, 2027 at a call price of 103.21%. The redemption totaled $69.3 million.

     Pepco has a $300 million commercial paper program. Pepco, Pepco Holdings, DPL, and ACE established a $1.5 billion 364-day revolving credit facility with various financial institutions. Pepco is not entitled to borrow more than $300 million.

     On September 3, 2002, Pepco redeemed $2 million or 40,000 shares of its $3.40 Serial Preferred Stock Series of 1992, pursuant to mandatory sinking fund provisions.

Pension Funding

     Pepco's pension assets did not achieve the level of returns assumed in the determination of their pension expense accruals during 2002. As a result, Pepco contributed $35 million to its pension plan in December 2002 to exceed a funding level of 100% with respect to its accrued benefit obligation.

     Effective December 31, 2002, as a result of the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Pepco Holdings Retirement Plan. Pepco Holdings adopted the Pepco and Conectiv benefit plans. The provisions and benefits of the merged plan are identical to those of the original Pepco and Conectiv Plans.

Construction Expenditures

     Pepco's construction expenditures totaled $194.7 million in 2002. For the five-year period 2003 through 2007, construction expenditures are projected to total approximately $900 million.

Disclosures About Contractual Obligations And Commercial Commitments

     Summary information about Pepco's consolidated contractual obligations and commercial commitments at December 31, 2002 is as follows:

	Contractual Maturity
Obligation	Total	Less than 1 Year	1-3   Years	4-5   Years	After  5 Years
	(Dollars in Millions)
Short-term debt	$   40.0	$ 40.0	$    -	$    -	$    -
Long-term debt	1,133.5	50.0	100.0	338.0	645.5
Preferred stock subject to   mandatory redemption	47.5	2.5	5.0	40.0	-
Preferred trust securities	125.0	-	-	-	125.0
Capital and operating   leases	134.7	18.0	33.8	33.3	49.6
Total	$1,480.7	$110.5	$138.8	$411.3	$820.1

REGULATORY AND OTHER MATTERS

Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict wheth er the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing payments to D.C. customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. It is a certainty that some party or parties will appeal the Hearing Examiner's Proposed Order to the Maryland Commission. The principal issue in the case is the same normalization issue that was raised in the D.C. case. On March 4, 2003, the IRS issued a NOPR that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential als o exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the Hearing Examiner or the Maryland Commission will issue their decisions.

     In Maryland, in accordance with the terms of an agreement approved by the Maryland Commission, customers who are unable to receive generation services from another supplier, or who do not select another supplier, are entitled to receive services from Pepco until July 1, 2004 (Standard Offer Service or SOS). Pepco has entered into a settlement in Phase I of Maryland Case No. 8908 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The Settlement provides for SOS to be procured from the wholesale marketplace and th at Pepco will be able to recover its costs of procurement and a return.

Environmental Matters

     Pepco is subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. The Company's subsidiaries may incur costs to clean up facilities found to be contaminated due to current and past disposal practices. The Company's subsidiaries' liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others.

     In October 1995, Pepco received notice from the EPA that it, along with several hundred other companies, may be a potentially responsible party (PRP) in connection with the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. In August 2001, Pepco entered into a Consent Decree for de minimis parties with EPA to resolve its liability at this site. Pursuant to the consent decree, in return for a de minimis payment by Pepco to the United States and a group of PRPs, those parties covenant not to sue Pepco for past and future costs of remediation at the site and the United States will also provide contribution protection against third party claims related to response actions at the site. Natural resource damages, if any, are not covered by the Consent Decree. Court approval of the Consent Decree is pending. Pepco believes that its liability at this site, pursuant to the terms of the Consent Decree, will not have a material adverse effect on its financial position or results of operations.

     In December 1987, Pepco was notified by the EPA that it, along with several other utilities and nonutilities, is a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination of a Philadelphia, Pennsylvania, site owned by a nonaffiliated company. In the early 1970s, Pepco sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the site. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a ROD that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In June 1998, the EPA issued a unilateral Administrative Order to Pepco and 12 other PRPs to conduct the design and actions called for in the ROD. At December 31, 2002, Pepco has accrued $1.7 million for its share of these costs. The Company be lieves that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     Pepco's Benning Service Center facility operates under a National Pollutant Discharge Elimination System (NPDES) permit. The EPA issued an NPDES permit for this facility in November 2000. Pepco has filed a petition with the EPA Environmental Appeals Board seeking review and reconsideration of certain provisions of the EPA's permit determination. In May 2001, Pepco and the EPA reached a settlement on Pepco's petition, pursuant to which the EPA withdrew certain contested provisions of the permit and agreed to issue a revised draft permit for public comment. As of December 31, 2002, the EPA has not issued a revised permit and Pepco is operating pursuant to the November 2000 permit absent the withdrawn conditions in accordance with the settlement agreement.

Litigation

     During 1993, Pepco was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City and Baltimore County), in separate ongoing, consolidated proceedings each denominated, "In re: Personal Injury Asbestos Case." Pepco (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their Complaints. While the pleadings are not entirely clear, it appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, Pepco was served, in September 1993, with a third-party complaint by Owens Corning Fibergl ass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against Pepco on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third-party complaint against Pepco, seeking contribution for the same plaintiffs involved in the Owens Corning third-party complaint. Since the initial filings in 1993, approximately 90 additional individual suits have been filed against Pepco. The third-party complaints involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore City Court during 1994 without any payment by Pepco. As of December 31, 2002, approximately 200 cases were pending against Pepco. Of the 200 remaining asbestos cases pending against Pepco, approximately 35 of those cases have been tendered to Mirant for defense and indemnification pursuant to the Asset Purchase and Sale Agr eement which was executed in December 2000. While the aggregate amount specified in the remaining suits would exceed $400 million, Pepco believes the amounts are greatly exaggerated, as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial position. However, an unfavorable decision rendered against Pepco could have a material adverse effect on results of operations in the year in which a decision is rendered.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP, an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property. As a result of the oil spill, eleven class action lawsuits and two additional lawsuits on behalf of a number of Southern Maryland residents, businesses and watermen were filed against Pepco. On November 27, 2001, Pepco and ST Services entered into a Settlement Agreement with the various plaintiffs to settle all pending class action litigation stemming from the oil spill. Under the Settlement Agreement, a total of $ 2.25 million was placed in an escrow account to be distributed to watermen and property owner class members pursuant to a Plan of Distribution filed with the Court. On December 27, 2001, the Court entered an "Order Certifying Settlement Classes and Preliminarily Approving Proposed Settlement," which was approved in April 2002. In April 2002, the Claims Administrator provided the Court with a list of those members of the Settlement Classes which had timely excluded themselves from the Settlement Agreement. Approximately 80 class members elected to exclude themselves from the terms of the November 7, 2001 Settlement Agreement.

     The Company is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.

FORWARD LOOKING STATEMENTS

     Some of the statements contained in this Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding the Company's intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause our or our industry's actual result s, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

     The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond the Company's control and may cause actual results to differ materially from those contained in forward-looking statements:

· Prevailing governmental policies and regulatory actions affecting the energy industry, including with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power expenses, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs);

· Changes in and compliance with environmental and safety laws and policies;

· Weather conditions;

· Population growth rates and demographic patterns;

· Competition for retail and wholesale customers;

· General economic conditions, including potential negative impacts resulting from an economic downturn;

· Growth in demand, sales and capacity to fulfill demand;

· Changes in tax rates or policies or in rates of inflation;

· Changes in project costs;

· Unanticipated changes in operating expenses and capital expenditures;

· Capital market conditions;

· Restrictions imposed by the Public Utility Holding Company Act of 1935;

· Legal and administrative proceedings (whether civil or criminal) and settlements that influence our business and profitability;

· Pace of entry into new markets;

· Trading counterparty credit risk;

· Ability to secure electric and natural gas supply to fulfill sales commitments at favorable prices;

· Volatility in market demand and prices for energy, capacity and fuel;

· Interest rate fluctuations and credit market concerns; and

· Effects of geopolitical events, including the threat of domestic terrorism.

     Any forward-looking statements speak only as to the date of this Annual Report and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of such factors, nor can the Company assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

     The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exhaustive.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS

CONECTIV

OVERVIEW

     Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of merger transactions and an exchange of common stock with Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc., which owned Atlantic City Electric Company (ACE) prior to the 1998 Merger. Conectiv owns other subsidiaries in addition to ACE and DPL, including Conectiv Energy Holding Company (CEH). Conectiv, along with CEH and ACE REIT, Inc., is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA).

     References herein to Conectiv may mean the activities of one or more subsidiary companies.

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco each became subsidiaries of PHI. See Note 2 to the Conectiv Consolidated Financial Statements for additional information.

     ACE and DPL are public utilities that supply and deliver electricity through their transmission and distribution systems to approximately 999,400 customers under the trade name Conectiv Power Delivery. DPL also supplies and delivers natural gas to approximately 115,400 customers in a 275 square mile area in northern Delaware. ACE's regulated service area is located in the southern one-third of New Jersey and DPL's regulated electric service area is located on the Delmarva Peninsula (Delaware and portions of Maryland and Virginia). On a combined basis, ACE's and DPL's regulated electric service areas encompass about 8,700 square miles and have a population of approximately 2.2 million.

     CEH and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading and marketing. CEH's operations began on July 1, 2000, coincident with the transfer of certain electric generating plants from ACE and DPL to CEH subsidiaries. Prior to July 1, 2000, non-regulated electricity production and sales, energy trading and marketing were conducted primarily by DPL. See "Energy Hedging and Trading Activities" in Notes 3 and 13 to the Consolidated Financial Statements for information about energy hedging and trading activities.

     Conectiv has altered the focus of its electric generation operations by building new "mid-merit" electric generating plants and selling electric generating plants designed to serve base load demand. Mid-merit electric generating plants are combined cycle units, which are constructed with combustion turbines, waste heat recovery boilers and a steam turbine. Mid-merit electric generating plants can quickly change their kWh output level on an economic basis and generally are operated during times when demand for electricity rises and prices are higher. During 2001 and 2002, Conectiv developed sites and purchased equipment for future mid-merit electric generating plants and began operating six newly-installed combustion turbines (654 MW). During 2000 and 2001, DPL, ACE, and another Conectiv subsidiary sold ownership interests in non-strategic electric generating plants which included nuclear electric generating plants (714 MW) and fossil fuel-f ired electric generating plants (1,081 MW). See Note 14 to the Conectiv Consolidated Financial Statements for additional information about the sales of electric generating plants during 2000-2001 and the termination of agreements for the sale of ACE's fossil fuel-fired electric generating plants.

     For information about other businesses conducted by Conectiv subsidiaries, see the discussion of "Other services" revenues under "Revenue Recognition" in Note 3 to the Consolidated Financial Statements.

CONSOLIDATED RESULTS OF OPERATIONS

     The Results of Operations discussion for Conectiv is presented only for the year ended December 31, 2002 in accordance with General Instruction I(2)(a).

Electric Revenues
	2002	2001	Change
	(Dollars in Millions)
Regulated electric revenues	$2,115.3	$2,080.0	$ 35.3
Non-regulated electric revenues	901.2	672.1	229.1
Total electric revenues	$3,016.5	$2,752.1	$264.4

     The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and electricity supply service within the service areas of ACE and DPL.

Regulated Electric Revenues

     The increase in "Regulated electric revenues" resulted from an increase of $69.3 million due to higher delivered kilowatt hour sales primarily due to hotter summer weather in 2002. The increase in kilowatt hours delivered was partially offset by a $31.1 million decrease due to increased customer migration to alternate suppliers during 2002.

Non-regulated Electric Revenues

     "Non-regulated electric revenues" for all periods presented reflect the effects of the netting of expenses with revenues for "energy trading book" contracts, per the provisions of EITF 02-3, as discussed in Note 3 to the Consolidated Financial Statements. The increase in "Non-regulated electric revenues" resulted from an increase of $277.5 million in wholesale business related to a new contract resulting from the Basic Generation Service (BGS) auction held in February 2002; see Note 11 to the Conectiv Consolidated Financial Statements for additional information on the auction. The increase in wholesale business from this contract was partially offset by a $34.3 million decrease in retail revenues due to Conectiv's exit from the competitive retail electricity markets by early 2001.

Gas Revenues
	2002	2001	Change
	(Dollars in Millions)
Regulated gas revenues	$148.3	$154.8	$ (6.5)
Non-regulated gas revenues	238.3	269.5	(31.2)
Total gas revenues	$386.6	$424.3	$(37.7)

     DPL has gas revenues from on-system natural gas sales, which generally are subject to price regulation, and from the transportation of natural gas for customers. Conectiv subsidiaries also trade and sell natural gas in transactions that are not subject to price regulation. The table above shows the amounts of gas revenues from sources that were subject to price regulation (regulated) and that were not subject to price regulation (non-regulated).

     The decrease in "Regulated gas revenues" primarily resulted from customer rate decreases related to recovery of lower purchased natural gas costs.

     "Non-regulated gas revenues" for all periods presented reflect the effects of the netting of expenses with revenues for "energy trading book" contracts, per the provisions of EITF 02-3, as discussed in Note 3 to the Consolidated Financial Statements. The decrease in "Non-regulated gas revenues" is primarily due to Conectiv's exit from the competitive retail gas business, partially offset by increases in volumes of gas trading activities.

Other Services Revenues
	2002	2001	Change
	(Dollars in Millions)
Petroleum sales and trading	$307.6	$324.2	$(16.6)
Operation of third parties' power plants	64.6	74.8	(10.2)
Coal trading	1.5	13.9	(12.4)
All other	65.5	74.9	(9.4)
Total other services revenues	$439.2	$487.8	$(48.6)

     The decrease in "Petroleum sales and trading" primarily resulted from lower volume and prices, which were adversely affected by the warmer winter weather in early 2002. The decrease in "Operation of third parties' power plants" resulted from fewer special projects performed during 2002 at the plants in comparison to 2001. The decrease in "Coal trading" resulted from a lack of market opportunities in 2002. The decrease in "All other" primarily resulted from a lack of market opportunities in oil commodities trading in 2002.

Operating Expenses

Electric Fuel and Purchased Energy

     "Electric fuel and purchased energy" related to non-regulated electric revenue activities for all periods presented reflect the effects of the netting of expenses with revenues for "energy trading book" contracts, per the provisions of EITF 02-3, as discussed in Note 3 to the Consolidated Financial Statements. "Electric fuel and purchased energy increased by $308.8 million to $2,051.9 million for 2002, from $1,743.1 million for 2001. The increase was due to a $238.7 million increase in "non-regulated electric fuel and purchased energy", primarily related to procuring energy for a new contract resulting from the BGS auction held in February 2002, as noted above in the discussion of "Non-regulated electric revenues." In addition, there was a $70.1 million increase in "regulated electric fuel and purchased energy" primarily related to higher volumes of kilowatt hours delivered and the higher cost of replacing the electricity produced by DPL's e lectric generating plants that were sold June 22, 2001.

Gas Purchased

     "Gas purchased" related to non-regulated gas revenue activities for all periods presented reflect the effects of the netting of expenses with revenues for "energy trading book" contracts, per the provisions of EITF 02-3, as discussed in Note 3 to the Consolidated Financial Statements. "Gas purchased" decreased by $76.5 million to $313.4 million for 2002, from $389.9 million for 2001. The decrease was mainly due to a $64.7 million decrease from lower competitive retail sales due to Conectiv's exit from this business in early 2001, and reduced costs of natural gas for the regulated gas delivery business.

Other Services' Cost of Sales

     Other services' cost of sales decreased by $26.6 million to $383.6 million for 2002, from $410.2 million for 2001. The primary reason for the decrease was related to lower volumes of petroleum products purchased at lower average prices.

Merger-related Costs

     Conectiv's operating results for 2002 and 2001 included costs related to the Conectiv/Pepco Merger of $75.4 million ($46.0 million after income taxes) and $17.0 million ($11.0 million after income taxes), respectively. The $75.4 million of costs for 2002 included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the NJBPU on July 3, 2002 that required ACE to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $18.4 million for severances and stock options settled in cash; and (iii) $26.5 million for investment banking, legal, consulting and other costs. The $17.0 million of costs for 2001 included investment banking, legal, consulting and other costs. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over Conectiv, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

Other Operation and Maintenance

     Other operation and maintenance expenses increased by $34.7 million to $516.9 million for 2002, from $482.2 million for 2001. The increase was mainly due to higher pension and other postretirement benefits expense, partly offset by lower operating expenses due to the sale of electric generating plants during 2001 and $16.3 million received by DPL in 2001 for termination of its membership in a nuclear mutual insurance company. Pension expense increased during 2002 mainly due to the adverse effects of stock market conditions on the fair value of trust fund assets and amortization of previous actuarial gains.

Loss on Sale of Leveraged Leases

     On July 3, 2002, Conectiv sold its leveraged lease portfolio of three aircraft and two containerships, which had a carrying value of $44.6 million, before an impairment reserve associated with the sale. In consideration for the assets sold, Conectiv received cash of $24.4 million and a note, which had an estimated fair value of $3.0 million. As a result of the sale, operating results for 2002 include a loss of $19.7 million before taxes, or $11.2 million after-taxes.

Impairment Losses

     As a result of Conectiv's decision to sell an office building during 2002, Conectiv was required to test the building's carrying value for impairment and the test showed that Conectiv's carrying value for the office building was impaired as of September 30, 2002. Accordingly, a $4.0 million before-tax impairment charge ($2.4 million after-tax) was recorded in the third quarter of 2002. Conectiv's assessment of the carrying value of the office building was based on offers received from potential purchasers of the building. The sale of the office building was completed in December 2002.

     In connection with Conectiv's second competitive bidding process for the sale of ACE's fossil fuel-fired electric generating plants, an impairment of the carrying value of ACE's Deepwater power plant was identified. Accordingly, a $9.5 million before-tax impairment charge ($5.6 million after-tax) was recorded in December 2002. Conectiv's assessment of the carrying value of the Deepwater power plant was based on offers from the competitive bidding process.

Depreciation and Amortization

     Depreciation and amortization expenses decreased by $35.5 million to $193.0 million for 2002, from $228.5 million for 2001. The decrease was primarily due to the sale of electric generating plants during 2001 and no longer amortizing goodwill due to SFAS No. 142, partly offset by an increase for depreciation of new mid-merit electric generating plants.

Other Taxes

     Other taxes decreased by $10.4 million to $64.0 million for 2002, from $74.4 million for 2001. The decrease was mainly due to expiration of the amortization of a regulatory asset for New Jersey state excise taxes.

Deferred Electric Service Costs

     Deferred electric service costs decreased by $71.9 million to $(71.3) million for 2002, from $(143.2) million for 2001. The decrease in deferred costs (causing an overall increase in total operating expenses) was mainly due to lower costs related to ACE providing Basic Generation Service, in addition to no longer including a return that had been earned on ACE's ownership interests in nuclear plants until such interests were sold in 2001.  See Note 11 to the Consolidated Financial Statements for further discussion of deferred electric service costs and basic generation service.

Other Income (Expenses)

     Other (expenses) increased by $6.6 million to a net expense of $(120.8) million for 2002, from a net expense of $(114.2) million for 2001. Net other (expenses) for 2001 includes a pre-tax gain of $73.0 million from the recognition of a previously deferred gain related to termination of a purchased power contract, as discussed in Note 12 to the Consolidated Financial Statements. Excluding the variance attributable to the $73.0 million gain on termination of a purchased power contract, net other (expenses) decreased $66.4 million. This decrease is primarily due to a $37.9 million decrease in interest expense, net of capitalized amounts, resulting from lower interest rates and lower amounts of outstanding short-term debt, as well as an $18.9 million decrease in losses on investments.

Income Taxes

     Income taxes decreased by $181.0 million to $70.6 million for 2002, from $251.6 million for 2001, primarily due to lower income from continuing operations before income taxes.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
   RESULTS OF OPERATIONS

DELMARVA POWER & LIGHT COMPANY

OVERVIEW

     DPL is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with DPL and Atlantic Energy, Inc.

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco and their respective subsidiaries (including DPL) each became subsidiaries of PHI. DPL continues as a wholly owned, direct subsidiary of Conectiv. See Note 2 to the DPL Consolidated Financial Statements for additional information.

     DPL is a public utility which supplies and delivers electricity and natural gas to its customers under the trade name Conectiv Power Delivery. DPL delivers electricity to approximately 485,100 regulated customers through its transmission and distribution systems and also supplies electricity to most of its electricity delivery customers, who have the option of choosing an alternative supplier. DPL's regulated electric service territory is located on the Delmarva Peninsula (Delaware and portions of Maryland and Virginia). DPL's electric service area encompasses about 6,000 square miles and has a population of approximately 1.2 million.

     DPL provides regulated gas service (supply and/or delivery) to approximately 115,400 customers located in a service territory that covers about 275 square miles with a population of approximately 500,000 in New Castle County, Delaware. DPL also sells gas off-system and in markets that are not subject to price regulation.

     The divestiture of the electric generating plants of DPL was completed on June 22, 2001 with the sale of the ownership interests of DPL in various electric generating plants that had 954 megawatts (MW) of capacity. The divestiture of the electric generating plants of DPL started in 2000. DPL contributed electric generating plants with 1,501 MW of capacity to Conectiv on July 1, 2000, in connection with the formation of Conectiv Energy Holding Company (CEH), which has subsidiaries engaged in non-regulated electricity production, energy trading and marketing. Divestiture of the electric generating plants also included the sale of DPL's ownership interests in nuclear electric generating plants (331 MW) on December 29, 2000.

     Prior to the formation of CEH on July 1, 2000, DPL's business activities included trading electricity and natural gas and the sale of electricity produced by non-regulated electric generating units. The transition of these activities from DPL to CEH and its subsidiaries occurred during the latter-half of 2000.

Regulation of Utility Operations

     Certain aspects of DPL's utility businesses are subject to regulation by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively), the Virginia State Corporation Commission (VSCC), and the Federal Energy Regulatory Commission (FERC). Excluding sales not subject to price regulation, the percentages of retail electric and gas utility operating revenues regulated by each state regulatory commission for 2002, were as follows: DPSC, 67.5%; MPSC, 29.4%; and VSCC, 3.1%. Wholesale sales and the transmission of electricity and gas are subject to FERC regulation. Retail gas sales are subject to regulation by the DPSC.

     As discussed in Note 7 to the DPL Consolidated Financial Statements, DPL's electricity generation business was restructured in the latter half of 1999, pursuant to enactment of Delaware and Maryland electric restructuring legislation and the issuance of restructuring orders by the DPSC and MPSC. Based on these orders, DPL determined that the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) no longer applied to its electricity generation business and an extraordinary charge to 1999 earnings resulted.

     DPL's electric delivery business and retail gas business are subject to the requirements of SFAS No. 71. When utility revenues are insufficient to recover current period expenses from customers, regulatory commissions may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory commission.

     The amount recognized in the DPL Consolidated Statements of Income for the cost of gas purchased to supply DPL's regulated gas customers is adjusted to the amount included in customer billings for such costs since customer rates are periodically adjusted to reflect amounts actually paid by DPL for purchased gas. A regulatory asset is recorded for under-collections from customers and a liability is recorded for over-collections from customers, which are both included in "regulatory assets, net" as "deferred energy supply costs" on the Consolidated Balance Sheets.

     Refer to Note 3 to the Consolidated Financial Statements for information about regulatory assets and liabilities arising from the financial effects of rate regulation.

RESULTS OF OPERATIONS

     The Results of Operations discussion for DPL is presented only for the year ended December 31, 2002 in accordance with General Instruction I(2)(a).

Electric Revenues
	2002	2001	Change
	(Dollars in Millions)
Regulated electric revenues	$1,036.4	$1,053.3	$(16.9)
Non-regulated electric revenues	3.4	5.8	(2.4)
Total electric revenues	$1,039.8	$1,059.1	$(19.3)

     The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and electricity supply service within the service areas of DPL.

Regulated Electric Revenues

     The decrease in "Regulated electric revenues" resulted from lower interchange and resale sales due to the sale of electric generating plants in 2001 and increased customer migration to alternate suppliers during 2002, partially offset by higher delivered kilowatt hour sales primarily due to hotter summer weather in 2002.

Gas Revenues
	2002	2001	Change
	(Dollars in Millions)
Regulated gas revenues	$148.3	$154.8	$ (6.5)
Non-regulated gas revenues	29.8	75.8	(46.0)
Total gas revenues	$178.1	$230.6	$(52.5)

     DPL has gas revenues from on-system natural gas sales, which generally are subject to price regulation, and from the transportation of natural gas for customers. The table above shows the amounts of gas revenues from sources that were subject to price regulation (regulated) and that were not subject to price regulation (non-regulated).

     The decrease in "Regulated gas revenues" primarily resulted from customer rate decreases related to recovery of lower purchased natural gas costs.

     The decrease in "Non-regulated gas revenues" is primarily due to DPL's exit from the competitive retail gas business and only selling to large industrial customers.

Operating Expenses

Electric Fuel and Purchased Energy

     "Electric fuel and purchased energy" increased by $30.1 million to $677.0 million for 2002, from $646.9 million for 2001. The increase was due to higher volumes of kilowatt hours delivered and the higher cost of

replacing the electricity produced by DPL's electric generating plants that were sold June 22, 2001.

Gas Purchased

     "Gas purchased" decreased by $53.8 million to $124.9 million for 2002, from $178.7 million for 2001. The decrease was mainly due to lower competitive retail sales due to Conectiv's exit from this business in early 2001, and reduced costs of natural gas for the regulated gas delivery business.

Merger-related Costs

     DPL's operating results for 2002 included costs related to the Conectiv/Pepco Merger of $9.7 million ($5.8 million after income taxes). The $9.7 million of costs included the following: (i) $8.2 million for severances and stock options settled in cash; and (ii) $1.5 million for contributions to certain funds based on the terms of orders issued by the MPSC and DPSC. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over DPL, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

Other Operation and Maintenance

     Other operation and maintenance expenses increased by $16.4 million to $178.7 million for 2002, from $162.3 million for 2001. The increase was mainly due to higher pension and other postretirement benefits expense, partly offset by lower operating expenses due to the sale of electric generating plants during 2001 and $16.3 million received by DPL in 2001 for termination of its membership in a nuclear mutual insurance company. Pension expense increased during 2002 mainly due to the adverse effects of stock market conditions on the fair value of trust fund assets and amortization of previous actuarial gains.

Depreciation and Amortization

     Depreciation and amortization expenses decreased by $13.2 million to $82.1 million for 2002, from $95.3 million for 2001, primarily due to the sale of electric generating plants during 2001.

Other Income (Expenses)

     Other (expenses) decreased by $15.5 million to a net expense of $(33.3) million for 2002, from a net expense of $(48.8) million for 2001. This decrease is primarily due to lower interest expense, net of capitalized amounts, resulting from the repayment of long-term debt, partially offset by lower interest income.

Income Taxes

     Income taxes decreased by $106.2 million to $33.7 million for 2002, from $139.9 million for 2001, primarily due to lower income before income taxes.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
     RESULTS OF OPERATIONS

ATLANTIC CITY ELECTRIC COMPANY

OVERVIEW

     Atlantic City Electric Company (ACE) is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with Atlantic Energy, Inc. and Delmarva Power & Light Company (DPL).

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco and their respective subsidiaries (including ACE) each became subsidiaries of PHI. ACE continues as a wholly-owned, direct subsidiary of Conectiv. See Note 2 to the ACE Consolidated Financial Statements for additional information.

     ACE is a public utility which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery. ACE delivers electricity within its service area to approximately 514,300 customers through its transmission and distribution systems and also supplies electricity (Basic Generation Service) to most of its electricity delivery customers, who have the option of choosing an alternative supplier. ACE's regulated service area covers about 2,700 square miles within the southern one-third of New Jersey and has a population of approximately 0.9 million.

RESULTS OF OPERATIONS

     The Results of Operations discussion for ACE is presented only for the year ended December 31, 2002 in accordance with General Instruction I(2)(a).

Electric Revenues
	2002         2001			Change
	(Dollars in Millions)
Regulated electric revenues	$1,078.9	$1,026.7	$52.2
Non-regulated electric revenues	5.8	14.4	(8.6)
Total electric revenues	$1,084.7	$1,041.1	$43.6

     The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and electricity supply service within the service areas of ACE.

Regulated Electric Revenues

     The increase in "Regulated electric revenues" resulted from higher delivered kilowatt hour sales primarily due to hotter summer weather in 2002, and higher volumes of interchange and resale sales, partially offset by a decrease due to increased customer migration to alternate suppliers during 2002.

Operating Expenses

Electric Fuel and Purchased Energy

     "Electric fuel and purchased energy" increased by $45.9 million to $682.5 million for 2002, from $636.6 million for 2001. The increase was due to higher volumes of kilowatt hours delivered and the higher average cost per kWh of electricity supplied to customers.

Merger-related Costs

     ACE's operating results for 2002 include costs related to the Conectiv/Pepco Merger of $38.1 million ($22.6 million after income taxes). The $38.1 million of costs included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the NJBPU on July 3, 2002 that required ACE to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $6.6 million for severances and stock options settled in cash; and (iii) $1.0 million for a contribution to a certain fund based on the terms of an order issued by the NJBPU. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over ACE, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

Other Operation and Maintenance

     Other operation and maintenance expenses decreased by $5.6 million to $243.6 million for 2002, from $249.2 million for 2001. The decrease was mainly due to the effect of the sale of ACE's interests in nuclear electric generating plants in October 2001, partly offset by higher pension and other postretirement benefits expense and severance and environmental costs for the Deepwater power plant. Pension expense increased during 2002 mainly due to the adverse effects of stock market conditions on the fair value of trust fund assets and amortization of previous actuarial gains.

Impairment Losses

     The impairment loss of $9.5 million in 2002 represents the write-down of the Deepwater power plant due to impairment of value based on the results of a competitive bidding process.

Depreciation and Amortization

     Depreciation and amortization expenses decreased by $15.5 million to $69.2 million for 2002, from $84.7 million for 2001 primarily due to the sale of ACE's interests in nuclear electric generating plants during 2001.

Other Taxes

     Other taxes decreased by $9.3 million to $24.8 million for 2002, from $34.1 million for 2001. The decrease was mainly due to expiration of the amortization of a regulatory asset for New Jersey state excise taxes.

Deferred Electric Service Costs

     Deferred electric service costs decreased by $71.9 million to $(71.3) million for 2002, from $(143.2) million for 2001. The decrease in deferred costs (causing an overall increase in total operating expenses) was mainly due to lower costs related to ACE providing Basic Generation Service, in addition to no longer including a return that had been earned on ACE's ownership interests in nuclear plants until such interests were sold in 2001.

Other Income (Expenses)

     Other (expenses) decreased by $13.7 million to a net expense of $(36.2) million for 2002, from a net expense of $(49.9) million for 2001. This decrease is primarily due to lower interest expense, net of capitalized amounts, resulting from repayment of long-term debt partly offset by an increase in income from billings to customers to recover ACE's income tax expense on contributions-in-aid of construction.

Income Taxes

     Income taxes decreased by $30.4 million to $16.3 million for 2002, from $46.7 million for 2001, primarily due to lower income before income taxes.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
    AND RESULTS OF OPERATIONS

ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC

OVERVIEW

     Atlantic City Electric Transition Funding LLC (ACE Funding), a limited liability company established by Atlantic City Electric (ACE) under the laws of the State of Delaware, was formed on March 28, 2001 pursuant to a limited liability company agreement with ACE dated April 11, 2001 as amended, as sole member of ACE Funding. ACE is a wholly owned subsidiary of Conectiv, which is a wholly owned subsidiary of Pepco Holdings, Inc., a registered holding company under the Public Utility Holding Company Act of 1935. ACE is a public utility, which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery.

     ACE Funding was organized for the sole purpose of purchasing and owning Bondable Transition Property (BTP), issuing transition bonds (Bonds) to fund purchasing BTP, pledging its interest in BTP and other collateral to the Trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. BTP represents the irrevocable right of ACE or its successor or assignee, to collect a non-bypassable transition bond charge (TBC) from customers pursuant to the bondable stranded costs rate order (BPU Financing Order), issued on September 20, 2002 by the New Jersey Board of Public Utilities (BPU) in accordance with the Electric Discount and Energy Competition Act enacted by the state of New Jersey in February 1999.

     The BPU Financing Order authorizes the TBC to be sufficient to recover $440 million aggregate principal amount of transition bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Bonds. ACE Funding's organizational documents require it to operate in a manner so that it should not be consolidated in the bankruptcy estate of ACE in the event ACE becomes subject to bankruptcy proceeding. Both ACE and ACE Funding will treat the transfer of the BTP to ACE Funding as a sale under the applicable law. The Bonds will be treated as debt of ACE Funding.

     For financial reporting, federal income tax and State of New Jersey income and corporation business tax purposes, the transfer of BTP to ACE Funding is being treated as a financing arrangement and not as a sale. Furthermore, the results of operations of ACE Funding will be consolidated with ACE for financial and income tax reporting purposes.

     ACE Funding did not have results of operations or member's equity in the period from its formation to December 31, 2001, as ACE Funding had not issued Bonds and purchased BTP.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pepco Holdings

Market Risk

     Market risk represents the potential loss arising from adverse changes in market rates and prices. Certain of Pepco Holdings financial instruments are exposed to market risk in the form of interest rate risk, equity price risk, commodity risk, and credit and nonperformance risk. Pepco Holdings management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Management reviews any open positions in accordance with strict policies in order to limit exposure to market risk.

Interest Rate Risk

     Pepco Holdings and its subsidiaries debt is subject to the risk of fluctuating interest rates in the normal course of business. Pepco Holdings manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term and variable rate debt was approximately $2.6 million as of December 31, 2002.

     PCI uses interest rate swap agreements to manage its overall borrowing rate and limit its interest rate risk. The potential loss in fair value from these agreements resulting from a hypothetical 10% increase in base interest rates was estimated at $3.4 million at December 31, 2002.

Equity Price Risk

     The Company through its subsidiaries holds investments in marketable equity securities and venture capital funds, which invest in securities of technology and service companies related to energy, utility, and communication industries and invests in marketable securities, which consist primarily of preferred stocks with mandatory redemption features and investment grade commercial paper. Pepco Holdings is exposed to equity price risk through the investments in the marketable equity securities and the venture capital funds. The potential change in the fair value of these investments resulting from a hypothetical 10% decrease in quoted securities prices was approximately $11.3 million as of December 31, 2002. Due to the nature of these investments and market conditions, the fair value of these investments may change by substantially more than 10%.

Commodity Price Risk

     Pepco Holdings is at risk for a decrease in market liquidity to levels that affect its capability to execute its commodity participation strategies. The Company believes the commodity markets to be sufficiently liquid to support its market participation.

     Conectiv's participation in wholesale energy markets includes trading and arbitrage activities, which expose Conectiv to commodity market risk. To the extent Conectiv has net open positions, controls are in place that are intended to keep risk exposures within management-approved risk tolerance levels. Conectiv engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodities (natural gas, petroleum, coal and electricity). The majority of these hedges relate to the procurement of fuel for its power plants, fixing the cash flows from the plant output, and securing power for electric load service. Conectiv's hedging activities are conducted using derivative instruments designated as cash flow hedges, which are designed to reduce the volatility on future cash flows. Conectiv's energy commodity hedging objectives, in accordance with its risk management policy, are pri marily the assurance of stable and known cash flows and the fixing of favorable prices and margins when they become available. Conectiv manages to the objective of hedging the variability in future cash flows for forecasted energy output from its generation assets at 75% or greater of such forecasted output over a period of 36 months. As of December 2002, Conectiv's average forecasted hedge position for the forward 36 months was projected to meet that objective.

     Pepco Energy Services uses forward, futures, options and swap contracts to hedge firm commitments or anticipated commodity transactions, and also, from time to time, creates trading positions.

Credit and Nonperformance Risk

     Certain of the Company's subsidiaries' agreements may be subject to credit losses and nonperformance by the counterparties to the agreements. However, the Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. The Company attempts to minimize credit risk exposure to its wholesale energy counterparties through, among other things, formal credit policies, regular assessment of counterparty creditworthiness that results in the establishment of a credit limit for each counterparty, monitoring procedures that include stress testing, the use of standard agreements which allow for the netting of positive and negative exposures associated with a single counterparty and collateral requirements under certain circumstances, and has established reserves for credit losses. As of December 31, 2002, the Company's credit exposure to wholesale energy counterparties was weighted 86% with investment gr ade counterparties, 13% with counterparties without external credit quality ratings, and 1% with non-investment grade counterparties.

Pepco

Market Risk

     Market risk represents the potential loss arising from adverse changes in market rates and prices. Certain of Pepco's financial instruments are exposed to market risk in the form of interest rate risk, equity price risk, commodity risk, and credit and nonperformance risk. Pepco's management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Management reviews any open positions in accordance with strict policies in order to limit exposure to market risk.

Interest Rate Risk

     Pepco's debt is subject to the risk of fluctuating interest rates in the normal course of business. Pepco manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term debt was approximately $.2 million as of December 31, 2002.

     INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR CONECTIV, DPL, ACE AND ACE FUNDING AS THEY MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND THEREFORE ARE FILING THIS FORM WITH A REDUCED FILING FORMAT.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Listed below is a table that sets forth, for each registrant, the page number where the information is contained herein.

	Registrants
Item	Pepco Holdings	Pepco	Conectiv	DPL	ACE	ACE Funding
Consolidated Statements   of Earnings	91	145	179	233	265	298
Consolidated Statements   of Comprehensive Income	92	146	180	-	-	-
Consolidated Balance   Sheets	93	147	181	234	266	299
Consolidated Statements   of Cash Flows	95	149	183	236	268	300
Consolidated Statements   of Shareholder's Equity	96	150	184	237	269	-
Notes to Consolidated   Financial Statements	97	151	186	238	270	301
Report of Independent   Accountants	90	144	178	232	264	297

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Report of Independent Accountants

To the Shareholders and Board of Directors
of Pepco Holdings, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings and shareholders' equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Pepco Holdings, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material missta tement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Washington, DC
February 10, 2003, except as to the twelfth and thirteenth paragraphs of
  Note 14 for which the date is March 4, 2003

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,	2002			2001			2000
(Millions, except $ per share data)
Operating Revenue
Pepco	$	1,533.5		$	1,723.5		$	2,220.6
Conectiv Power Delivery		996.2			-			-
Conectiv Energy		850.2			-			-
Pepco Energy Services		826.7			541.5			212.4
Other Non-Regulated		117.9			106.2			132.5
Gain on divestiture of generation assets		-			29.3			423.8
Total Operating Revenue		4,324.5			2,400.5			2,989.3
Operating Expenses
Fuel and purchased energy		2,538.4			1,238.1			1,183.7
Other operation and maintenance		775.1			373.4			409.8
Depreciation and amortization		239.8			170.6			247.6
Other taxes		225.6			186.5			207.4
Impairment losses		-			65.5			45.7
Total Operating Expenses		3,778.9			2,034.1			2,094.2
Operating Income		545.6			366.4			895.1
Other Income (Expenses)
Interest and dividend income		24.8			62.0			27.7
Interest expense		(213.3	)		(148.7	)		(211.5	)
Loss from Equity Investments		(9.7	)		(23.9	)		(17.1	)
Other income		7.8			5.3			8.2
Total Other (Expenses)		(190.4	)		(105.3	)		(192.7	)
Preferred Stock Dividend Requirements of Subsidiaries		20.6			14.2			14.7
Income Tax Expense		124.1			83.5			341.2
Net Income	$	210.5		$	163.4		$	346.5
Earnings Per Share of Common Stock
Basic	$	1.61		$	1.51		$	3.02
Diluted	$	1.61		$	1.50		$	2.96
The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,	2002			2001			2000
(Millions of Dollars)
Net income	$	210.5		$	163.4		$	346.5
Other comprehensive (loss)/income, net of taxes
Energy commodity derivative instruments designated as cash flow hedges
Unrealized gain from cash flow hedges net of reclassification adjustments and net of taxes of $11 million for the year ended December 31, 2002		17.2			-			-
Marketable Securities
Unrealized gain/(loss) on marketable securities net of reclassification adjustments and net of taxes (benefit) of $2.3 million, $1.6 million and $(3.1) million for the years ended December 31, 2002, 2001, and 2000, respectively		4.3			2.9			(5.7	)
Treasury lock
Unrealized loss from treasury lock net of reclassification adjustments and net of taxes of $42.7 million for the year ended December 31, 2002		(59.7	)		-			-
Interest rate swap agreement designated as cash flow hedge
Unrealized loss from cash flow hedge net of reclassification adjustments and net of taxes (benefit) of $4.3 million, $(1.2) million, and zero for the years ended December 31, 2002, 2001, and 2000		(8.0	)		(2.1	)		-
Other comprehensive (loss)/income, net of taxes		(46.2	)		.8			(5.7	)
Comprehensive income	$	164.3		$	164.2		$	340.8
The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS	December 31,     2002			December 31,     2001
(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents, including $16.3 million in restricted cash in 2002	$	98.8		$	515.5
Marketable securities		175.3			161.2
Accounts receivable, less allowance for uncollectible accounts of $37.3 million and $9.5 million		1,118.5			401.2
Fuel, materials and supplies-at average cost		254.9			37.8
Prepaid expenses and other		54.4			24.2
Total Current Assets		1,701.9			1,139.9
INVESTMENTS AND OTHER ASSETS
Goodwill		1,431.8			-
Regulatory assets, net		1,175.5			14.3
Investment in finance leases		1,091.6			736.0
Prepaid pension expense		124.9			152.4
Other		538.0			489.9
Total Investments and Other Assets		4,361.8			1,392.6
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		10,625.0			4,361.9
Accumulated depreciation		(3,827.0	)		(1,608.5	)
Net Property, Plant and Equipment		6,798.0			2,753.4
TOTAL ASSETS	$	12,861.7		$	5,285.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY	December 31,     2002			December 31,     2001
(Millions of Dollars)
CURRENT LIABILITIES
Short-term debt	$	1,377.4		$	458.2
Accounts payable and accrued payroll		638.8			224.1
Capital lease obligations due within one year		15.8			15.2
Interest and taxes accrued		63.4			92.6
Other		501.2			175.3
Total Current Liabilities		2,596.6			965.4
DEFERRED CREDITS
Income taxes		1,535.2			501.6
Investment tax credits		69.0			24.7
Other		432.0			38.8
Total Deferred Credits		2,036.2			565.1
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt		4,712.8			1,602.1
Capital lease obligations		119.6			120.3
Total Long-Term Debt and Capital Lease Obligations		4,832.4			1,722.4
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED   SECURITIES OF SUBSIDIARY TRUST WHICH HOLDS SOLELY   PARENT JUNIOR SUBORDINATED DEBENTURES		290.0			125.0
PREFERRED STOCK
Serial preferred stock		35.3			35.3
Redeemable serial preferred stock		75.4			49.5
Total Preferred Stock		110.7			84.8
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 and $1 par value, respectively-     authorized 400,000,000 and 200,000,000 shares,     respectively-issued 169,982,361 shares and     118,544,883 shares, respectively		1.7			118.5
Premium on stock and other capital contributions		2,212.0			1,028.3
Capital stock expense		(3.2	)		(12.9	)
Accumulated other comprehensive loss		(52.9	)		(6.7	)
Retained income		838.2			974.1
		2,995.8			2,101.3
Less cost of shares of common stock in treasury (none     and 11,323,707 shares, respectively)		-			(278.1	)
Total Shareholders' Equity		2,995.8			1,823.2
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	12,861.7		$	5,285.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2002			2001			2000
(Millions of Dollars)
OPERATING ACTIVITIES
Net income	$	210.5		$	163.4		$	346.5
Adjustments to reconcile net income to net cash from (used by) operating activities:
Depreciation and amortization		239.8			170.6			247.6
Gain on divestiture of generation assets		-			(29.3	)		(423.8	)
Impairment losses		-			65.5			45.7
Changes in:
Accounts receivable		(75.3	)		80.0			(184.5	)
Regulatory assets, net		34.8			(152.2	)		(227.0	)
Prepaid expenses		74.1			389.4			(377.7	)
Accounts payable and accrued payroll		165.9			(52.7	)		34.8
Interest and taxes accrued, including Federal income tax refund of $135.4 million in 2002		(57.1	)		(721.8	)		727.8
Net other operating activities, including divestiture related items in 2001 and 2000		212.8			(11.0	)		(216.3	)
Net Cash From (Used By) Operating Activities		805.5			(98.1	)		(26.9	)
INVESTING ACTIVITIES
Acquisition of Conectiv, net of cash acquired		(1,075.6	)		-			-
Net investment in property, plant and equipment		(503.8	)		(245.3	)		(225.5	)
Proceeds from/changes in:
Divestiture of generation assets		-			156.2			2,741.0
Purchase of leveraged leases		(319.6	)		(157.7	)		-
Sales of marketable securities, net of purchases		1.4			75.4			(38.2	)
Purchases of other investments, net of sales		(17.7	)		(56.9	)		(78.5	)
Sale of aircraft		4.0			22.9			87.1
Net other investing activities		(9.1	)		(8.0	)		(90.5	)
Net Cash (Used By) From Investing Activities		(1,920.4	)		(213.4	)		2,395.4
FINANCING ACTIVITIES
Dividends paid on preferred and common stock		(135.3	)		(126.5	)		(190.4	)
Redemption of preferred stock		(9.9	)		(5.6	)		(9.7	)
Issuance of common stock		105.7			-			-
Reacquisition of the Company's common stock		(2.2	)		(78.1	)		(200.0	)
Issuances of long-term debt		1,974.2			92.4			-
Reacquisitions of long-term debt		(415.2	)		(1,059.9	)		(216.4	)
Repayments of short-term debt, net of issuances		(684.8	)		138.5			12.1
Cost of issuances and financings		(130.4	)		-			-
Net other financing activities		(3.9	)		1.6			1.8
Net Cash From (Used By) Financing Activities		698.2			(1,037.6	)		(602.6	)
Net (Decrease) Increase In Cash and Cash Equivalents		(416.7	)		(1,349.1	)		1,765.9
Cash and Cash Equivalents at Beginning of Period		515.5			1,864.6			98.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	98.8		$	515.5		$	1,864.6
Supplemental Disclosure of Cash Flow Information
Cash paid (received) for interest (net of capitalized   interest of $10.6 million, $2.6 million and $3.4   million) and income taxes:
Interest	$	139.6		$	172.0		$	108.4
Income taxes	$	(271.0	)	$	781.2		$	45.8
Supplemental Disclosure of Non-Cash Investing Activity
Transfer of Benning and Buzzard Stations to Pepco Energy Services	$	-		$	-		$	53.6
The accompanying Notes are an integral part of these Consolidated Financial Statements.

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
	Common Stock
	Shares		Par Value			Premium on Stock			Accumulated Other Comprehensive Income (Loss)			Retained Income
(Dollar Amounts in Millions)
BALANCE, DECEMBER 31, 1999	118,530,802		$	118.5		$	1,025.4		$	(1.8	)	$	781.1
Net Income	-			-			-			-			346.5
Other comprehensive loss	-			-			-			(5.7	)		-
Dividends on common stock	-			-			-			-			(190.4	)
Conversion of stock options	13,934			-			0.3			-			-
Gain on acquisition of preferred stock	-			-			1.6			-			-
BALANCE, DECEMBER 31, 2000	118,544,736		$	118.5		$	1,027.3		$	(7.5	)	$	937.2
Net Income	-			-			-			-			163.4
Other comprehensive income	-			-			-			.8			-
Dividends on common stock	-			-			-			-			(126.5	)
Conversion of stock options	147			-			-			-			-
Gain on acquisition of preferred stock	-			-			.7			-			-
Release of restricted stock	-			-			.3			-			-
BALANCE, DECEMBER 31, 2001	118,544,883		$	118.5		$	1,028.3		$	(6.7	)	$	974.1
Net Income	-			-			-			-			210.5
Other comprehensive income	-			-			-			(46.2	)		-
Dividends on common stock	-			-			-			-			(130.6	)
Issuance of common stock:
Related to Conectiv acquisition	163,602,584			1.7			2,095.6			-			-
Original issue shares	5,750,000			-			105.7			-			-
DRP original shares	629,777			-			12.4			-			-
Cancellation of Pepco outstanding stock	(107,221,176	)		(107.2	)		(963.8	)		-			-
Cancellation of Pepco Treasury Stock	(11,323,707	)		(11.3	)		(64.5	)		-			(215.8	)
Reacquired Conectiv and Pepco PARS	-			-			(3.2	)		-			-
Vested options converted to Pepco Holdings options	-			-			1.5			-			-
BALANCE, DECEMBER 31, 2002	169,982,361		$	1.7		$	2,212.0		$	(52.9	)	$	838.2
The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEPCO HOLDINGS, INC.

(1)  ORGANIZATION

     Pepco Holdings, Inc. (Pepco Holdings or the Company, formerly New RC, Inc.), a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting Potomac Electric Power Company's (Pepco) acquisition of Conectiv. In accordance with the terms of the merger agreement, upon the consummation of the merger on August 1, 2002, Pepco and Conectiv became wholly owned subsidiaries of Pepco Holdings. Additionally, Pepco, through a series of transactions, transferred its ownership interests in its pre-merger subsidiaries Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services) to Pepco Holdings and PCI transferred its ownership interest in its pre-merger subsidiary Pepco Communications, Inc. (Pepcom) to Pepco Holdings. These transactions resulted in PCI, Pepco Energy Services, and Pepcom becoming whol ly owned subsidiaries of Pepco Holdings. Additionally, PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries; therefore, Pepco Holdings has a subsidiary service company that provides a variety of support services to Pepco Holdings and its subsidiaries. The costs of the service company are directly assigned or allocated to Pepco Holdings' or its subsidiaries based on prescribed allocation factors listed in the service agreement filed with, and approved by, the Securities and Exchange Commission (SEC). Pepco Holdings manages its operations as described below.

Power Delivery

     The largest component of Pepco Holdings' business is power delivery, which is conducted through its subsidiaries Pepco, Delmarva Power & Light Company (DPL), and Atlantic City Electric Company (ACE). Pepco, DPL and ACE are all regulated public utilities in the jurisdictions in which they serve customers. The operations of DPL and ACE collectively are referred to as "Conectiv Power Delivery."

Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements entered into with regulatory authorities, Pepco is required to provide electricity supply at specified rates (referred to as "default service") to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would have to find alternative sources of supply at rates then prevailing.

Conectiv Power Delivery

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides gas distribution service in northern Delaware. Under regulatory settlements, DPL is required to provide default electricity service in Maryland until July 2003 for non-residential customers and until July 2004 for residential customers, to customers in Delaware until May 2006 and to customers in Virginia until January 2004 (which may be extended to July 2007). Conectiv Energy (described below) supplies all of DPL's default service load requirements under a supply agreement that ends May 31, 2006. The terms of the supply agreement are structured to coincide with DPL's load requirements under each of its regulatory settlements. Conectiv Energy's resources for supplying DPL's default service load include electricity generated by Conectiv Energy's plants and electricity purchased under long-term agreements. DPL purchase s gas supplies for its customers from marketers and producers in the spot market and under short-term and long-term agreements.

     ACE is engaged in the generation, transmission, and distribution of electricity in southern New Jersey. ACE has default service obligations, known as Basic Generation Service (BGS), for approximately 20 percent of the electricity supply to its customers. ACE expects to fulfill these obligations through the generation output from its fossil fuel-fired generating plants and through existing purchase power agreements with non-utility generators (NUG). As discussed in Note 14. Commitments and Contingencies herein, in January 2003, ACE terminated its competitive bidding process to sell these generation assets.

     ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) during 2001. ACE Transition Funding, which is discussed in Note 14. Commitments and Contingencies, herein, is a wholly owned subsidiary of ACE.

Competitive Energy

     This component of the Company's business is conducted through subsidiaries of Conectiv Energy Holding Company (collectively referred to herein as Conectiv Energy) and Pepco Energy Services. Conectiv Energy Holding Company and Pepco Energy Services are subsidiaries of Pepco Holdings.

Conectiv Energy

     Conectiv Energy supplies power to DPL and provides wholesale power and ancillary services to the Pennsylvania/New Jersey/Maryland (PJM) power pool. Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility, multi-fuel capability and low capital requirements that can quickly change their output level on an economic basis. Mid-merit plants generally are operated during times when demand for electricity rises and prices are higher. Through December 31, 2002, Conectiv Energy also engaged in energy trading to take advantage of price fluctuations and arbitrage opportunities.

     As of December 31, 2002, Conectiv Energy owned and operated electric generating plants with 2,600 MW of capacity. In January 2002, Conectiv Energy began construction of a 1,100 MW combined cycle plant with six combustion turbines at a site in Bethlehem, Pennsylvania that is expected to become fully operational in stages adding 360 MW in 2002 and an additional 740 MW of capacity in 2003. In addition, Conectiv Energy has ordered seven combustion turbines which, with additional equipment, could be configured into up to three combined cycle plants with approximately 550 MW of capacity each. Through December 31, 2002 a total of $192.3 million has been paid for these turbines. The total cost to purchase the combustion turbines is approximately $235 million. In August of 2002, as part of the acquisition of Conectiv by Pepco, the book value of these combustion turbines was adjusted down to the then fair market value of $153 million (approximately 35% l ower than the purchase cost). Construction of these additional plants is subject to market and other conditions but is currently scheduled to occur in phases to be completed in 2007 and 2008. In light of continuing declines in wholesale energy prices, further analysis of energy markets and projections of future demand for electricity, among other factors, Conectiv Energy is considering all of its options including delaying delivery of equipment, delaying construction, selling the equipment and canceling equipment orders.

Pepco Energy Services

     Pepco Energy Services provides retail electricity and natural gas to residential, commercial, industrial and governmental customers in the District of Columbia and states in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management solutions to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, equipment operation and maintenance, fuel management, and appliance service agreements. In addition, Pepco Energy Services owns electricity generation plants with approximately 800 MW of peaking capacity, the output of which is sold in the wholesale market. Pepco Energy Services also purchases and sells electricity and natural gas in the wholesale markets to support its commitments to its retail customers.

Other Non-Regulated

     This component of Pepco Holdings' business is conducted through its subsidiaries PCI and Pepcom.

PCI

     PCI manages a portfolio of financial investments and strategic operating businesses that are designed to provide supplemental earnings and cash flow. PCI has been redirecting its investment operations to focus on investments that are related to the energy industry, such as energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets, located outside of the United States, that provide a long-term, stable stream of cash flow and earnings. PCI has reduced its previous concentration of investments in the aircraft industry from 33 aircraft in 1995 to three aircraft currently. PCI also owns a ten-story, 360,000 square foot office building in downtown Washington, D.C., which is leased to Pepco and serves as Pepco Holdings' and Pepco's corporate headquarters.

     PCI's utility industry products and services are provided through various operating companies. Its underground electric services company, W.A. Chester, provides high voltage construction and maintenance services to utilities and to other customers throughout the United States. PCI also owns Severn Cable, which provides low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

Pepcom

     Pepcom owns a 50% interest in Starpower Communications, LLC, a joint venture with RCN Corporation, which provides cable and telecommunication services to households in the Washington, D.C. area.

(2)  MERGER TRANSACTION

General

     On August 1, 2002, Pepco's acquisition of Conectiv was consummated through a series of merger transactions and an exchange of cash and Pepco Holdings' common stock. In accordance with the terms of the merger agreement, existing holders of Conectiv common stock and Class A common stock, outstanding immediately prior to the merger, received cash in the aggregate amount of $1.1 billion and approximately 56.2 million shares of Pepco Holdings common stock. The number of Pepco Holdings shares issued to Conectiv shareholders was determined based on a formula outlined in the merger agreement, which is included in the Company's Registration Statement on Form S-4 (Number 333-57042). The stock was valued at $18.26 per share, resulting in stock consideration paid to existing Conectiv shareholders of approximately $1 billion. The valuation of Pepco Holdings shares was determined based on the closing market prices on the New York Stock Exchange of Pepco 's common stock 3 days before and 3 days after the date that the amount of Pepco Holdings common shares to be issued to Conectiv shareholders became fixed (July 25, 2002). Additionally, Pepco incurred approximately $35.6 million in direct acquisition costs which are treated as consideration paid for Conectiv. Also, under the terms of the merger agreement approximately $1.7 million in existing Conectiv stock options and performance accelerated restricted stock (PARS) were converted to PHI options and PARS. Accordingly, as illustrated in the table below, total consideration paid for Conectiv was approximately $2.2 billion.

     The merger was accounted for using the purchase method of accounting, with Pepco as the acquirer of Conectiv. In accordance with the provisions of the purchase method of accounting, Pepco compared the total cost to acquire Conectiv to the estimated fair values (on August 1, 2002, the date of acquisition) of the Conectiv assets acquired and liabilities assumed. The excess of cost over the fair value of Conectiv's assets and liabilities acquired was recorded as goodwill.

     The following table presents (in millions of dollars) (1) the estimated fair value of Conectiv's assets and liabilities at August 1, 2002, the acquisition date, (2) the goodwill balance resulting from the acquisition of Conectiv by Pepco and (3) the total consolidated Pepco Holdings goodwill balance at December 31, 2002. Goodwill may be subject to refinement during 2003.

Total Consideration Paid for Conectiv:
Cash paid to existing Conectiv shareholders	$	1,095.2
Stock issued to existing Conectiv     shareholders		1,029.7
Conversion of Conectiv options/PARS		1.7
Pepco direct merger costs		35.6
			$	2,162.2
Fair Value of Conectiv's Assets/Liabilities:
Assets
Property, Plant and Equipment, Net		3,629.7
Investments and Other Assets		1,461.5
Current Assets		873.5
Total Assets	$	5,964.7
Liabilities
Preferred Stock and Securities		200.8
Long-Term Debt		1,489.9
Current Liabilities		2,234.3
Deferred Credits and Other		1,428.4
Total Liabilities	$	5,353.4
Less:  Fair Value of Net Assets Acquired				611.3
Deferred Income Tax Liability				209.6
Add:   Liabilities Assumed				73.0
Goodwill Resulting Directly from the          Acquisition of Conectiv			$	1,414.3
Goodwill on Pepco Energy Services' Books				17.5
Consolidated Pepco Holdings' Goodwill at   December 31, 2002			$	1,431.8

     Goodwill generated by the acquisition of Conectiv is attributable to Pepco Holdings' power delivery business.

Pro Forma Information (unaudited)

     Pro forma unaudited financial information for Pepco Holdings on a consolidated basis, giving effect to the merger as if it had occurred at the beginning of each year presented, is presented below. This pro forma information is not necessarily indicative of the results that would have occurred, or that will occur in the future. Amounts, except earnings per share, are in millions.

	For the Year Ended     December 31,
		2002		2001
Operating Revenue	$	6,777.3	$	6,361.8
Income from Continuing Operations (a)	$	231.5	$	511.0
Average Shares Outstanding		163.4		167.0
Basic and Diluted Earnings Per Share (a)	$	1.42	$	3.06
Additional Supplemental Pro Forma Information:
Income from Continuing Operations, per GAAP (see above)	$	231.5	$	511.0
Adjustments to Remove the Impact of Special Items:
Merger Related Costs	$	63.4	$	11.0
Loss (Gain) on Sales of Assets	$	11.2	$	(234.0	)
Income from Continuing Operations, Excluding   Special Items	$	306.1	$	288.0
Earnings Per Share, Excluding Special Items (a)	$	1.87	$	1.72

(a) This amount reflects the pro forma impact of $700 million in debt issued in September 2002 at 7.15%, the proceeds of which were used to fund the acquisition. Total debt issued in September 2002 was $1.5 billion. The remaining $800 million in debt was used to repay outstanding debt. Pro forma earnings per share, excluding special items, if the pro forma impact of the entire $1.5 billion in debt was calculated would be $1.73 and $1.50 per share for the years ended December 31, 2002 and 2001, respectively.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of Pepco Holdings and its wholly owned subsidiaries. All intercompany balances and transactions between subsidiaries have been eliminated. Investments in entities in which Pepco Holdings has a 20% to 50% interest are accounted for using the equity method. Under the equity method, investments are initially carried at cost and subsequently adjusted for the Company's proportionate share of the investees' undistributed earnings or losses and dividends. Certain prior period amounts have been reclassified in order to conform to the current period presentation.

Consolidated Financial Statement Composition

     As a result of the merger transaction on August 1, 2002, Pepco Holdings' accompanying consolidated balance sheet and consolidated statements of shareholders' equity as of December 31, 2002 include the accounts of Pepco Holdings and its subsidiaries (discussed in Note (1) Organization, herein), after giving effect to the merger transaction and resulting purchase accounting entries discussed in Note (2) Merger Transaction, herein. Since Pepco was the acquiring company, in accordance with the purchase method of accounting, Pepco represents the "predecessor" company. Accordingly, the accompanying consolidated balance sheet as of December 31, 2001, and the consolidated statements of shareholders' equity as of December 31, 2001 and 2000, respectively, as previously reported by Pepco, include only the consolidated accounts of Pepco and its pre-merger subsidiaries, PCI and Pepco Energy Services.

     The accompanying consolidated statements of earnings, consolidated statements of comprehensive income, and consolidated statements of cash flows for the year ended December 31, 2002 include Pepco's and its pre-merger subsidiaries' operating results for the full year consolidated with Conectiv and its subsidiaries operating results for the five months of August 1, 2002, the date the merger was consummated, through December 31, 2002. The accompanying consolidated statements of earnings, consolidated statements of comprehensive income, and consolidated statements of cash flows for the years ended December 31, 2001 and 2000, as previously reported by Pepco, include only the consolidated operations of Pepco and its pre-merger subsidiaries.

     Accordingly, due to the application of the purchase method of accounting that was used to record the merger transaction, the consolidated balances included in the accompanying consolidated financial statements as of and for the years ended December 31, 2002, 2001, and 2000 are not comparable.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Examples of estimates used by the Company include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, pension assumptions, and fair values used in the purchase method of accounting and the resulting goodwill balance. Although Pepco Holdings believes that its estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates.

Regulation of Power Delivery Operations

     Pepco is regulated by the Maryland Public Service Commission (Maryland Commission), the District of Columbia Public Service Commission (D.C. Commission), and its wholesale business is regulated by the Federal Energy Regulatory Commission (FERC). Conectiv Power Delivery is subject to regulation by the Delaware Public Service Commission (Delaware Commission), the Maryland Commission, the New Jersey Board of Public Utilities (NJBPU), the Virginia State Corporation Commission (Virginia Commission), and FERC.

Revenue Recognition

     Power Delivery revenues primarily include revenues from the supply and delivery of electricity to the customers of Pepco, DPL, and ACE. Revenues from the supply and delivery of natural gas to DPL's customers are also included in Power Delivery. Competitive Energy revenues are primarily derived from electricity and natural gas trading activities and generation, which are the sale of electricity, capacity, and ancillary services from deregulated electric generating plants. It also includes revenues from wholesale and retail sales of electricity and natural gas to customers that are supplied by purchases in wholesale markets and revenues from energy management products and services. Other Non-Regulated revenues are provided by Pepco Holdings' non-regulated subsidiary PCI.

     The Power Delivery and Competitive Energy businesses recognize revenues for the supply and delivery of electricity and gas upon delivery to the customer, including amounts for services rendered, but not yet billed. Conectiv Energy recognizes revenue when delivery is substantially complete for non-trading activities, and on a mark-to-market basis for trading activities. Pepco Energy Services recognizes revenue for its wholesale and retail commodity business upon delivery to customers. Revenues for Pepco Energy Services' energy efficiency construction business is recognized using the percentage-of-completion method of revenue recognition and revenues from its operation and maintenance and other products and services contracts are recognized when earned. Revenues from the Other Non-Regulated business lines are principally recognized when services are performed or products are delivered; however, revenue from PCI's utility industry services contrac ts is recognized using the percentage-of-completion method of revenue recognition, which recognizes revenue as work progresses on the contract.

Accounting For the Effects of Certain Types of Regulation

     The requirements of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" apply to the Power Delivery businesses of Pepco, DPL, and ACE. SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management's assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. Should existing facts or circumstances change in the future to indicate that a regulatory asset is not probable of recovery, then the regulatory asset would be charged to earnings.

     The components of Pepco Holdings' regulatory asset balances at December 31, 2002 and 2001, are as follows:

		2002			2001
		(Millions of Dollars)
Recoverable stranded costs	$	920.8		$	-
Deferred energy supply costs		136.2			(13.4	)
Deferred recoverable income taxes		116.5			55.6
Deferred debt extinguishment costs		56.8			25.7
Regulatory liability for New Jersey income tax benefit		(51.2	)		-
Deferred other post retirement benefit costs		25.0			-
Unrecovered purchase power costs		10.5			-
Generation Procurement Credit, customer sharing commitment, and other		(39.1	)		(53.6	)
Net Regulatory Assets	$	1,175.5		$	14.3

Accounting For Derivatives

     Changes in the fair value of derivatives that are not hedges, under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholders' equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. If a forecasted transaction is no longer probable, the deferred gain or loss in accumulated other comprehensive income is immediately reclassified to earnings. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately.

     In June 2002, Pepco Holdings entered into several treasury lock transactions in anticipation of the issuance of several series of fixed rate debt by the end of September 2002. These treasury lock transactions, which were designated as qualified cash flow hedges in accordance with the provisions of SFAS 133, were intended to offset the changes in future cash flows attributable to fluctuations in interest rates. Upon the closing of the sale of the debt on September 6, 2002, the net loss on the settlement of the treasury lock transactions of $63.4 million (after-tax) was recorded as accumulated other comprehensive loss and began to be amortized into interest expense over the life of the related debt. Additionally, the fair value of the liability of $106.1 million (pre-tax) was paid by Pepco Holdings on September 4, 2002, the hedge settlement date.

     Conectiv Energy engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodities (natural gas, petroleum, coal and electricity). The majority of these hedges relate to the procurement of fuel for the power plants, fixing the cash flows from the plant output, and securing power for electric load service. Conectiv Energy's hedging activities are conducted using derivative instruments designated as cash flow hedges, which are designed to reduce the variability in future cash flows. Conectiv Energy's commodity hedging objectives, in accordance with its risk management policy, are primarily the assurance of stable and known cash flows and the fixing of favorable prices and margins when they become available.

     Conectiv Bethlehem, LLC (CBI), a subsidiary of Conectiv Energy, entered into an interest rate swap agreement for the purpose of managing its overall borrowing rate and limiting its interest rate risk associated with debt it has incurred. CBI currently hedges 75% of the interest rate payments for its variable rate debt. CBI formally designated its interest rate swap agreements as a cash flow hedge.

     Pepco Energy Services purchases natural gas futures and electricity forward contracts to hedge price risk in connection with the purchase of physical natural gas and electricity for delivery to customers in future months. Pepco Energy Services accounts for its natural gas futures and electricity forward contracts as cash flow hedges of forecasted transactions.

     PCI has entered into interest rate swap agreements for the purpose of managing its overall borrowing rate and limiting its interest rate risk associated with debt it has issued. PCI currently hedges 100% of its variable rate debt and approximately 24% of its fixed rate debt for the Medium Term Note program. PCI formally designated its interest rate swap agreements as both cash flow hedge and fair value hedge instruments, as appropriate.

     On October 25, 2002, the Emerging Issues Task Force (EITF) rescinded Issue No. 98-10 (EITF 98-10), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." The Company's interpretation of EITF 98-10 is consistent with the current rules that are being applied under SFAS No. 133 and therefore management does not believe that rescinding EITF 98-10 will impact its financial position or results of operations.

Energy Trading Activities

     In 2002, a pronouncement was issued by the EITF entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenue and expense associated with "energy trading book" contracts on a gross vs. net basis. Previously the EITF concluded that gross presentation was acceptable, but with the issuance of EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, net presentation is required. Conectiv Energy and Pepco Energy Services enter into trading activities that are subject to the provisions of this pronouncement and both historically have classified these contracts on a gross basis.

     Conectiv Energy and Pepco Energy Services have completed their evaluation of the financial statement reclassification required by EITF 02-3. Beginning with July 2002, all of their trades were recorded net and therefore no reclassification was required for activities after July 2002. Accordingly, since Conectiv Energy's operating results that are included in Pepco Holdings' results herein consist only of the post-merger months of August 2002 through December 2002, no revenue or expense reclassifications are required for Conectiv Energy's portion of Pepco Holdings' results. However, based on the provisions of EITF 02-3, Pepco Energy Services' results during the period January 2002 through June 2002 required a reclassification adjustment that reduced its revenues by $22.6 million. Additionally, Pepco Energy Services' revenues decreased from $643.9 million to $541.5 million and from $234.9 million to $212.4 million, fo r the years ended December 31, 2001 and 2000, respectively. There is no impact on Conectiv Energy's or Pepco Energy Services' overall financial position or net results of operations as a result of the implementation of EITF 02-3.

Accounting For Marketable Securities

     The Company, through its subsidiaries, holds marketable equity securities and investment grade commercial paper investments which are classified as available-for-sale securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income on the accompanying consolidated balance sheets. However, if a decline in fair value of an available-for-sale security is determined to be other than temporary, then the cost basis of the security is written down to fair value and the decline in fair value is included in earnings.

     Included in net unrealized losses are gross unrealized losses of $2.3 million and gross unrealized gains of $1.1 million at December 31, 2002 and gross unrealized losses of $8.7 million and gross unrealized losses of $1.7 million at December 31, 2001.

     In determining gross realized gains and losses on sales or maturities of securities, specific identification is used. Gross realized gains were $.6 million, $.6 million, and $1.1 million, in 2002, 2001, and 2000, respectively. Gross realized losses were $.7 million, $.7 million, and $1.4 million, in 2002, 2001, and 2000, respectively.

     At December 31, 2002, the contractual maturities for mandatorily redeemable preferred stock held by PCI are $83.1 million within one year, $34.9 million from one to five years, $50.7 million from five to 10 years and $5.8 million for over 10 years.

Short-Term Debt

     Short-term financing requirements have been principally satisfied through the sale of commercial promissory notes. Interest rates for the short-term financing during 2002 ranged from 1.45% to 2.57% and during 2001 ranged from 2.06% to 6.61%. Additionally, a minimum 100% line of credit back-up for outstanding commercial promissory notes is maintained.

     A detail of the components of Pepco Holdings' short-term debt at December 31, 2002 and 2001 is as follows:

		2002		2001
		(Millions of Dollars)
Commercial paper	$	450.9	$	350.2
Short-term borrowings		361.8		-
Current portion of long-term debt		406.3		108.0
Variable rate demand bonds		158.4		-
Total	$	1,377.4	$	458.2

Accounting for Goodwill and Certain Other Intangibles

     Effective January 1, 2002, Pepco Holdings and its subsidiaries adopted the full provisions of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets apart from goodwill. SFAS 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually. Additionally, because Pepco Holdings completed the net asset valuation and determination of goodwill process in August 2002, the Company did not test for impairment in 2002 and therefore intends to test for impairment during 2003.

Environmental Remediation Costs

     Environmental remediation costs are accrued at the time that management determines that it is probable that an asset has been impaired or that a liability has been incurred and the amount of the loss can be reasonably estimated. Environmental remediation costs are charged as an operating expense unless the costs extend the life of an asset or prevent environmental contamination that has yet to occur, in which case the costs are capitalized. Amounts that the Company has determined are probable of recovery from third parties, such as insurance carriers, are netted against the operating expense line item. The amount that is probable of recovery from third parties and the anticipated liability for environmental remediation costs are separately recorded. Amounts accrued for probable environmental remediation costs that may be incurred in the future are not measured on a discounted basis.

Cash and Cash Equivalents

     Cash and cash equivalents include cash on hand, money market funds, and commercial paper with original maturities of three months or less. Cash and cash equivalents includes $16.3 million in 2002 that is restricted for costs incurred on the CBI Project.

Other Assets

     The other assets balance principally consists of real estate under development, equity and other investments, and deferred compensation trust assets.

Other Current Liabilities

     The other current liability balance principally consists of customer deposits, accrued vacation liability, other postretirement/postemployment benefits, and the current portion of deferred income taxes.

Other Deferred Credits

     The other deferred credits balance principally consists of accrued Conectiv other post employment benefit liabilities and miscellaneous deferred revenue.

Accounts Receivable and Allowance for Uncollectible Accounts

     Pepco Holdings' subsidiaries accounts receivable balances primarily consist of customer account receivable, other accounts receivable, and accrued unbilled revenue. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date, usually within one month. The Company uses the allowance method to account for uncollectible accounts receivable.

Capitalized Interest and Allowance for Funds Used During Construction

     In accordance with the provisions of SFAS No. 34, "Capitalization of Interest Cost," the cost of financing the construction of Pepco Holdings' subsidiaries electric generating plants is capitalized. Other non-utility construction projects also include financing costs in accordance with SFAS No. 34. In regards to the Company's regulated utility operations, the cost of additions to, and replacements or betterments of, retirement units of property and plant is capitalized. Such costs include material, labor, the capitalization of an Allowance for Funds Used During Construction (AFUDC) and applicable indirect costs, including engineering, supervision, payroll taxes and employee benefits. The original cost of depreciable units of plant retired, together with the cost of removal, net of salvage, is charged to accumulated depreciation.

Leasing Activities

     Pepco Holdings accounts for leases entered into by its subsidiaries in accordance with the provisions of SFAS No. 13, "Accounting for Leases." Income from investments in direct financing leases and leveraged lease transactions, in which PCI is an equity participant, is accounted for using the financing method. In accordance with the financing method, investments in leased property are recorded as a receivable from the lessee to be recovered through the collection of future rentals. For direct financing leases, unearned income is amortized to income over the lease term at a constant rate of return on the net investment. Income including investment tax credits, on leveraged equipment leases, is recognized over the life of the lease at a constant rate of return on the positive net investment. Investments in equipment under operating leases are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basi s over the equipment's estimated useful life.

Amortization of Debt Issuance and Reacquisition Costs

     Expenses incurred in connection with the issuance of long-term debt, including premiums and discounts associated with such debt, are deferred and amortized over the lives of the respective issues. Costs associated with the reacquisition of debt are also deferred and amortized over the lives of the new issues.

Treasury Stock

     The Company uses the cost method of accounting for treasury stock. Under the cost method, the Company records the total cost of the treasury stock as a reduction to its shareholders' equity on the face of its consolidated balance sheets. Additionally, stock held in treasury is not considered outstanding for the purposes of computing the Company's earnings per share.

Severance Costs

     Through December 31, 2002, Pepco Holdings accounted for its subsidiaries' severance costs in accordance with the provisions of EITF No. 94-3 (EITF 94-3) "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." For any activities after January 1, 2003, the Company will apply the provisions of newly issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

     During 2002, Pepco Holdings' management approved initiatives by Pepco and Conectiv to streamline their operating structure by reducing the number of employees at each company. These initiatives met the criteria for the accounting treatment provided under EITF 94-3. As of December 31, 2002, Pepco Holdings accrued $25.4 million of severance costs in connection with the plan. These costs relate to 274 employees, who primarily work in the Company's power delivery business. Management intends to pay the severance costs by the end of 2003.

Pension and Other Post Employment Benefit Plans

     Pepco Holdings has a noncontributory retirement plan (the Plan) that covers substantially all employees of Pepco, DPL, ACE, and certain employees of other Pepco Holdings' subsidiaries. Following the consummation of the acquisition of Conectiv by Pepco on August 1, 2002, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan on December 31, 2002. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan. In addition to providing pension benefits, Pepco Holdings also provides certain health care and life insurance benefits for eligible employees (OPEBS).

     The Company accounts for the Plan in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and its OPEBS in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company's financial statement disclosures were prepared in accordance with SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."

     Pepco and Conectiv's pension assets did not achieve the level of returns assumed in the determination of their pension expense accruals during 2002. As a result, Pepco contributed $35 million to its pension plan in December 2002 to exceed a funding level of 100% with respect to its accrued benefit obligation. Conectiv's pension plan did not require a contribution to exceed 100% of its accrued benefit obligation.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (the Company's first quarter 2003 financial statements). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. The Company has completed its assessment of the provisions of SFAS No. 143 and believes that although the implementation of the Statement will result in certain account reclassifications, it will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on

extinguishment of debt would be classified as an extraordinary item in Pepco Holdings' Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation," which is effective for interim periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 "Accounting for Stock Based Compensation" to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Pepco Holdings currently accounts for its stock based compensation plan using the provisions of Accounting Principles Board ( APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company believes that the implementation of SFAS 148 will not have a material impact on its financial position or results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). The Company is in the process of assessing the provisions of FIN 45 in order to determine its impact on the Company's financial position and results of operations.

     In January 2003, FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities" (Fin 46). Pepco Holdings is in the process of assessing the provisions of Fin 46 in order to determine its impact on the Company's financial position or results of operations.

(4)  SEGMENT INFORMATION

     Based on the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," Pepco Holdings' management has identified the following reportable segments: Pepco, Conectiv Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated. Intercompany (intersegment) revenues and expenses are not eliminated at the segment level for purposes of presenting segment financial results. Elimination of these intercompany amounts is accomplished for Pepco Holdings' consolidated results through the "Corporate and Other" column. Segment financial information for the years ended December 31, 2002, 2001, and 2000, is as follows.

		December 31, 2002
		(In Millions)
		Power Delivery Segments				Competitive Energy Segments
		Pepco		Conectiv Power Delivery		Conectiv Energy		Pepco Energy Services		Other Non- Regulated		(a) Corp. & Other			PHI Cons.
Operating Revenue	$	1,533.9	$	997.3	$	1,214.3	$	827.5	$	115.5	$	(364.0	)	$	4,324.5
Operating Expense		1,219.7		890.5		1,157.6		815.9		43.4		(348.2	)		3,778.9
Operating Income		314.2		106.8		56.7		11.6		72.1		(15.8	)		545.6
Net Income		136.3		46.4		30.5		6.8		29.0		(38.5	)		210.5
Total Assets		3,536.4		4,569.4		2,111.6		296.9		1,754.9		592.5			12,861.7

(a)

"Corp. and Other" for 2002 includes primarily severance costs, as well as unallocated Pepco Holdings (parent company) capital costs, such as acquisition financing costs, and the depreciation and amortization related to purchase accounting adjustments for the fair value of non-regulated Conectiv assets and liabilities as of August 1, 2002. Intercompany transactions are also included in this line item. Additionally, this line item for "total assets" also includes Pepco Holdings' goodwill balance.

Note:

The condensed segment statements of earnings information for the year ended December 31, 2002 presented above includes Pepco and its pre-merger subsidiaries (PCI and Pepco Energy Services) results for the entire periods presented consolidated with Conectiv and its subsidiaries results starting on August 1, 2002, the date the merger was consummated. The 2001 and 2000 operating amounts included herein reflect only the operations of Pepco and its pre-merger subsidiaries, as previously reported by Pepco. Accordingly, the amounts between years are not comparable.

		December 31, 2001
		(In Millions)
		Power Delivery Segments		Competitive Energy Segments
		Pepco	Conectiv Power Delivery	Conectiv Energy		Pepco Energy Services			Other Non- Regulated			(a) Corp. & Other			PHI Cons.
Operating   Revenue	$	1,752.8	-	-	$	541.5		$	112.2		$	(6.0	)	$	2,400.5
Operating   Expense		1,369.7	-	-		524.1			146.3			(6.0	)		2,034.1
Operating Income   (loss)		383.1	-	-		17.4			(34.1	)		-			366.4
Net Income   (loss)		189.2	-	-		10.3			(36.1	)		-			163.4
Total Assets		5,010.0	-	-		211.8			1,289.9			(1,225.8	)		5,285.9
		December 31, 2000
		(In Millions)
		Power Delivery Segments		Competitive Energy Segments
		Pepco	Conectiv Power Delivery	Conectiv Energy		Pepco Energy Services			Other Non- Regulated			(a) Corp. & Other			PHI Cons.
Operating   Revenue	$	2,644.4	-	-	$	212.4		$	132.5			-		$	2,989.3
Operating   Expense		1,794.8	-	-		228.9			70.5			-			2,094.2
Operating Income   (loss)		849.6	-	-		(16.5	)		62.0			-			895.1
Net Income   (loss)		343.4	-	-		(8.8	)		11.9			-			346.5
Total Assets		7,967.4	-	-		176.6			-			(2,348.9	)		7,027.3

(a) "Corp. and Other" for 2001 and 2000 represents the elimination of intercompany rent paid by Pepco to PCI for lease of office space in PCI's office building. This line item for "total assets" also represents the elimination of intercompany transactions.

(5)  LEASING ACTIVITIES

     The investment in financing leases was comprised of the following at December 31:

		2002		2001
		(Millions of Dollars)
Energy leveraged leases	$	1,022.0	$	658.8
Aircraft leases		18.3		22.7
Other		51.3		54.5
Total	$	1,091.6	$	736.0

     Pepco Holdings' $1,022.0 million equity investment in energy leveraged leases at December 31, 2002, consists of electric power plants and natural gas transmission and distribution networks located outside of the United States. Of this amount, $367.4 million of equity is attributable to facilities located in The Netherlands, $497.5 million in Austria and $157.1 million in Australia.

     The components of the net investment in finance leases at December 31, 2002 and 2001 are summarized below:

At December 31, 2002:	Leveraged Leases			Direct Finance Leases			Total Finance Leases
	(Millions of Dollars)
Rents receivable, net of recourse debt	$	2,324.4		$	60.9		$	2,385.3
Residual value		-			22.6			22.6
Less:    Unearned and deferred income		(1,298.6	)		(17.7	)		(1,316.3	)
Investment in finance leases		1,025.8			65.8			1,091.6
Less:    Deferred taxes		(278.5	)		(43.9	)		(322.4	)
Net Investment in Finance Leases	$	747.3		$	21.9		$	769.2
At December 31, 2001:
Rents receivable, net of recourse debt	$	1,435.5		$	70.5		$	1,506.0
Residual value		-			22.6			22.6
Less:    Unearned and deferred income		(772.7	)		(19.9	)		(792.6	)
Investment in finance leases		662.8			73.2			736.0
Less:    Deferred taxes		(210.2	)		(43.2	)		(253.4	)
Net Investment in Finance Leases	$	452.6		$	30.0		$	482.6

     Income recognized from leveraged leases was comprised of the following:

For the Year Ended December 31,	2002		2001			2000
	(Millions of Dollars)
Pre-tax earnings from leveraged leases	$	64.1	$	9.0		$	37.5
Investment tax credit recognized		-		.3			.8
Income from leveraged leases, including   investment tax credit		64.1		9.3			38.3
Income tax expense (benefit)		14.2		(9.9	)		7.5
Net Income from Leveraged Leases	$	49.9	$	19.2		$	30.8

     In June 2002, PCI entered into a $609 million leveraged lease transaction with an Austrian municipal-owned entity. This transaction involved PCI's purchase and leaseback of hydroelectric facilities, over a base term of approximately 28 to 35 years. The transaction was financed with approximately $503 million of third party, non-recourse debt over the base term. PCI's equity investment in this leveraged lease was approximately $113 million.

     In September 2002, PCI entered into a $766 million leveraged lease transaction with an Austrian municipal-owned entity. This transaction involved PCI's purchase and leaseback of 14 hydroelectric facilities, over a base term ranging from approximately 31 to 39 years. The transaction was financed with approximately $634 million of third party, non-recourse debt over the base term. PCI's equity investment in this leveraged lease was approximately $153 million.

     In November 2002, PCI entered into a $309 million leveraged lease transaction with an Austrian municipal-owned entity. This transaction involved PCI's purchase and lease back of three hydroelectric facilities, over a base term of approximately 36 years. The transaction was financed with approximately $259 million of third party, non-recourse debt over the base term. PCI's equity investment in this leveraged lease was approximately $55 million.

     In December 2001, PCI entered into an $850.0 million leveraged lease transaction with an Austrian municipal-owned entity. This transaction involved PCI's purchase and leaseback of a 56% undivided interest in a hydroelectric facility, over a base term of approximately 33 years. The transaction was financed with approximately $692.0 million of third party, non-recourse debt at commercial rates for a period of approximately 33 years. PCI's equity investment in this leveraged lease was approximately $164.6 million.

     Rents receivable from leveraged leases are net of non-recourse debt. Minimum lease payments receivable from PCI's finance leases for each of the years 2003 through 2007 and thereafter are $10.4 million, $10.5 million, $3.4 million, $34.2 million, and $5.3 million, and $1,027.8 million, respectively.

     The approximate annual commitments under all capital and operating leases are $37.7 million for 2003, $34.3 million for 2004, $34.5 million for 2005, $34.3 million for 2006, $34.1 million for 2007, and $174.3 million thereafter.

(6)  PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment is comprised of the following.

At December 31, 2002		Original   Cost		Accumulated Depreciation		Net Book Value
		(Millions of Dollars)
Generation	$	1,672.1	$	678.2	$	993.9
Distribution		5,373.3		2,104.3		3,269.0
Transmission		1,584.7		609.3		975.4
Gas		304.4		107.8		196.6
General		868.3		301.1		567.2
Construction work in progress		644.9		-		644.9
Nonoperating and other property		177.3		26.3		151.0
Total	$	10,625.0	$	3,827.0	$	6,798.0
At December 31, 2001
Distribution	$	3,163.0	$	1,213.2	$	1,949.8
Transmission		701.3		239.0		462.3
General		359.3		155.7		203.6
Construction work in progress		115.2		-		115.2
Nonoperating and other property		23.1		.6		22.5
Total	$	4,361.9	$	1,608.5	$	2,753.4

     The nonoperating and other property amounts include balances for distribution and transmission plant held for future use as well as other property held by non-utility subsidiaries.

     Pepco Holdings' utility subsidiaries use separate depreciation rates for each electric plant account. The rates, which vary from jurisdiction to jurisdiction, were equivalent to a system-wide composite depreciation rate of approximately 3.5% for Pepco's transmission and distribution system property in 2002, 2001 and 2000. The composite depreciation rate in 2002 for DPL was approximately 3.2% and for ACE was 3.3%.

     Property, plant and equipment includes regulatory assets of $53 million and $47 million at December 31, 2002 and 2001, respectively, which are accounted for pursuant to SFAS No. 71.

(7)  PENSIONS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (OPEB)

Pension Benefits

     The Pepco Holdings Retirement Plan (Plan) is a noncontributory plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries. Effective December 31, 2002, following the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic pension cost. Under such accounting, Conectiv's accrued pension liability was adjusted on August 1, 2002 through consolidation to recognize all previously unrecognized gains and losses arising from past experience different from that assumed, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.87, "Employers' Accounting for Pensions." The Conectiv Plan transferred a projected benefit obligation of $804 million and plan assets of $744 million on August 1, 2002.

     As a result of the divestiture of Pepco's Generation Assets to Mirant, in December 2000 Pepco recognized a curtailment charge of approximately $8.7 million. Since this charge is the direct result of the divestiture, it was considered to be a transaction cost and was netted against the gain on divestiture of Generation Assets on the Company's accompanying statements of earnings for the year ended December 31, 2000. Additionally, in accordance with the terms of the divestiture, with respect to generation employees transferred from the Company to Mirant, the Company is only responsible for the portion of transferred employees' pensions that relate to service with the Company.

     Pension expense/(income) included in net period benefit cost was $9.0 million in 2002, $(3) million in 2001, and $3 million in 2000. The 2002 net period benefit cost amount of $9.0 million includes $2.9 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002. The components of net periodic benefit cost were computed as follows.

		Pension Benefits
		2002			2001			2000
		(Millions of Dollars)
Components of Net Periodic Benefit Cost
Service cost	$	16.0		$	9.7		$	12.8
Interest cost		54.1			36.3			37.2
Expected return on plan assets		(69.0	)		(50.9	)		(48.7	)
Amortization of prior service cost		1.0			1.0			1.4
Recognized actuarial loss		6.9			.9			.3
Net Period Benefit Cost	$	9.0		$	(3.0	)	$	3.0

     Pension program assets are stated at fair value and are composed of approximately 42% and 45% of fixed income investments (including cash equivalents) with the balance in equity investments at December 31, 2002 and 2001, respectively. No Pepco Holdings stock is included in the pension program assets.

     The changes in benefit obligation and fair value of plan assets are presented in the following table.

		Pension Benefits
		2002			2001
		(Millions of Dollars)
Change in Benefit Obligation
Projected Benefit obligation at beginning of year	$	548.3		$	532.3
Service cost		16.0			9.7
Interest cost		54.1			36.3
Acquisition		804.1			-
Actuarial loss		40.7			3.2
Benefits paid		(64.3	)		(33.2	)
Projected Benefit Obligation at End of Year	$	1,398.9		$	548.3
Accumulated Benefit Obligation at December 31	$	1,228.2		$	489.0
Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year	$	555.0		$	576.9
Actual return on plan assets		(37.2	)		(14.6	)
Company contributions		35.0			25.0
Acquisition		744.3			-
Benefits paid		(56.5	)		(32.3	)
Fair Value of Plan Assets at End of Year	$	1,240.6		$	555.0

     The following table sets forth the Program's prepaid benefit cost.

		Pension Benefits
		2002			2001
		(Millions of Dollars)
Funded status	$	(158.3	)	$	6.7
Unrecognized actuarial loss		278.1			139.6
Unrecognized prior service cost		5.1			6.1
Prepaid Benefit Cost	$	124.9		$	152.4

     The actuarial assumptions for Pepco and Conectiv at December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.0	%
Expected return on plan assets
Pepco	9.0	%	9.0	%
Conectiv	9.5	%	-
Rate of compensation increase
Pepco	4.0	%	4.0	%
Conectiv	4.5	%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. The Company expects to review, and may change the actuarial assumptions of the plan for 2003.

Other Post-Employment Benefits

     In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for eligible employees (OPEBS). The Company is amortizing the Pepco plan related unrecognized transition obligation measured at January 1, 1993, over a 20-year period.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic benefit cost. Under such accounting Conectiv's accrued postretirement liability was adjusted on August 1, 2002 through consolidation to recognize all previously unrecognized actuarial gains and losses, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.106. The Conectiv Plan transferred a projected benefit obligation of $320 million and plan assets of $100 million on August 1, 2002.

     Postemployment benefit expense included in net income was $28.1 million, $15.9 million, and $18 million in 2002, 2001, and 2000, respectively. The 2002 net period benefit cost amount of $28.1 million includes $9.7 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002.

		Other Post   Employment Benefits
		2002			2001			2000
		(Millions of Dollars)
Components of Net Periodic Benefit Cost
Service cost	$	7.2		$	4.6		$	5.8
Interest cost		20.0			8.2			8.2
Expected return on plan assets		(5.2	)		(1.9	)		(1.9	)
Recognized actuarial loss		6.1			5.0			5.9
Net Period Benefit Cost	$	28.1		$	15.9		$	18.0

     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed health care cost trend rate used to measure the expected cost benefits covered by the plan is 10% for the both the Pepco and Conectiv plans. These rates are expected to decline to 5.0% over the next four-year period. A one percentage point change in the assumed health care cost trend rate would have the following effects for fiscal year 2002.

	1 Percentage-Point Increase		1 Percentage-Point Decrease
		(Millions of Dollars)
Effect on total of service and interest   cost components	$	1.6	$	(1.4	)
Effect on postretirement benefit obligation	$	21.4	$	(20.2	)

    The changes in benefit obligation and fair value of plan assets are presented in the following table.

	Other Post- Employment Benefits
		2002			2001
	(Millions of Dollars)
Change in Benefit Obligation
Benefit obligation at beginning of year	$	122.3		$	113.4
Service cost		7.2			4.7
Interest cost		20.0			8.2
Acquisition		319.8			-
Actuarial loss		22.4			6.0
Benefits paid		(19.3	)		(10.0	)
Benefit Obligation at End of Year	$	472.4		$	122.3
Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year	$	18.7		$	21.0
Actual return on plan assets		(.4	)		(.3	)
Company contributions		20.4			5.0
Acquisition		100.2			-
Benefits paid		(15.9	)		(7.0	)
Fair Value of Plan Assets at End of Year	$	123.0		$	18.7

     The following table sets forth the Program's accrued benefit cost.

		Other Post- Employment Benefits
		2002			2001
		(Millions of Dollars)
Funded status	$	(349.4	)	$	(103.6	)
Unrecognized actuarial loss		82.5			55.2
Unrecognized initial net obligation		12.0			17.4
Accrued Benefit Cost	$	(254.9	)	$	(31.0	)

     Actuarial assumptions as of December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.0	%
Expected return on plan assets
Pepco	9.0	%	9.0	%
Conectiv	9.5	%	-
Rate of compensation increase
Pepco	4.0	%	4.0	%
Conectiv	4.5	%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for 2002 net periodic expense determination. The Company expects to review, and may change the actuarial assumptions of the plans for 2003.

     Pepco funded the 2002 and 2001 portions of its estimated liability for Pepco postretirement medical and life insurance costs through the use of an Internal Revenue Code (IRC) 401 (h) account, within the Company's pension plan, and an IRC 501 (c) (9) Voluntary Employee Beneficiary Association (VEBA). Conectiv also annually funds a portion of its estimated postretirement liability through its VEBAs. Assets are composed of cash equivalents, fixed income investments and equity investments.

     The Company also sponsors defined contribution savings plans covering all eligible employees. Under these plans, the Company makes contributions on behalf of participants. Company contributions to the plans totaled approximately $9.0 million in 2002, $4.3 million in 2001, and $5 million in 2000.

(8)  LONG-TERM DEBT

     The components of long-term debt are shown below.

			At December 31
Interest Rate	Maturity		2002		2001
			(Millions of Dollars)
First Mortgage Bonds
Pepco:
5.625%	2003	$	50.0	$	50.0
6.50%	2005		100.0		100.0
6.25%	2007		175.0		175.0
6.50%	2008		78.0		78.0
5.875%	2008		50.0		50.0
5.75%	2010		16.0		16.0
6.00%	2022		30.0		30.0
6.375%	2023		37.0		37.0
7.25%	2023		100.0		100.0
6.875%	2023		100.0		100.0
5.375%	2024		42.5		42.5
5.375%	2024		38.3		38.3
6.875%	2024		75.0		75.0
7.375%	2025		75.0		75.0
8.50%	2027		-		66.2
7.50%	2028		40.0		40.0
DPL:
6.40%	2003		85.0		-
7.15% - 8.15%	2011 - 2015		33.0		-
5.90%	2021		18.2		-
7.71%	2025		100.0		-
6.05%	2032		15.0		-
ACE:
6.63%	2013		68.6		-
7.00%	2023		62.5		-
7.00%	2028		75.0		-
6.38%	2003 - 2006		2.0		-
6.80%	2021		38.9		-
5.60%	2025		4.0		-
6.15% - 7.20%	2028 - 2029		54.7		-
Amortizing First Mortgage Bonds
DPL:
6.95%	2003 - 2008		17.9		-
Total First Mortgage Bonds		$	1,581.6	$	1,073.0
NOTE:    Schedule is continued on next page.

			At December 31,
Interest Rate	Maturity		2002			2001
			(Millions of Dollars)
First Mortgage Bonds
5.20%		2019		$	31.0		$	-
5.50%		2025			15.0			-
4.90%		2026			34.5			-
5.65%		2028 - 2029			16.2			-
Variable		2030 - 2032			78.4			-
Total Unsecured Tax-Exempt Bonds					175.1			-
Medium-Term Notes (secured)
ACE:
6.00% - 7.20%		2003			40.0			-
6.18% - 7.98%		2004 - 2008			223.0			-
7.25% - 7.63%		2010 - 2014			8.0			-
7.68%		2015 - 2016			17.0			-
Total Medium-Term Notes (secured)					288.0			-
Medium-Term Notes (unsecured)
Pepco:
7.46% - 7.60%		2002			-			40.0
7.64%		2007			35.0			35.0
6.25%		2009			50.0			50.0
7.00%		2024			50.0			50.0
DPL:
8.30%		2004			4.5			-
6.75%		2006			20.0			-
7.06% - 8.13%		2007			61.5			-
7.56% - 7.58%		2017			14.0			-
6.81%		2018			4.0			-
7.61%		2019			12.0			-
7.72%		2027			10.0			-
ACE:
6.63%		2003			30.0			-
7.50% - 7.52%		2007			15.0			-
CIV:
6.73%		2003			50.0			-
6.73%		2004			50.0			-
5.30% - 6.73%		2005			280.0			-
6.73%		2006			20.0			-
Total Medium-Term Notes (unsecured)				$	706.0		$	175.0

NOTE:    Schedule is continued on next page.

			At December 31,
Interest Rate	Maturity		2002			2001
			(Millions of Dollars)
First Mortgage Bonds
2.89%	2010	$	109.0		$	-
4.21%	2013		66.0			-
4.91%	2017		118.0			-
5.50%	2023		147.0			-
Total Asset Backed Bonds			440.0			-
Recourse Debt
PCI:
4.00% - 5.99%	2008		92.0			92.0
6.00% - 6.99%	2003 - 2005		213.2			228.1
7.00% - 8.99%	2003 - 2004		107.1			125.7
Total Recourse Debt			412.3			445.8
Notes (unsecured)
PHI:
5.50% - 7.45%	2007 - 2032		1,500.0			-
Nonrecourse debt
PCI:
6.57% - 9.66%			25.3			26.6
Acquisition fair value adjustment			2.4			-
Total Long-Term Debt			5,130.7			1,720.4
Net unamortized discount			(11.6	)		(10.3)
Current portion			(406.3	)		(108.0)
Total Net Long-Term Debt		$	4,712.8		$	1,602.1

     The outstanding First Mortgage Bonds at Pepco, DPL and ACE are secured by a lien on substantially all of the respective Company's property, plants, and equipment.

     The aggregate amount of maturities for long-term debt outstanding at December 31, 2002, are $406.3 million in 2003, $229.3 million in 2004, $502.8 million in 2005, $130.4 million in 2006, $846.4 million in 2007, and $3,003.9 million thereafter.

(9)  INCOME TAXES

     The provision for income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

Provision for Income Taxes

	For the Year Ended December 31,
		2002			2001			2000
		(Millions of Dollars)
Current Tax Expense
Federal	$	(305.0	)	$	(0.8	)	$	465.8
State and local		(17.2	)		11.0			114.9
Total Current Tax (Benefit) Expense		(322.2	)		10.2			580.7
Deferred Tax Expense
Federal		400.5			58.0			(198.3	)
State and local		49.2			18.9			(19.5	)
Investment tax credits		(3.4	)		(3.6	)		(21.7	)
Total Deferred Tax Expense (Benefit)		446.3			73.3			(239.5	)
Total Income Tax Expense	$	124.1		$	83.5		$	341.2

Reconciliation of Consolidated Income Tax Expense

		For the Year Ended December 31,
		2002					2001					2000
		Amount		Rate			Amount		Rate			Amount		Rate
	(Millions of Dollars)
Income Before Income Taxes	$	340.3				$	251.9				$	693.2
Income tax at federal statutory    rate	$	119.1		.35		$	88.2		.35		$	242.6		.35
Increases (decreases) resulting   from
Depreciation		6.6		.02			3.0		.01			11.7		.02
Removal costs		(2.4	)	(.01	)		(3.0	)	(.01	)		(5.6	)	(.01	)
Allowance for funds used       during construction		(.1	)	-			0.4		-			0.9		-
State income taxes, net of       federal effect		20.7		.06			19.4		.08			63.3		.09
Tax credits		(4.0	)	(.01	)		(3.0	)	(.01	)		(4.8	)	(.01	)
Dividends received deduction		(1.8	)	(.01	)		(2.3	)	(.01	)		(3.4	)	-
Reversal of previously accrued       deferred taxes		-		-			(7.3	)	(.03	)		(2.1	)	-
Taxes related to divestiture       at non-statutory rates		-		-			6.1		.02			48.3		.07
Leveraged leases		(8.3	)	(.02	)		(14.4	)	(.06	)		(4.3	)	(.01	)
Other		(5.7	)	(.02	)		(3.6	)	(.01	)		(5.4	)	(.01	)
Total Income Tax Expense	$	124.1		.36		$	83.5		.33		$	341.2		.49

Components of Consolidated Deferred Tax Liabilities (Assets)

	At December 31
			2002			2001
	(Millions of Dollars
Deferred Tax Liabilities (Assets)
Depreciation and other book to tax basis differences		$	1,484.4		$	511.9
Rapid amortization of certified pollution control     facilities and prepayment premium on debt retirement			97.0			-
Deferred taxes on amounts to be collected through     future rates			57.2			22.4
Deferred investment tax credit			(38.8	)		(17.3	)
Contributions in aid of construction			(57.2	)		(48.1	)
Goodwill, accumulated other comprehensive income,     and valuation adjustments			(195.1	)		-
Deferred electric service and electric restructuring     liabilities			8.2			-
Finance and operating leases			246.0			123.2
Assets with a tax basis greater than book basis			(25.1	)		(26.4	)
Customer sharing			(3.7	)		(4.7	)
Transition costs			(14.3	)		(14.3	)
Property taxes, contributions to pension plan,     and other			29.1			(6.3	)
Total Deferred Tax Liabilities, Net			1,587.7			540.4
Deferred tax liabilities included in   Other Current Liabilities			52.5			38.8
Total Deferred Tax Liabilities, Net-Non-Current		$	1,535.2		$	501.6

     The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax bases of assets and liabilities. The portion of the net deferred tax liability applicable to Pepco's operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet.

     The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on Pepco's, DPL's and ACE's property continues to be normalized over the remaining service lives of the related assets.

     The Company files a consolidated federal income tax return. The Company's federal income tax liabilities for all years through 1997 have been determined. The Company is of the opinion that the final settlement of its federal income tax liabilities for subsequent years will not have a material adverse effect on its financial position or results of operations.

(10)  SERIAL PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK

     The amounts outstanding for Pepco, DPL, and ACE Serial Preferred Stock and Redeemable Serial Preferred Stock are as follows. Pre-merger (2001) amounts for DPL and ACE are not included.

			Shares Outstanding			December 31
Issuer	Series	Redemption   Price		2002	2001 (3)		2002	2001 (3)
						(Millions of Dollars)
Pepco	$2.44 Series of 1957	$51.00		239,641	239,641	$	12.0	$	12.0
Pepco	$2.46 Series of 1958	$51.00		173,892	173,912		8.7		8.7
Pepco	$2.28 Series of 1965	$51.00		291,759	291,759		14.6		14.6
						$	35.3	$	35.3
Pepco	$3.40 Series of 1992	(1)		950,000	990,000	$	47.5	$	49.5
ACE	$100 per share par value, 4.00% - 5.00%	$100 - $105.5		62,305	-		6.2		-
DPL	$100 per share par value,      3.70% - 5.00%      6-3/4%	$103 - $105 (2)		181,698 35,000	- -		18.2  3.5		-    -
						$	75.4	$	49.5

(1)	The shares of the $3.40 (6.80%) Series are subject to mandatory redemption, at par, through the operation of a sinking fund that began redeeming 50,000 shares annually, on September 1, 2002, with the remaining shares to be redeemed on September 1, 2007. The shares were not redeemable prior to September 1, 2002; thereafter, the shares are redeemable at par. The sinking fund requirements through 2006 with respect to the Redeemable Serial Preferred Stock are $2.5 million in 2004, 2005, and 2006. In the event of default with respect to dividends, or sinking fund or other redemption requirements relating to the serial preferred stock, no dividends may be paid, nor any other distribution made, on common stock. Payments of dividends on all series of serial preferred or preference stock, including series that are redeemable, must be made concurrently.
(2)	Redeemable beginning November 1, 2003 at $100 per share.
(3)	The 2001 amounts for ACE and DPL are pre-acquisition and therefore not included.

     On September 3, 2002, Pepco redeemed $2 million or 40,000 shares of its $3.40 Serial Preferred Stock Series of 1992, pursuant to mandatory sinking fund provisions.

     On December 30, 2002, DPL redeemed at par 316,500 shares of its $25 par preferred stock with an annual dividend rate of 7.75%.

(11)  COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
        OF SUBSIDIARY TRUST

     Pepco, DPL, and ACE have wholly owned financing subsidiary trusts shown in the table below. The financing subsidiary trusts have common and preferred trust securities outstanding and hold Junior Subordinated Debentures (the Debentures) of Pepco, DPL, and ACE. Pepco, DPL, and ACE own all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trusts. The trusts use interest payments received on the Debentures, which are the trusts' only assets, to make cash distributions on the trust securities. The obligations of Pepco, DPL, and ACE pursuant to the Debentures and guarantees of distributions with respect to the trusts' securities, to the extent the trusts have funds available therefore, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have issued.

     For Pepco Holdings' consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2026 to 2038. The Debentures are subject to redemption, in whole or in part, at the option of Pepco, DPL, and/or ACE, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events.

		Shares Outstanding				Amount
Issuer	Series	2002	2001			2002		2001
				Millions of Dollars)
Pepco financing trust	$25 per share, 7.375%	5,000,000	5,000,000		$	125.0	$	125.0
DPL financing trust	$25 per share, 8.125%	2,800,000	2,800,000			70.0		-
ACE financing trust	$25 per share, 8.25%	2,800,000	2,800,000			70.0		-
ACE financing trust	$25 per share, 7.375%	1,000,000	1,000,000			25.0		-
					$	290.0	$	125.0

Note: The 2001 amounts for DPL and ACE are pre-acquisition and therefore are not included.

(12)  STOCK BASED COMPENSATION AND CALCULATIONS OF EARNINGS PER SHARE
        OF COMMON STOCK

Stock Based Compensation

     The objective of the Company's long-term incentive plan (the Plan) is to increase shareholder value by providing a long-term incentive to reward officers, key employees, and directors of the Company and its subsidiaries and to increase the ownership of the Company's Common Stock by such individuals. Any officer or key employee of the Company or its subsidiaries may be designated by the Board as a participant in the Plan. Under the Plan, awards to officers and key employees may be in the form of restricted stock, options, performance units, stock appreciation rights, and dividend equivalents. Non-employee directors are entitled to a grant on May 1 of each year of a non-qualified stock option for 1,000 shares of common stock. The Board of Directors has determined that these grants will not be made. Up to 10,000,000 shares of common stock may be issued under the Plan for a period of 10 years after August 1, 2002.

     Prior to the merger, Pepco and Conectiv each had a Long-Term Incentive Plan under which stock options were granted. At the time of the merger, Pepco options were exchanged on a one-for-one basis for Company stock options granted under the Company's Long-Term Incentive Plan. At the time of the merger, certain Conectiv options vested and were canceled in exchange for a cash payment. Certain other Conectiv options were exchanged on a 1 for 1.28205 basis for Company stock options under the Company's Long-Term Incentive Plan. Options were granted under Pepco's plan in May 1998 and additional options were granted in May 1999, January 2000, May 2000, January 2001, May 2001, January 2002, and May 2002. The exercise prices of the options are $24.3125, $29.78125, $22.4375, $23.15625, $24.59, $21.825, $22.57 and $22.685, respectively, which represents the market prices (fair values) of the common stock on their grant dates. Fifty percent of the options gr anted in 1998 became exercisable on October 9, 1998 and the remaining 50% became exercisable on June 11, 1999. Twenty-five percent of the options granted on January 1, 2000 became exercisable on January 1, 2001. The remaining options for the January 1, 2000 grant will become exercisable at the rate of twenty-five percent on January 1 of each year until January 1, 2004. Twenty-five percent of the options granted on May 1, 2000 became exercisable on May 1, 2001. The remaining options for the May 1, 2000 grant will become exercisable at the rate of twenty-five percent on May 1 of each year until May 1, 2004. Twenty-five percent of the options granted on January 1, 2001 became exercisable on January 1, 2002. The remaining options for the January 1, 2001 grant will become exercisable at the rate of twenty-five percent on January 1 of each year until January 1, 2005. Twenty-five percent of the options granted on May 1, 2001 will become exercisable on May 1, 2002. The remaining options for the May 1, 2001 grant wil l become exercisable at the rate of twenty-five percent on May 1 of each year until May 1, 2005. Twenty-five percent of the options granted on January 1, 2002 became exercisable on January 1, 2003. The remaining options for the January 1, 2002 grant will become exercisable at the rate of twenty-five percent on January 1 of each year until January 1, 2006. Twenty-five percent of the options granted on May 1, 2002 will become exercisable on May 1, 2003. The remaining options for the May 1, 2002 grant will become exercisable at the rate of twenty-five percent on May 1 of each year until May 1, 2006.

     At the date of merger with Conectiv, 590,198 shares of Conectiv Stock Options were converted into 756,660 shares of Pepco Holdings Stock Options. These stock options were originally granted on January 1, 1998, January 1, 1999, July 1, 1999, October 18, 2000, and January 1, 2002. The exercise prices of these options, after conversion, are $17.81, $18.91, $19.30, $13.08 and $19.03, respectively, which represent the adjusted market price (fair values) of Conectiv common stock on their grant dates. All of the options granted in 1998, 1999 and 2000 are exercisable. Fifty percent of the options granted in 2002 are exercisable on January 1, 2004. The remaining options for the 2002 grant will become exercisable on January 1, 2005.

     Stock option activity for the three years ended December 31 is summarized below.

	2002			2001			2000
	Number of Shares		Weighted Average Price	Number of Shares		Weighted Average Price	Number of Shares		Weighted Average Price
Beginning-of-year   balance	970,741	$	23.7810	594,341	$	22.9083	253,675	$	24.5281
Options granted	1,151,860	$	20.1363	389,600	$	24.5261	366,500	$	22.4571
Options exercised	0	$	0	-		-	13,934	$	24.3125
Options forfeited	0	$	0	13,200	$	24.0220	11,900	$	22.4375
End-of-year balance	2,122,601	$	21.8031	970,741	$	23.7810	594,341	$	22.9083
Exercisable	508,247	$	20.3969	87,125	$	22.4044	-		-

     For options outstanding as of December 31, 2002, the range of exercise prices was $13.08 to $29.7813, and the weighted average remaining contractual life was approximately 8 years.

     The Company recognizes compensation costs for the Plan based on the accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." There were no stock-based employee compensation costs charged to expense in 2002 and 2001, and approximately $9 thousand charged in 2000. The Company's pro forma net income and pro forma earnings per share are not substantially impacted based on the application of SFAS No. 123, "Accounting for Stock-Based Compensation" or SFAS No. 148. The after tax compensation expense that would have been recorded under SFAS No. 123 for 2002 and 2001 would have been approximately $570 thousand and $240 thousand, respectively.

     Stock-based employee compensation costs, net of taxes, in respect of share awards charged to expense in 2002 was approximately $1.1 million. No amounts were expensed in 2001 or 2000.

     The fair values of each option granted in 2002 and 2001, estimated on the date of grant using the Black Scholes option pricing model, and related valuation assumptions are as follows:

		2002			2001
Weighted average fair value per option	$	3.59		$	2.47
Expected option term (years)		8			8
Expected volatility		27.43	%		16.58	%
Expected dividend yield		5.40	%		4.74	%
Risk-free interest rate		5.20			4.92	%

     The number of share award opportunities granted under Pepco's Performance Restricted Stock Program, a component of the Company's Long-Term Incentive Plan, during 2002, 2001, and 2000 were 57,000, 58,250, and 52,750, respectively. In addition, 287,800 shares award opportunities were approved under the Program for grants to be made in 2003. The fair value per share on grant date for the performance restricted stock was $22.51 for the 2002 grant, $24.43 for the 2001 grant, and $22.44 for the 2000 grant. Performance criteria are selected and measured over a three-year period. Depending on the extent to which the performance criteria are satisfied, the executives will earn some or all of the maximum award of common stock.

     The number of shares and share award opportunities granted under the Merger Success Integration Program established under the Company's Long-Term Incentive Plan during 2002 was 241,075. The fair value per share on grant date was $19.73. Of those shares, 96,427 are restricted and have time based vesting over three years, with vesting of 20% in 2003, 30% in 2004, and 50% in 2005. The remaining 144,648 shares may be earned based on performance during the years 2003 and 2004. Performance criteria are selected and measured over the two-year period. Depending on the extent to which the performance criteria are satisfied, the executives will earn some or all of the maximum award of common stock. The number of shares eligible for award in 2004 for 2003 performance is 72,331 and the number of shares eligible for award for in 2005 for 2004 performance is 72,317.

     On August 1, 2002, the date of the consummation of the merger with Conectiv, in accordance with the terms of the merger agreement, 80,602 shares of Conectiv performance accelerated restricted stock (PARS) were converted to 103,336 shares of Pepco Holdings restricted stock. The PARS were originally granted on January 1, 2002 at a fair market price of $24.40. All of the converted restricted stock has time based vesting over periods ranging from 5 to 7 years from the original grant date.

Calculations of Earnings Per Share of Common Stock

     Reconciliations of the numerator and denominator for basic and diluted earnings per common share are shown below.

	For the Year Ended December 31,
	2002			2001		2000
(Millions, except Per Share Data)
Income (Numerator):
Net Income	$	210.5		$	163.4	$	346.5
Add:    Interest paid or accrued on Convertible           Debentures, net of related taxes		-			0.3		3.6
Earnings Applicable to Common Stock, Assuming   Conversion of Convertible Securities	$	210.5		$	163.7	$	350.1
Shares (Denominator):
Average shares outstanding for computation of   basic earnings per share of common stock		131.1	(a)		108.5		114.9
Average shares outstanding for diluted   computation:
Average shares outstanding		131.1			108.5		114.9
Additional shares resulting from the       conversion of convertible debentures		-			0.3		3.4
Average Shares Outstanding for Computation of   Diluted Earnings Per Share of Common Stock		131.1			108.8		118.3
Basic earnings per share of common stock	$	1.61		$	1.51	$	3.02
Diluted earnings per share of common stock	$	1.61		$	1.50	$	2.96

(a) Amount includes weighted average impact of 56.2 million Pepco Holdings shares issued to Conectiv shareholders on August 1, 2002 in connection with the acquisition of Conectiv.

     The Company's Shareholder Dividend Reinvestment Plan (DRP) provides that shares of common stock purchased through the plan may be original issue shares or, at the option of the Company, shares purchased in the open market. The DRP permits additional cash investments by plan participants of not less than $25 each calendar month or more than $200,000 each calendar year. There were 629,777 original issue shares issued under the DRP in 2002. No original issue shares were issued under the DRP in 2001 or 2000.

     The following table presents the Company's common stock reserved:

Name of Plan	Number of  Shares
DRP	10,000,000
Conectiv Incentive Compensation Plan	1,800,000
Potomac Electric Power Company Long-Term Incentive Plan	1,400,000
Pepco Holdings, Inc. Long-Term Incentive Plan	10,000,000
Pepco Holdings, Inc. Stock Compensation Plan for Directors	100,000
Potomac Electric Power Company Savings Plans consisting of (i)   the Savings Plan for Exempt Employees, (ii) the Savings Plan   for Bargaining Unit Employees, and (iii) the Savings Plan for   Non-Exempt, Non-Bargaining Unit Employees	3,000,000
Conectiv Savings and Investment Plan	20,000
Atlantic Electric Savings and Investment Plan-B	25,000
Total	26,345,000

(13)  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair values of the Company's financial instruments at December 31, 2002 and 2001 are shown below.

		At December 31,
		2002			2001
		(Millions of Dollars)
		Carrying  Amount	Fair Value		Carrying  Amount	Fair Value
Assets
Marketable securities	$	175.3	175.3	$	161.2	161.2
Liabilities and Capitalization
Long-Term Debt	$	4,712.8	5,015.9	$	1,602.1	1,591.2
Company Obligated Mandatorily    Redeemable Preferred Securities    of Subsidiary Trust which holds    Solely Parent Junior    Subordinated Debentures	$	290.0	291.5	$	125.0	124.6
Serial Preferred Stock	$	35.3	26.7	$	35.3	26.1
Redeemable Serial Preferred Stock	$	75.4	69.1	$	49.5	49.4

     The methods and assumptions below were used to estimate, at December 31, 2002 and 2001, the fair value of each class of financial instruments shown above for which it is practicable to estimate that value.

     The fair value of the Marketable Securities was derived based on quoted market prices.

     The fair values of the Long-term Debt, which includes First Mortgage Bonds and Medium-Term Notes, excluding amounts due within one year, were derived based on current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The fair values of the Recourse and the Non-Recourse Debt held by PCI, excluding amounts due within one year, were based on current rates offered to similar companies for debt with similar remaining maturities.

     The fair values of the Serial Preferred Stock, Redeemable Serial Preferred Stock, and Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust, excluding amounts due within one year, were derived based on quoted market prices or discounted cash flows using current rates of preferred stock with similar terms.

     The carrying amounts of all other financial instruments in Pepco Holdings' accompanying financial statements approximate fair value.

(14)  COMMITMENTS AND CONTINGENCIES

Termination of Agreements for Sale of ACE Electric Generating Plants

     Under the terms of agreements between ACE and NRG Energy, Inc. (NRG) for the sale of ACE's fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station) the agreements were subject to termination by either party after February 28, 2002. NRG delivered notice to Conectiv on April 1, 2002 terminating these agreements. On January 13, 2003, the Company announced the termination of a second competitive bidding process initiated on May 23, 2002 to sell these ACE-owned fossil fuel-fired electric generating plants. The Company noted that while the competitive bidding process identified a number of interested parties, current conditions in the electric energy market prevented ACE from reaching agreements for the sale of these generating assets. The Company remains interested in selling these assets on acceptable terms, but cannot predict whether or not any or all of the plants will be sold, whe ther the New Jersey Board of Public Utilities (NJBPU) will grant the required approval of any sales agreements, or any related impacts upon recoverable stranded costs.

Basic Generation Service

    Under the provisions of New Jersey's 1999 Electric Discount and Energy Competition Act (the New Jersey Act) and the NJBPU's Final Decision and Order concerning restructuring ACE's electric utility business, ACE was obligated to provide Basic Generation Service (BGS) through July 31, 2002, which entailed supplying electricity to customers in ACE's service area who do not choose an alternative supplier. The Final Decision and Order provides for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from NUGs, and the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACE's customers for BGS, the under-recovered costs are deferred a s a regulatory asset. Pursuant to the terms of the 1999 restructuring of ACE's electric generation business, during 2000-2002, the under-recovered costs were first applied to a deferred energy cost liability that was eliminated and then a regulatory asset was established ($153.0 million as of December 31, 2002). After the initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the under-recovered cost balance over a reasonable period of time to be determined by the NJBPU. ACE's recovery of the deferred costs is subject to review by the NJBPU.

     On August 1, 2002, in accordance with the provisions of the New Jersey Act and the NJBPU's Final Decision and Order, ACE petitioned the NJBPU for a $71.6 million, or 8.4%, annualized increase in electric rates, effective August 1, 2003. This proposed rate increase is intended to recover ACE's deferred cost balance as of August 1, 2003 over a four-year period and reset Power Delivery rates such that an under-recovery of certain costs is no longer embedded in rates. ACE's recovery of the deferred costs is subject to review by the NJBPU, which will determine the amount of cost recovery in accordance with the New Jersey Act. The outside auditing firm selected by the NJBPU has completed its review and audit of the deferral balance of ACE. A draft report has been provided to ACE, and ACE has responded to the NJBPU and the auditors with factual comments.

     BGS electricity supply beyond July 31, 2002 was provided for by a BGS auction held in February 2002, which awarded about 1,900 MW, or 80% of ACE's BGS load to four suppliers for the period from August 1, 2002 to July 31, 2003. The remaining 20% of ACE's BGS load is supplied utilizing ACE's electric supply, consisting of its fossil fuel-fired electric generating plants (excluding Deepwater), which are used first to meet such BGS load, and its NUG contracts, to the extent such electric generating plants are not sufficient to satisfy such load.

     Any portion of ACE's electric supply that exceeds the load requirement of the BGS customers is sold in the wholesale market. In addition, if any of the four suppliers awarded 80% of ACE's BGS load default on performance, ACE will offer the defaulted load to the other winning bidders. If they are not interested, ACE will then procure the needed supply from the wholesale market. Any costs related to this new supply that are not covered by remuneration from the supplier in default will be included in the calculation of deferred electric service costs, which are subject to NJBPU review and future recovery in customer rate increases.

     By Decision and Order dated December 18, 2002, the NJBPU approved the process for the procurement of BGS supply for the period starting August 1, 2003. The decision included holding two separate but simultaneous auctions to procure BGS supply. The first auction will be for the supply needed to serve large commercial and industrial customers who will be paying an hourly energy price. There are approximately 50 customers in this group for ACE. The auction will determine the capacity price to be paid by these customers. The period covered by this auction is August 1, 2003 through May 31, 2004. The second auction will be for the supply needs of the remainder of the BGS customers, and would be for full requirements service (energy, capacity, transmission, and ancillary services) for these customers. In this auction, two-thirds of the needs will be procured for the same period as the first auction, while the remaining one-third of the needs will be p rocured for a period of 34 months. The results of these auctions will be used to set the rates paid by the customers in each group. The decision also established working groups to deal with metering issues and customer education. The auctions were conducted February 3 and 4, 2003. The NJBPU approved the results of the auctions on February 5, 2003. ACE has entered into BGS Supplier Agreements with the winning bidders. If any of the winning bidders were to default on their commitments, ACE will offer the defaulted load to other winning bidders, or will make arrangements to purchase the needed supply from PJM-administered markets.

Securitization

     Under the New Jersey Act, up to 100% of recovery-eligible stranded costs related to electric generating plants and the costs to affect buyouts or buy downs of NUG contracts may be recovered through customer rates. On September 9, 2002, New Jersey enacted an amendment (Amendment) to the New Jersey Act. The Amendment permits the NJBPU to authorize the securitization of deferred balances of electric public utilities resulting from the provisions of the New Jersey Act. The NJBPU may authorize the issuance of transition bonds by an electric public utility or other financing entity in order to (i) recover stranded costs deemed eligible for rate recovery in a stranded cost recovery order; (ii) recover rate reduction requirements determined by the NJBPU to be necessary under the provisions of the New Jersey Act; or (iii) recover basic generation service transition costs. The NJBPU may approve transition bonds with scheduled amortization of up to fiftee n years if related to stranded cost recoveries or recoveries of basic generation service transition costs, or the remaining term of a purchase power agreement if related to the buyout or buy down of long-term purchase power contracts with NUGs.

     On September 20, 2002, the NJBPU issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. ACE issued Transition Bonds totaling $440 million on December 19, 2002, in accordance with this Financing Order. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buy down of the American Ref-Fuel NUG contract. Also included in the amount authorized was $20 million of transaction costs and capital reduction costs.

     ACE formed ACE Transition Funding during 2001 as a special purpose entity (SPE) for the sole purpose of purchasing and owning the bondable transition property (BTP), issuing transition bonds (Bonds), pledging ACE Transition Funding's interest in BTP and other collateral to the bond trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Proceeds from the sale of Bonds were transferred to ACE in consideration for the BTP, and ACE will repurchase debt and/or equity related to the stranded costs and NUG contracts noted above. The Bonds of ACE Transition Funding are included in the accompanying Consolidated Balance Sheets.

     On January 31, 2003, ACE filed a petition seeking from the NJBPU an administrative valuation of a portion of the B.L. England Station stranded costs and a finding that such costs may be included as part of the principal amount of transition bonds for which ACE may seek approval under the New Jersey Act. Management anticipates that the necessary approvals will be received from the NJBPU and that a bondable stranded costs rate petition will ultimately be approved, leading to the issuance of additional transition bonds.

Rate Increase

     On February 3, 2003, ACE filed a petition with the NJBPU to increase its electric distribution rates and the Regulatory Asset Recovery Charge in New Jersey. The request, if approved, will increase ACE's annual revenues by approximately $68.4 million. The petition was filed in accordance with the NJBPU's Final Order in restructuring, which mandated that ACE file a plan to set rates that will be in place when the New Jersey Act's transition period ends July 31, 2003.

Pepco Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether th e IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing payments to D.C. customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. It is a certainty that some party or parties will appeal the Hearing Examiner's Proposed Order to the Maryland Commission. The principal issue in the case is the same normalization issue that was raised in the D.C. case. On March 4, 2003, the IRS issued a NOPR that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. The potential also exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the Hearing Examiner or the Maryland Commission will issue their decisions.

     In Maryland, in accordance with the terms of an agreement approved by the Maryland Commission, customers who are unable to receive generation services from another supplier, or who do not select another supplier, are entitled to receive services from Pepco until July 1, 2004 (Standard Offer Service or SOS). Pepco has entered into a settlement in Phase I of Maryland Case No. 8908 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The settlement provides for SOS to be procured from the wholesale marketplace and th at Pepco will be able to recover its costs of procurement and a return.

Full Requirements Contract with Mirant

     Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would have to find alternative sources of supply at rates then prevailing.

Environmental Matters

     The Company through its subsidiaries is subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. The Company's subsidiaries may incur costs to clean up facilities found to be contaminated due to current and past disposal practices. The Company's subsidiaries' liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including wh ether a Pepco Holdings subsidiary or a corporate predecessor is responsible for conditions on a particular parcel). The Company's current liabilities include approximately $22.7 million as of December 31, 2002, for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a potentially responsible party, alleged to be a third-party contributor, or has made a decision to clean up contamination on its own property. The accrued liability as of December 31, 2002, included $11.2 million for remediation and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with the Delaware Department of Natural Resources and Environmental Control during 2001. As a result of discontinuing the second competitive bidding process for ACE's fossil fuel-fired generating stations and management's decision to clean up contamination on its own pr operty, ACE's anticipated $7 million costs to clean up the Deepwater generating station is included in the previously stated $22.7 million liability. The costs of cleaning up ACE's B.L. England generating station have not yet been quantified. The Company does not expect such future costs to have a material effect on the Company's financial position or results of operations.

     In April 2002, EPA proposed regulations addressing best technology available for minimizing environmental impact from existing power production cooling water intake structures. The ACE Deepwater electric generating station's New Jersey Pollution Discharge Elimination System (NJPDES) renewal permit, effective through September 30, 2007 will require a study to evaluate the efficiency of recent changes to the intake structure and other biological impact studies that will be submitted with a permit renewal application in 2007. The NJPDES permit for the B.L. England Station expired in December 1999, but has been administratively extended, through submittal of a renewal application, and the plant continues to operate under the conditions of the existing permit until a renewal permit is issued by the New Jersey Department of Environmental Protection (NJDEP).

     A Conectiv subsidiary holds a National Pollution Discharge Elimination System (NPDES) permit for the Edge Moor Power Plant. Studies to determine impacts on aquatic organisms by the plant's intake structures, required by the existing permit which expires in October 2003, were completed in 2002. The results of these studies and additional site specific studies on alternative technologies are expected to determine whether changes to intake structures are required to comply with any final rule that EPA adopts.

     On May 4, 2002, ACE, Conectiv Atlantic Generation, LLC (CAG), and the NJDEP entered into an Administrative Consent Order (ACO) to address ACE's and CAG's inability to procure Discrete Emission Reductions (DER) credits to comply with New Jersey's NO_x Reasonable Available Control Technology (RACT) requirements and NJDEP's allegations that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The ACO eliminates requirements for ACE and CAG to purchase DER credits for certain ACE and CAG electric generating units through May 1, 2005 and provides, among other things, for installation of new controls on CAG's electric generating units ($7 million estimated cost), a $1.0 million penalty, a $1.0 million contribution to promote, develop and enhance an urban airshed reforestation project, and operating hour limits at ACE's Deepwater Unit No. 4.

     On July 11, 2001, the NJDEP denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a number of stays of the denial to authorize ACE to operate Unit 1 with the current fuel until May 29, 2003. NJDEP also issued addendums to the permit/certificate to operate for Unit 1 authorizing trial burns of coal with a sulfur content less than 2.6%. ACE is requesting an extension of the current stay of the denial and submitted final wrap-up reports on the results of its test burns to NJDEP on January 28, 2003. Management is not able to predict the outcome of ACE's appeal, including the effects, if any, of trial burn results on NJDEP's position with regard to the denial or the appeal.

     In February 2000, the United States Environmental Protection Agency (USEPA) and NJDEP requested information from ACE regarding the operation of coal-fired boilers at ACE's B.L. England and Deepwater generating stations. As of December 2002, in responding to this request and numerous subsequent requests, ACE has provided more than 24,000 pages of documents covering activities at B.L. England and Deepwater since 1978 to USEPA and NJDEP. USEPA has sought this information pursuant to its authority under Clean Air Act Section 114, and the ACE requests are similar to those that USEPA has made of other electric utilities to determine compliance with New Source Review (NSR) Prevention of Significant Deterioration (PSD) and non-attainment NSR requirements. Similar inquiries have resulted in the filing of federal lawsuits against utilities in the South and Midwest. A number of settlements of litigation brought as a result of such inquiries alleging violations of NSR standards have been announced. In January 2002, the Department of Justice completed its review of the USEPA's enforcement actions and concluded that the USEPA has a reasonable basis on which to pursue NSR enforcement. On December 31, 2002, EPA published an NSR reform package including both proposed and final rules. The proposed rule offers options for clarifying the routine maintenance, repair and replacement exclusion to the NSR rules. It is unclear how EPA's proposed reform rules will ultimately impact the on-going NSR enforcement actions; however, EPA officials have indicated their intention to continue with the NSR enforcement initiative targeting alleged past violations under the current rules. ACE met with EPA and NJDEP in May 2002 to discuss NSR issues. Since then, ACE entered into a confidentiality agreement with the government agencies. The Company does not believe that it has violated NSR requirements. Management cannot predict the impact of the USEPA/NJDEP inquiries or proposal o n B.L England or Deepwater operations.

     In October 1995, Pepco received notice from the EPA that it, along with several hundred other companies, may be a potentially responsible party (PRP) in connection with the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. In August 2001, Pepco entered into a Consent Decree for de minimis parties with EPA to resolve its liability at this site. Pursuant to the consent decree, in return for a de minimis payment by Pepco to the United States and a group of PRPs, those parties covenant not to sue Pepco for past and future costs of remediation at the site and the United States will also provide contribution protection against third party claims related to response actions at the site. Natural resource damages, if any, are not covered by the Consent Decree. Court approval of the Consent Decree is pending. Pepco believes that its liability at this site, pursuant to the terms of the Consent Decree, will not have a material adverse effect on its financial position or results of operations.

     In June 1992, EPA identified ACE as a PRP at the Bridgeport Rental and Oil Services (BROS) superfund site in Logan Township, New Jersey. In September 1996, ACE along with other PRPs signed a consent decree with EPA and NJDEP to address remediation of the Site. ACE's liability is limited to 0.232 percent and ACE has made contributions of approximately $105,000. The Phase 2 Remedial Investigation/Feasibility Study (RI/FS) to address groundwater and wetlands contamination is scheduled to be completed in September 2003. ACE believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     In November 1991, NJDEP identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with other PRPs, signed an Administrative Consent Order (ACO) with NJDEP to remediate the Site. The soil cap remedy for the Site has been completed and the NJDEP conditionally approved the Remedial Action Report in January 2003. The results of groundwater monitoring over the next year will help to determine the extent of post-remedy operation and maintenance costs.

     In December 1987, Pepco was notified by the EPA that it, along with several other utilities and nonutilities, is a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination of a Philadelphia, Pennsylvania, site owned by a nonaffiliated company. In the early 1970s, Pepco sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the site. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a ROD that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In June 1998, the EPA issued a unilateral Administrative Order to Pepco and 12 other PRPs to conduct the design and actions called for in the ROD. At December 31, 2002, Pepco has accrued $1.7 million for its share of these costs. Pepco believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     Pepco's Benning Service Center facility operates under a National Pollutant Discharge Elimination System (NPDES) permit. The EPA issued an NPDES permit for this facility in November 2000. Pepco has filed a petition with the EPA Environmental Appeals Board seeking review and reconsideration of certain provisions of the EPA's permit determination. In May 2001, Pepco and the EPA reached a settlement on Pepco's petition, pursuant to which the EPA withdrew certain contested provisions of the permit and agreed to issue a revised draft permit for public comment. As of December 31, 2002, the EPA has not issued a revised permit and Pepco is operating pursuant to the November 2000 permit absent the withdrawn conditions in accordance with the settlement agreement.

     In the late 1980's DPL was identified by EPA as a PRP at the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. The PRP Group determined that in 1987 and 1988 DPL sent 440 gallons of waste paint to the site. DPL paid $290.40 in connection with a Consent Agreement as a Non-Performing Settling Party to resolve its liability for Phase I activities at the site. In September 1991 DPL made an additional $500 payment pursuant to a second Administrative Consent Order initiating Phase II activities. The site was added to the National Priorities List in 1994. In February 2003, the PRP Group informed DPL that DPL was a de micromis party at the Site because its 440 gallon contribution to the Site was less than EPA's 890 gallon threshold for de minimis status and that DPL has no further liability for contribution to the Site's remediation fund.

     In the late 1980's, DPL was notified by the EPA that it, along with several other utilities and nonutilities was a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination at the Metal Bank/Cottman Avenue site located in Philadelphia, Pennsylvania at which the Site owner, from 1968 to 1972, drained oil from used transformers to reclaim copper. Based on the PRP group's determination that DPL sent 102 transformers to the Site, DPL was allocated responsibility for 0.24 percent of remediation costs. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a Record of Decision (ROD) that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In 1999, DPL entered into a de minimis settlement with EPA and paid approximately $107,000 to resolve its liability for clea nup costs at the Site. The de minimis settlement did not resolve DPL's responsibility for natural resource damages, if any, at the Site. DPL believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

Litigation

     During 1993, Pepco was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City and Baltimore County), in separate ongoing, consolidated proceedings each denominated, "In re: Personal Injury Asbestos Case." Pepco (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their Complaints. While the pleadings are not entirely clear, it appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, Pepco was served, in September 1993, with a third-party complaint by Owens Corning Fiberglass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against Pepco on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third-party complaint against Pepco, seeking contribution for the same plaintiffs involved in the Owens Corning third-party complaint. Since the initial filings in 1993, approximately 90 additional individual suits have been filed against Pepco. The third-party complaints involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore City Court during 1994 without any payment by Pepco. As of December 31, 2002, approximately 200 cases were pending against Pepco. Of the 200 remaining asbestos cases pending against Pepco, approximately 35 of those cases have been tendered to Mirant for defense and indemnification pursuant to the Asset Purchase and Sale Agreement wh ich was executed in December 2000. While the aggregate amount specified in the remaining suits would exceed $400 million, Pepco believes the amounts are greatly exaggerated, as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial position. However, an unfavorable decision rendered against Pepco could have a material adverse effect on results of operations in the year in which a decision is rendered.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP, an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property. As a result of the oil spill, eleven class action lawsuits and two additional lawsuits on behalf of a number of Southern Maryland residents, businesses and watermen were filed against Pepco. On November 27, 2001, Pepco and ST Services entered into a Settlement Agreement with the various plaintiffs to settle all pending class action litigation stemming from the oil spill. Under the Settlement Agreement, a total of $2.25 million was placed in an escrow account to be distributed to watermen and property owner class members pursuant to a Plan of Distribution filed with the Court. On December 27, 2001, the Court entered an "Order Certifying Settlement Classes and Preliminarily Approving Proposed Settlement," which was approved in April 2002. In April 2002, the Claims Administrator provided the Court with a list of those members of the Settlement Classes which had timely excluded themselves from the Settlement Agreement. Approximately 80 class members elected to exclude themselves from the terms of the November 27, 2001 Settlement Agreement.

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by Delmarva and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provisions of the m aster power purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe th at the Company has material financial exposure related to the Enron bankruptcy.

     The Company, through its subsidiaries, is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.

Third Party Guarantees

     At December 31, 2002, Pepco Holdings and its subsidiaries guaranteed $416.5 million of third party obligations. The detail of these guarantees is summarized below.

		Guarantor
		PHI		Conectiv		PCI		Total
		(Dollars in Millions)
Energy trading obligations of Conectiv Energy	$	80.7	$	136.3		-	$	217.0
Energy trading obligations of Pepco Energy Services		36.9		-		-		36.9
Construction performance guarantees		85.3		36.6		-		121.9
Other		-		28.2		12.5		40.7
Total	$	202.9	$	201.1	$	12.5	$	416.5

     Pepco Holdings and the above referenced significant subsidiaries guarantee payments to counter-parties related to routine energy trading obligations, including requirements under BGS contracts for ACE. A portion of Conectiv's Mid-merit plant program and the energy management programs of Pepco Energy Services contains construction payment guarantees. Pepco Holdings also has investments in partnerships and joint ventures, which are accounted for under the equity method of accounting. Pepco Holdings and its subsidiaries guarantee certain payment and performance obligations associated with these unconsolidated entities.

Dividends Declared

     Pepco Holdings' Board of Directors has declared a quarterly dividend on common stock of $.25 per share to be paid March 31, 2003, to shareholders of record on March 10, 2003.

(15)  QUARTERLY FINANCIAL SUMMARY (UNAUDITED)

		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total
	(Millions of Dollars, except Per Share Data)
2002
Total Operating Revenue	$	489.2		581.2		1,641.2		1,607.5		4,324.5
Total Operating Expenses	$	426.3		481.8		1,383.4		1,484.7		3,778.9
Operating Income	$	62.9		99.4		257.8		122.8		545.6
Other (Expenses)	$	(24.9	)	(25.0	)	(62.2	)	(75.5	)	(190.4	)
Preferred Stock Dividend   Requirements of   Subsidiaries	$	3.6		3.6		6.1		7.4		20.6
Income Tax Expense	$	11.1		25.1		74.3		13.6		124.1
Net Income	$	23.3		45.7		115.2		26.3		210.5
Basic Earnings Per Share of   Common Stock	$	.22		.43		.80		.16		1.61
Diluted Earnings Per Share   of Common Stock	$	.22		.43		.80		.16		1.61
Cash Dividends Per Common Share	$	.25		.25		.25		.25		1.00
2001
Total Operating Revenue	$	607.0		592.0		720.0		481.9		2,400.5
Total Operating Expenses	$	474.7		492.5		586.8		489.3		2,034.1
Operating Income	$	132.8		99.5		133.2		(7.4	)	366.4
Other (Expenses)	$	(19.0	)	(28.4	)	(25.1	)	(32.4	)	(105.3	)
Preferred Stock Dividend   Requirements of   Subsidiaries	$	3.5		3.6		3.6		3.6		14.2
Income Tax Expense (Benefit)	$	46.6		19.3		35.8		(26.2	)	83.5
Net Income (Loss)	$	63.7		48.2		68.7		(17.2	)	163.4
Basic Earnings (Loss) Per   Share of Common Stock	$	.58		.45		.64		(.16	)	1.51
Diluted Earnings (Loss) Per   Share of Common Stock	$	.57		.45		.64		(.16	)	1.50
Cash Dividends Per   Common Share	$	.415		.25		.25		.25		1.165

NOTES:	As a result of the merger transaction that was completed on August 1, 2002, the third and fourth quarter 2002 results are not comparable with the prior years presented. For additional information, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations "Overview" and "Lack of Comparability of Operating Results with Prior Years" sections, herein.
	The Company's subsidiaries' sales of electric energy are seasonal and, accordingly, comparisons by quarter within a year are not meaningful. The totals of the four quarterly basic earnings per common share and diluted earnings per common share may not equal the basic earnings per common share and diluted earnings per common share for the year due to changes in the number of common shares outstanding during the year and, with respect to the diluted earnings per common share, changes in the amount of dilutive securities.
	All periods presented include the reclassification of revenues and expenses required by EITF 02-3.

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Report of Independent Accountants

To the Shareholder and Board of Directors
of Potomac Electric Power Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings and shareholder's equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Potomac Electric Power Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mater ial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Washington, DC
February 10, 2003, except as to the first and second paragraphs of Note 12
     for which the date is March 4, 2003

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,		2002		2001		2000
(Millions of Dollars)
Operating Revenue
Utility	$	1,533.9	$	1,723.5	$	2,220.6
Competitive		454.1		647.7		344.9
Gain on divestiture of generation assets		-		29.3		423.8
Total Operating Revenue		1,988.0		2,400.5		2,989.3
Operating Expenses
Fuel and purchased energy		994.7		1,238.1		1,183.7
Other operation and maintenance		316.9		373.4		409.8
Depreciation and amortization		153.3		170.6		247.6
Other taxes		198.2		186.5		207.4
Impairment losses		-		65.5		45.7
Total Operating Expenses		1,663.1		2,034.1		2,094.2
Operating Income		324.9		366.4		895.1
Other Income (Expenses)
Interest and dividend income		20.6		62.0		27.7
Interest expense		(106.5)		(148.7)		(211.5)
Loss from Equity Investments, principally      a Telecommunication Entity		(2.1)		(23.9)		(17.1)
Other income		(8.3)		5.3		8.2
Total Other Expenses		(96.3)		(105.3)		(192.7)
Distributions on Preferred Securities of   Subsidiary Trust		9.2		9.2		9.2
Income Tax Expense		80.3		83.5		341.2
Net Income		139.1		168.4		352.0
Dividends on Preferred Stock		5.0		5.0		5.5
Earnings Available for Common Stock	$	134.1	$	163.4	$	346.5
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,	2002		2001			2000
(Millions of Dollars)
Net income	$	139.1	$	168.4		$	352.0
Other comprehensive income/(loss), net of taxes
Marketable Securities
Unrealized gain/(loss) on marketable securities net of reclassification adjustments and net of taxes (benefit) of $.8 million, $1.6 million and $(3.1) million for the years ended December 31, 2002, 2001, and 2000, respectively		1.5		2.9			(5.7	)
Interest rate swap agreement designated as     cash flow hedge
Unrealized gain/(loss) from cash flow hedge net of reclassification adjustments and net of taxes (benefit) of $1.4 million, $(1.2) million, and zero for the years ended December 31, 2002, 2001, and 2000		2.7		(2.1	)		-
Other comprehensive income/(loss), net of taxes		4.2		.8			(5.7	)
Comprehensive income	$	143.3	$	169.2		$	346.3
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED BALANCE SHEETS
	December 31, 2002		December 31, 2001
ASSETS
(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents		$   13.9	$  515.5
Marketable securities		-	161.2
Accounts receivable, less allowance for uncollectible      accounts of $3.6 million and $9.5 million		373.4	401.2
Fuel, materials and supplies - at average cost		37.8	37.8
Prepaid expenses and other		10.2	24.2
Total Current Assets		435.3	1,139.9
INVESTMENTS AND OTHER ASSETS
Regulatory assets, net		-	14.3
Investment in finance leases		-	736.0
Prepaid pension expense		182.3	152.4
Other		108.5	489.9
Total Investments and Other Assets		290.8	1,392.6
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		4,550.0	4,361.9
Accumulated depreciation		(1,739.7)	(1,608.5)
Net Property, Plant and Equipment		2,810.3	2,753.4
TOTAL ASSETS		$3,536.4	$5,285.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED BALANCE SHEETS
	December 31, 2002		December 31, 2001
LIABILITIES AND SHAREHOLDER'S EQUITY
(Millions of Dollars)
CURRENT LIABILITIES
Short-term debt		$   90.0	$  458.2
Accounts payable and accrued payroll		167.4	224.1
Capital lease obligations due within one year		15.6	15.2
Interest and taxes accrued		57.6	92.6
Other		164.4	175.3
Total Current Liabilities		495.0	965.4
DEFERRED CREDITS
Regulatory liabilities, net		15.9	-
Income taxes		589.4	501.6
Investment tax credits		22.6	24.7
Other		28.1	38.8
Total Deferred Credits		656.0	565.1
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt		1,083.5	1,602.1
Capital lease obligations		118.7	120.3
Total Long-Term Debt and Capital Lease Obligations		1,202.2	1,722.4
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES    OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR    SUBORDINATED DEBENTURES		125.0	125.0
PREFERRED STOCK
Serial preferred stock		35.3	35.3
Redeemable serial preferred stock		47.5	49.5
Total Preferred Stock		82.8	84.8
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $.01 and $1 par value, respectively -      authorized 400,000,000 and 200,000,000 shares,      respectively - issued 100 shares and      118,544,883 shares, respectively		-	118.5
Premium on stock and other capital contributions		507.6	1,028.3
Capital stock expense		(1.1)	(12.9)
Accumulated other comprehensive loss		-	(6.7)
Retained income		468.9	974.1
		975.4	2,101.3
Less cost of shares of common stock in treasury      (none and 11,323,707 shares, respectively)		-	(278.1)
Total Shareholder's Equity		975.4	1,823.2
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY		$3,536.4	$5,285.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2002		2001		2000
(Millions of Dollars)
OPERATING ACTIVITIES
Net Income	$  139.1	$	168.4	$	352.0
Adjustments to reconcile net income to net cash   from (used by) operating activities:
Net gain on divestiture of generation assets	-		(29.3)		(423.8)
Impairment losses	-		65.5		45.7
Depreciation and amortization	153.3		170.6		247.6
Changes in:
Accounts receivable	9.6		80.0		(184.5)
Regulatory assets, net	112.8		(152.2)		(227.0)
Prepaid expenses	14.0		389.4		(377.7)
Accounts payable and accrued payroll	12.5		(52.7)		34.8
Interest and taxes accrued, including         Federal income tax refund of         $135.4 million in 2002	73.6		(721.8)		727.8
Net other operating activities, including         divestiture related items in 2001 and 2000	(48.6)		(11.0)		(216.3)
Net Cash From (Used By) Operating Activities	466.3		(93.1)		(21.4)
INVESTING ACTIVITIES
Net investment in property, plant and equipment	(194.7)		(245.3)		(225.5)
Proceeds from/changes in:
Divestiture of generation assets	-		156.2		2,741.0
Purchase of leveraged leases	(111.6)		(157.7)		-
Sales of marketable securities,       net of purchases	2.2		75.4		(38.2)
Purchases of other investments, net of sales	(15.4)		(56.9)		(78.5)
Sale of aircraft	4.1		22.9		87.1
Net other investing activities, including       $8.9 million in POM cash transferred       to Pepco Holdings in 2002	(8.9)		(8.0)		(90.5)
Net Cash (Used By) From Investing Activities	(324.3)		(213.4)		2,395.4
FINANCING ACTIVITIES
Dividend to Pepco Holdings	(432.3)		-		-
Dividends paid on Pepco preferred and common stock	(67.6)		(131.5)		(195.9)
Redemption of preferred stock	(2.0)		(5.6)		(9.7)
Reacquisition of Pepco's common stock	(2.2)		(78.1)		(200.0)
Issuances of long-term debt	34.3		92.4		-
Reacquisitions of long-term debt	(128.4)		(1,059.9)		(216.4)
Repayments of short-term debt, net or issuances	(43.2)		138.5		12.1
Net other financing activities	(2.2)		1.6		1.8
Net Cash Used By Financing Activities	(643.6)		(1,042.6)		(608.1)
Net (Decrease) Increase In Cash and   Cash Equivalents	(501.6)		(1,349.1)		1,765.9
Cash and Cash Equivalents at Beginning of Year	515.5		1,864.6		98.7
CASH AND CASH EQUIVALENTS AT END OF YEAR	$   13.9	$ $	515.5	$	1,864.6
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) for interest (net of     capitalized interest of $- million, $2.6     million, and $3.4 million) and income taxes:
Interest	$  125.4	$	172.0	$	108.4
Income taxes	$ (144.1)	$	781.2	$	45.8
The accompanying Notes are an integral part of these Consolidated Financial Statements.

POTOMAC ELECTRIC POWER COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
	Common Stock Shares    Par Value		Premium on Stock	Accumulated Other Comprehensive Income (Loss)	Retained Income
(Dollar Amounts in Millions)
BALANCE, DECEMBER 31, 1999	118,530,802	$118.5	$1,025.4	($1.8)	$781.1
Net Income	-	-	-	-	352.0
Other comprehensive (loss)	-	-	-	(5.7)	-
Dividends:
Preferred stock	-	-	-	-	(5.5)
Common stock	-	-	-	-	(190.4)
Conversion of stock options	13,934	-	0.3	-	-
Gain on acquisition of preferred stock	-	-	1.6	-	-
BALANCE, DECEMBER 31, 2000	118,544,736	$118.5	$1,027.3	($7.5)	$937.2
Net Income	-	-	-	-	168.4
Other comprehensive loss	-	-	-	(.8)	-
Dividends:
Preferred stock	-	-	-	-	(5.0)
Common stock	-	-	-	-	(126.5)
Conversion of stock options	147	-	-	-	-
Gain on acquisition of preferred stock	-	-	.7	-	-
Release of restricted stock	-	-	.3	-	-
BALANCE, DECEMBER 31, 2001	118,544,883	$118.5	$1,028.3	($6.7)	$974. 1
Net Income	-	-	-	-	139.1
Other comprehensive income	-	-	-	4.2	-
Dividends:
Preferred stock	-	-	-	-	(5.0)
Common stock	-	-	-	-	(62.6)
Dividends to Pepco Holdings					(432.2)
Merger Related Transactions:
Transfer of ownership of PCI and PES	-	-	(545.9)	2.5	54.2
Change in shares outstanding     and par value of shares     due to cancellation	(107,221,076)	(107.2)	118.5	-	-
Premium on capital stock retired,     net of expense	-	-	(28.9)	-	18.2
Transfer of premium on treasury shares	-	-	(62.1)	-	62.1
Cancellation of treasury shares and     related capital stock expense	(11,323,707)	(11.3)	(2.3)	-	(279.0)
BALANCE, DECEMBER 31, 2002	100	$     -	$  507.6	$  -	$468.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

POTOMAC ELECTRIC POWER COMPANY

(1)  ORGANIZATION

     On August 1, 2002, Potomac Electric Power Company (Pepco or the Company) closed on its acquisition of Conectiv for a combination of cash and stock valued at approximately $2.2 billion. In accordance with the terms of the merger agreement, both Pepco and Conectiv became subsidiaries of Pepco Holdings, Inc. (Pepco Holdings, formerly New RC, Inc.) a registered holding company under the Public Utility Holding Company Act of 1935. Pepco Holdings was incorporated under the laws of Delaware on February 9, 2001 for the purpose of effecting the merger. As part of the merger transaction, holders of Pepco's common stock immediately prior to the August 1, 2002 merger received in exchange for their Pepco shares approximately 107,125,976 shares of Pepco Holdings common stock, par value $.01 per share. Additionally, Pepco issued 100 shares of common stock, par value $.01, all of which are owned by Pepco Holdings.

     Since August 1, 2002, Pepco is engaged solely in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Under settlements entered into with regulatory authorities, Pepco is required to provide electricity supply at specified rates (referred to as "default service") to customers in Maryland until July 2004 and to customers in Washington, D.C. until February 2005. Under a full requirements contract entered into in 2000 in connection with the purchase by Mirant Corporation (Mirant) of substantially all of Pepco's electricity generation assets, Mirant is obligated to supply Pepco with all of the capacity and energy needed to fulfill these default service obligations at fixed prices that are lower than currently approved tariff rates that Pepco charges for providing such service. If Mirant were to fail to fulfill its supply obligations, Pepco would ha ve to find alternative sources of supply at rates then prevailing.

     Until August 1, 2002, Pepco was also engaged in the management of a diversified financial investments portfolio and the supply of energy products and services in competitive retail markets. These activities were performed through the Company's wholly owned unregulated subsidiary at that time, POM Holdings, Inc. (POM) which until August 1, 2002, was the parent company of two wholly owned subsidiaries, Potomac Capital Investment Corporation (PCI) and Pepco Energy Services, Inc. (Pepco Energy Services). PCI managed the Company's financial investment portfolio and Pepco Energy Services provided competitive energy products and services. PCI's investment in Starpower Communications, LLC, which provides cable and telecommunication services in the Washington, D.C. area, is owned by its wholly owned subsidiary Pepco Communications, Inc. (Pepcom). After the merger, the stock of PCI, Pepco Energy Services, and Pepcom was distributed as a dividend to P epco Holdings, which resulted in Pepco Holdings becoming the new parent company of PCI, Pepco Energy Services, and Pepcom.

     Additionally, the Company has a wholly owned Delaware statutory business trust, Potomac Electric Power Company Trust I, and a wholly owned Delaware Investment Holding Company, Edison Capital Reserves Corporation.

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

     As discussed in the "Overview" section herein, on August 1, 2002, in accordance with the terms of the merger agreement, Pepco transferred its ownership of PCI and Pepco Energy Services to Pepco Holdings. Accordingly, the accompanying consolidated balance sheet and consolidated statement of shareholders' equity as of December 31, 2002 include only Pepco's operations. The consolidated balance sheet as of December 31, 2001, and the consolidated statements of shareholders' equity as of December 31, 2001 and 2000, respectively, as previously reported by Pepco, include the consolidated accounts of Pepco and its pre-merger wholly owned subsidiaries, PCI and Pepco Energy Services.

     The accompanying consolidated statements of earnings and the consolidated statements of cash flows for the year ended December 31, 2002 include Pepco's operations for the entire year consolidated with its pre-merger subsidiaries operations for the seven months of January 2002 through July 2002. The accompanying consolidated statements of earnings and consolidated statements of cash flows for the years ended December 31, 2001 and 2000, as previously reported by Pepco, include the consolidated operations of Pepco and its pre-merger subsidiaries, for the entire year presented.

     Accordingly, the 2002 balances included in the accompanying consolidated financial statements referred to above are not comparable with the 2001 and 2000 balances.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, such as Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties," requires management to make certain estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial statement and the reported amounts of revenue and expenses during the reporting period. Examples of estimates used by the Company include the calculation of the allowance for uncollectible accounts, environmental remediation costs and anticipated collections, unbilled revenue, and pension assumptions. Actual results may differ significantly from these estimates under different assumptions or conditions.

Regulation of Power Delivery Operations

     Pepco is regulated by the Maryland Public Service Commission (Maryland Commission), the District of Columbia Public Service Commission (D.C. Commission), and its wholesale business is regulated by the Federal Energy Regulatory Commission (FERC).

Revenue Recognition

     Pepco's revenue for services rendered but unbilled as of the end of each month is accrued and included in the accounts receivable balance on the accompanying consolidated balance sheets. Revenue from Pepco Energy Services' energy services contracts and from PCI's utility industry services contracts was recognized using the percentage-of-completion method of revenue recognition, which recognized revenue as work progressed on the contract. Revenue from Pepco Energy Services' electric and gas marketing businesses was recognized as services when rendered.

Accounting For Certain Types of Regulation

     Based on the regulatory framework in which it has operated, Pepco has historically applied, and in connection with its transmission and distribution business continues to apply, the provisions of Statement of Financial Accounting Standards No. 71 (SFAS 71) "Accounting for the Effects of Certain Types of Regulation." SFAS 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management's assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. Should existing facts or circumstances change in the future to indicate that a regulatory asset is not probable of recovery, then the regulatory asset would be charged to earnings.

     The components of Pepco's regulatory (liability)/asset balances at December 31, 2002 and 2001, are as follows:

	2002	2001
	(Millions of Dollars)
Income taxes recoverable through future rates, net	$ 41.6	$55.6
Customer sharing commitment	(7.1)	(14.5)
Unamortized debt reacquisition costs	27.3	25.7
Deferred fuel liability, net	-	(13.4)
Generation Procurement Credit and Other	(77.7)	(39.1)
Net Regulatory (Liability)/Asset	$(15.9)	$14.3

Income Taxes Recoverable Through Future Rates, net: Represents the portion of deferred income tax liabilities applicable to Pepco's utility operations that has not been reflected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized.

Customer Sharing Commitment: Represents portion of the Company's gain on divestiture of its generating assets remaining to be shared with customers.

Unamortized Debt Reacquisition Costs: The costs of debt extinguishment for which recovery through regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.

Generation Procurement Credit (GPC) and Other: GPC represents the customers' share of profits that Pepco has realized on the procurement and resale of generation services to standard offer service customers that has not yet been distributed to customers. Pepco is currently distributing the customers' share of profits monthly to all distribution customers in a billing credit. Pepco's December 2000 generation divestiture settlement agreements, approved by both the D.C. and Maryland Commissions, required the sharing between customers and shareholders of any profits earned during the four year transition period in each jurisdiction.

Environmental Remediation Costs

     The Company accrues environmental remediation costs at the time that management determines that it is probable that an asset has been impaired or that a liability has been incurred and the amount of the loss can be reasonably estimated. Environmental remediation costs are charged as an operating expense unless the costs extend the life of an asset or prevent environmental contamination that has yet to occur, in which case the costs are capitalized. Amounts that the Company has determined are probable of recovery from third parties, such as insurance carriers, are netted against the operating expense line item. The amount that is probable of recovery from third parties and the anticipated liability for environmental remediation costs are separately recorded. Amounts accrued for probable environmental remediation costs that may be incurred in the future are not measured on a discounted basis.

Transition Power Agreement and Generation Procurement Credit

     As part of the agreement to divest its generation assets, Pepco signed a Transition Power Agreement (TPA) with Mirant. Under the TPA, Pepco has the ability of acquiring all of the energy and capacity that is needed for Standard Offer Service from Mirant at prices that are below the Company's current cost-based billing rates for Standard Offer Service, thereby providing Pepco with a built-in margin on all Standard Offer Service sales that Pepco acquires from Mirant. Under the settlement agreements mentioned above, Pepco will share such margin amounts with customers on an annual cycle basis, beginning in Maryland with the period July 1, 2000 to June 30, 2001 and from February 9, 2001, to February 8, 2002, in D.C. (the GPC).

     In both jurisdictions, amounts shared with customers each year are determined only after Pepco recovers certain guaranteed annual reductions to customer rates. In addition, because the annual cycle for the GPC in Maryland began on July 1, 2000, Pepco supplied SOS from its traditional sources until the Generation Assets were sold and, thus, recorded losses on SOS sales during this period, mostly because of higher summer generating costs. Therefore, margin amounts from SOS sales in Maryland between January 8, 2001, and June 30, 2001, will be recorded as income to Pepco until both the guaranteed rate reduction amount and the SOS losses incurred in 2000 are recovered. Once such amounts are recovered, profit is shared with customers in Maryland generally on a 50/50 basis.

Accounting For Marketable Securities

     Prior to the merger, Pepco held investments in marketable equity securities and investment grade commercial paper through its subsidiary PCI. These investments were classified as available-for-sale securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses on available-for-sale securities were excluded from earnings and were reported in accumulated other comprehensive income on the accompanying consolidated balance sheet for 2001.

Accounts Receivable and Allowance for Uncollectible Accounts

     Pepco's accounts receivable balances primarily consist of customer account receivable, other accounts receivable, and accrued unbilled revenue. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date, usually within one month. Pepco uses the allowance method to account for uncollectible accounts receivable.

Cash And Cash Equivalents

     Cash and cash equivalents includes cash on hand, money market funds, and commercial paper with original maturities of three months or less.

Other Assets

     The other assets balance principally consists of deferred compensation trust assets and unamortized debt expense.

Other Current Liabilities

     The other current liability balance principally consists of customer deposits, accrued vacation liability, other post-retirement/post-employment benefits, and the current portion of deferred income taxes.

Short-Term Debt

     Short-term financing requirements have been principally satisfied through the sale of commercial promissory notes. Interest rates for the Utility's short-term financing during 2002 ranged from 1.50% to 2.14% and for 2001 ranged from 2.06% to 6.61%. Additionally, a minimum 100% line of credit back-up for outstanding commercial promissory notes is maintained. This line of credit was unused during 2002, used for several days due to limited market accessability following the terrorist attacks on September 11, 2001, and otherwise was unused during 2001 and 2000. Pepco's commercial paper balance was $40 million and $118 million at December 31, 2002 and 2001, respectively.

Amortization Of Debt Issuance And Reacquisition Costs

     Expenses incurred in connection with the issuance of long-term debt, including premiums and discounts associated with such debt, are deferred and amortized over the lives of the respective issues. Costs associated with the reacquisition of debt are also deferred and amortized over the lives of the new issues.

Derivative Instruments and Hedging Activities

     While wholly owned by Pepco, PCI entered into interest rate swap agreements to manage its overall borrowing rate and limit its interest rate risk and Pepco Energy Services, in support of its retail energy sales operations, entered into forward and futures contracts to hedge firm commitments or anticipated commodity transactions and to create trading positions. The agreements and contracts that did not require physical delivery of a commodity but are used to hedge price risk in connection with serving customers were accounted for in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133) entitled, "Accounting for Derivative Instruments and Hedging Activities" and Statement of Financial Accounting Standards No. 138 (SFAS 138) entitled, "Accounting for Certain Derivative Instruments and Certain Hedging Activities."

Energy Trading Reclassifications

     In 2002, the Emerging Issues Task Force issued a pronouncement entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenue and expense associated with "energy trading book" contracts on a gross vs. net basis. Previously, the EITF concluded that gross presentation was acceptable, but with the issuance of EITF 02-3 and the subsequent guidance provided by the EITF, net presentation is required. Pepco does not enter into trading activities that are subject to the provisions of the pronouncement, however, its pre-merger subsidiary Pepco Energy Services did enter into such transactions and historically classified these contracts on a gross basis.

     Pepco Energy Services has completed its evaluation of the extent of the revenue and expense reclassifications required by EITF 02-3. Beginning with July 2002, all trades were recorded net. However, based on the provisions of EITF 02-3, Pepco Energy Services' results during the period January 2002 through June 2002 required a reclassification adjustment that reduced its revenues by $22.6 million. Additionally, Pepco Energy Services' revenues decreased from $643.9 million to $541.5 million and from $234.9 million to $212.4 million, for the years ended December 31, 2001 and 2000, respectively. There is no impact on Pepco's overall financial position or net results of operations as a result of the implementation of EITF 02-3.

Severance Costs

     Through December 31, 2002, Pepco accounted for its subsidiaries' severance costs in accordance with the provisions of EITF No. 94-3 (EITF 94-3) "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." For any activities after January 1, 2003, the Company will apply the provisions of newly issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

     During 2002, Pepco's management approved initiatives by Pepco to streamline its operating structure by reducing the number of employees. These initiatives met the criteria for the accounting treatment provided under EITF 94-3. As of December 31, 2002, Pepco accrued $17.5 million of severance costs in connection with the plan. These costs relate to 196 employees, who primarily work in the power delivery business. Management intends to pay the severance costs by the end of 2003.

Pension and Other Post Employment Benefit Plans

     Following the consummation of the acquisition of Conectiv by Pepco on August 1, 2002, the Pepco General Retirement Plan was merged into Pepco Holdings noncontributory retirement plan (the Plan) on December 31, 2002. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan. In addition to providing pension benefits, Pepco also provides certain health care and life insurance benefits for eligible employees (OPEBS).

     The Company accounts for the Plan in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and its OPEBS in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Company's financial statement disclosures were prepared in accordance with SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."

     Pepco's pension assets did not achieve the level of returns assumed in the determination of their pension expense accruals during 2002. As a result, Pepco contributed $35 million to its pension plan in December 2002 to exceed a funding level of 100% with respect to its accrued benefit obligation.

Asset Impairment Evaluation

     Pepco tests its long-lived assets for recoverability in accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 was effective beginning with Pepco's fiscal 2002 financial statements. Prior to the effective date of SFAS No. 144, Pepco tested for recoverability of its long lived assets in accordance with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 prescribes that long-lived assets are to be tested for recoverability in order to determine if they are impaired whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.

     During 2001, PCI determined that its aircraft portfolio was impaired and wrote the portfolio down to its fair value by recording a pre-tax impairment loss of $55.5 million ($36.1 million after-tax). Also during 2001 PCI recorded a pre-tax write-off of $10 million ($6.5 million after-tax) related to its preferred stock investment in a wholly owned subsidiary of Enron. During 2000, Pepco assessed whether the carrying amounts of the Benning Road and Buzzard Point generating stations that were transferred to Pepco Energy Services were determined to be impaired and were written down to their fair value by recognizing a pre-tax impairment loss of $40.3 million ($24.1 after-tax). Additionally, during 2000 PCI had several miscellaneous write-offs which totaled $5.4 million, pre-tax.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (the Company's first quarter 2003 financial statements). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. Pepco has completed its assessment of the provisions of SFAS No. 143 and believes that although the implementation of the Statement will result in certain account reclassifications it will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in Pepco Holdings' Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002 (Pepco's first quarter 2003 financial statements). The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Pepco is in the process of assessing the provisions of FIN 45 in order to determine its impact on the its financial position and results of operations.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Pepco is in the process of assessing the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations.

(3)  SEGMENT INFORMATION

     As a result of the merger transaction on August 1, 2002, Pepco has determined that its regulated utility operations represent its only reportable segment under the provisions of Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). Accordingly, Pepco's segment disclosure for the year ended 2002 includes its reportable utility segment information, with PCI and Pepco Energy Services' pre-merger seven months ended July 2002 operations presented as separate columns. Prior to the August 1, 2002 merger Pepco identified two reportable segments: its utility operations and POM's operations (Competitive Segment). Based on this current year change in reportable segments, Pepco has restated its year-end 2001 and 2000 segment disclosures to conform to the 2002 presentation. The information presented is in millions of dollars.

	Reportable Utility    Segment	PCI	PES	(A) Elim.	Total   Pepco
For the Year Ended December 31, 2002
Operating Revenue	$1,533.9	$59.2	$401.0	$(6.1)	$1,988.0
Operating Expenses	1,241.5	26.3	401.4	(6.1)	1,663.1
Operating Income	292.4	32.9	(.4)	-	324.9
Net Income	124.0	14.9	.2	-	139.1
Total Assets	$3,536.4	$   -	$   -	$   -	$3,536.4

	Reportable Utility     Segment	PCI	PES	(A) Elim.	Total   Pepco
For the Year Ended December 31, 2001
Operating Revenue	$1,752.8	$  112.2	$541.5	$    (6.0)	$2,400.5
Operating Expenses	1,369.7	146.3	524.1	(6.0)	2,034.1
Operating Income	383.1	(34.1)	17.4	-	366.4
Net Income	194.2	(36.1)	10.3	-	168.4
Total Assets	$5,010.0	$1,289.9	$211.8	$(1,225.8)	$5,285.9

	Reportable  Utility    Segment	PCI	PES	(A) Elim.	Total   Pepco
For the Year Ended December 31, 2000
Operating Revenue	$2,644.4	$  132.5	$212.4	$       -	$2,989.3
Operating Expenses	1,794.8	70.5	228.9	-	2,094.2
Operating Income	849.6	62.0	(16.5)	-	895.1
Net Income	348.9	11.9	(8.8)	-	352.0
Total Assets	$7,967.4	$1,232.2	$176.6	$(2,348.8)	$7,027.3

(A) Represents the elimination of rent paid to PCI for Pepco's lease of office space in PCI's 10-story commercial office building. The lease commenced in June 2001.

(4)  PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment is comprised of the following.

At December 31, 2002	Original   Cost	Accumulated Depreciation	Net    Book Value
	(Millions of Dollars)
Distribution	$3,313.0	$1,304.7	$2,008.3
Transmission	704.3	251.3	453.0
General	436.5	183.0	253.5
Construction work in progress	65.4	-	65.4
Nonoperating and other property	30.8	.7	30.1
Total	$4,550.0	$1,739.7	$2,810.3
At December 31, 2001
Distribution	$ 3,163.0	$1,213.2	$1,949.8
Transmission	701.3	239.0	462.3
General	359.3	155.7	203.6
Construction work in progress	115.2	-	115.2
Nonoperating and other property	23.1	.6	22.5
Total	$ 4,361.9	$1,608.5	$2,753.4

     The nonoperating and other property amounts include balances for distribution and transmission plant held for future use as well as other property held by non-utility subsidiaries.

    Pepco uses separate depreciation rates for each electric plant account. The rates, which vary from jurisdiction to jurisdiction, were equivalent to a system-wide composite depreciation rate of approximately 3.5% for Pepco's transmission and distribution system property in 2002, 2001 and 2000.

     Property, plant and equipment includes regulatory assets of $53 million and $47 million at December 31, 2002 and 2001, respectively, which are accounted for pursuant to SFAS No. 71.

(5)  PENSIONS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (OPEB)

Pension Benefits

     The Pepco Holdings Retirement Plan (Plan) is a noncontributory plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries. Effective December 31, 2002, following the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic pension cost. Under such accounting, Conectiv's accrued pension liability was adjusted on August 1, 2002 through consolidation to recognize all previously unrecognized gains and losses arising from past experience different from that assumed, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.87, "Employers' Accounting for Pensions." The Conectiv Plan transferred a projected benefit obligation of $804 million and plan assets of $744 million on August 1, 2002.

     As a result of the divestiture of Pepco's Generation Assets to Mirant, in December 2000 Pepco recognized a curtailment charge of approximately $8.7 million. Since this charge is the direct result of the divestiture, it was considered to be a transaction cost and was netted against the gain on divestiture of Generation Assets on the Company's accompanying statements of earnings for the year ended December 31, 2000. Additionally, in accordance with the terms of the divestiture, with respect to generation employees transferred from the Company to Mirant, the Company is only responsible for the portion of transferred employees' pensions that relate to service with the Company.

     Pension expense/(income) included in net period benefit cost was $9.0 million in 2002, $(3) million in 2001, and $3 million in 2000. The 2002 net period benefit cost amount of $9.0 million includes $2.9 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002. The components of net periodic benefit cost were computed as follows.

	Pension Benefits
	2002	2001	2000
	(Millions of Dollars)
Components of Net Periodic Benefit Cost
Service cost	$ 16.0	$   9.7	$ 12.8
Interest cost	54.1	36.3	37.2
Expected return on plan assets	(69.0)	(50.9)	(48.7)
Amortization of prior service cost	1.0	1.0	1.4
Recognized actuarial loss	6.9	.9	.3
Net Period Benefit Cost	$  9.0	$  (3.0)	$  3.0

     The $9 million in net period benefit cost presented above is comprised of $6.1 million for Pepco and $2.9 million for Conectiv.

     Pension program assets are stated at fair value and are composed of approximately 42% and 45% of fixed income investments (including cash equivalents) with the balance in equity investments at December 31, 2002 and 2001, respectively. No Pepco Holdings stock is included in the pension program assets.

     The changes in benefit obligation and fair value of plan assets are presented in the following table.

	Pension Benefits
	2002	2001
	(Millions of Dollars)
Change in Benefit Obligation
Projected Benefit obligation at beginning of year	$  548.3	$532.3
Service cost	16.0	9.7
Interest cost	54.1	36.3
Acquisition	804.1	-
Actuarial loss	40.7	3.2
Benefits paid	(64.3)	(33.2)
Projected Benefit Obligation at End of Year	$1,398.9	$548.3
Accumulated Benefit Obligation at December 31	$1,228.2	$489.0
Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year	$  555.0	$576.9
Actual return on plan assets	(37.2)	(14.6)
Company contributions	35.0	25.0
Acquisition	744.3	-
Benefits paid	(56.5)	(32.3)
Fair Value of Plan Assets at End of Year	$1,240.6	$555.0

     The following table sets forth the Program's prepaid benefit cost.

	Pension Benefits
	2002	2001
	(Millions of Dollars)
Funded status	$ (158.3)	$   6.7
Unrecognized actuarial loss	278.1	139.6
Unrecognized prior service cost	5.1	6.1
Prepaid Benefit Cost	$  124.9	$ 152.4

     The actuarial assumptions for Pepco and Conectiv at December 31, 2002, and 2001 are:

	2002	2001
Discount rate	6.75%	7.0%
Expected return on plan assets
Pepco	9.0%	9.0%
Conectiv	9.5%	-
Rate of compensation increase
Pepco	4.0%	4.0%
Conectiv	4.5%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. The Company expects to review, and may change the actuarial assumptions of the plan for 2003.

Other Post-Employment Benefits

     In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for eligible employees (OPEBS). The Company is amortizing the Pepco plan related unrecognized transition obligation measured at January 1, 1993, over a 20-year period.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic benefit cost. Under such accounting Conectiv's accrued postretirement liability was adjusted on August 1, 2002 through consolidation to recognize all previously unrecognized actuarial gains and losses, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.106. The Conectiv Plan transferred a projected benefit obligation of $320 million and plan assets of $100 million on August 1, 2002.

     Postemployment benefit expense included in net income was $28.1 million, $15.9 million, and $18 million in 2002, 2001, and 2000, respectively. The 2002 net period benefit cost amount of $28.1 million includes $9.7 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002.

	Other Post Employment Benefits
	2002	2001	2000
	(Millions of Dollars)
Components of Net Periodic Benefit Cost
Service cost	$7.2	$ 4.6	$ 5.8
Interest cost	20.0	8.2	8.2
Expected return on plan assets	(5.2)	(1.9)	(1.9)
Recognized actuarial loss	6.1	5.0	5.9
Net Period Benefit Cost	$28.1	$15.9	$18.0

     The $28.1 million in net period benefit cost presented above is comprised of $18.4 million for Pepco and $9.7 million for Conectiv.

    Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed health care cost trend rate used to measure the expected cost benefits covered by the plan is 10% for the both the Pepco and Conectiv plans. These rates are expected to decline to 5.0% over the next four-year period. A one percentage point change in the assumed health care cost trend rate would have the following effects for fiscal year 2002.

	1 Percentage-Point Increase	1 Percentage-Point Decrease
	(Millions of Dollars)
Effect on total of service and   interest cost components	$ 1.6	$ (1.4)
Effect on postretirement benefit   obligation	$21.4	$(20.2)

     The changes in benefit obligation and fair value of plan assets are presented in the following table.

	Other Post Employment Benefits
	2002	2001
	(Millions of Dollars)
Change in Benefit Obligation
Benefit obligation at beginning of year	$122.3	$113.4
Service cost	7.2	4.7
Interest cost	20.0	8.2
Acquisition	319.8	-
Actuarial loss	22.4	6.0
Benefits paid	(19.3)	(10.0)
Benefit Obligation at End of Year	$472.4	$122.3
Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year	$ 18.7	$ 21.0
Actual return on plan assets	(.4)	(.3)
Company contributions	20.4	5.0
Acquisition	100.2	-
Benefits paid	(15.9)	(7.0)
Fair Value of Plan Assets at End of Year	$123.0	$ 18.7

    The following table sets forth the Program's accrued benefit cost.

	Other Post Employment Benefits
	2002	2001
	(Millions of Dollars)
Funded status	$(349.4)	$(103.6)
Unrecognized actuarial loss	82.5	55.2
Unrecognized initial net obligation	12.0	17.4
Accrued Benefit Cost	$(254.9)	$ (31.0)

    Actuarial assumptions as of December 31, 2002, and 2001 are:

	2002	2001
Discount rate	6.75%	7.0%
Expected return on plan assets
Pepco	9.0%	9.0%
Conectiv	9.5%	-
Rate of compensation increase
Pepco	4.0%	4.0%
Conectiv	4.5%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for 2002 net periodic expense determination. The Company expects to review, and may change the actuarial assumptions of the plans for 2003.

     Pepco funded the 2002 and 2001 portions of its estimated liability for Pepco postretirement medical and life insurance costs through the use of an Internal Revenue Code (IRC) 401 (h) account, within the Company's pension plan, and an IRC 501 (c) (9) Voluntary Employee Beneficiary Association (VEBA). Conectiv also annually funds a portion of its estimated postretirement liability through its VEBAs. Assets are composed of cash equivalents, fixed income investments and equity investments.

     The Company also sponsors defined contribution savings plans covering all eligible employees. Under these plans, the Company makes contributions on behalf of participants. Company contributions to the plans totaled $4.6 million in 2002, $4.3 million in 2001, and $5 million in 2000.

(6)  LONG-TERM DEBT

     The components of long-term debt are shown below.

			At December 31,
Interest Rate	Maturity		2002		2001
			(Millions of Dollars)
First Mortgage Bonds
5.625%	2003	$	50.0	$	50.0
6.50%	2005		100.0		100.0
6.25%	2007		175.0		175.0
6.50%	2008		78.0		78.0
5.875%	2008		50.0		50.0
5.75%	2010		16.0		16.0
6.00%	2022		30.0		30.0
6.375%	2023		37.0		37.0
7.25%	2023		100.0		100.0
6.875%	2023		100.0		100.0
5.375%	2024		42.5		42.5
5.375%	2024		38.3		38.3
6.875%	2024		75.0		75.0
7.375%	2025		75.0		75.0
8.50%	2027		-		66.2
7.50%	2028		40.0		40.0
Total First Mortgage Bonds			1,006.8		1,073.0
Medium-Term Notes
7.46% - 7.60%	2002		-		40.0
7.64%	2007		35.0		35.0
6.25%	2009		50.0		50.0
7%	2024		50.0		50.0
Recourse Debt
4.00% - 5.99%	2001-2008		-		92.0
6.00% - 6.99%	2001-2008		-		228.1
7.00% - 8.99%	2001-2004		-		125.7
Nonrecourse debt			-		26.6
Net unamortized discount			(8.3)		(10.3)
Current portion			(50.0)		(108.0)
Net Long-Term Debt		$	1,083.5	$	1,602.1

     The outstanding First Mortgage Bonds are secured by a lien on substantially all of the Company's property, plant and equipment. Additional bonds may be issued under the mortgage as amended and supplemented in compliance with the provisions of the indenture.

     The aggregate amounts of maturities for long-term debt outstanding at December 31, 2002,are $50 million in 2003, zero in 2004, $100 million in 2005, zero in 2006, $210 million in 2007, and $781.8 million thereafter.

     On July 15, 2002 the Company redeemed at 103.21% of principal amount, plus accrued interest to the redemption date, the entire $66.2 million outstanding principal amount of its 8.5% First Mortgage Bonds.

(7)  INCOME TAXES

The provision for income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

Provision for Income Taxes
For the Year Ended December 31,
		2002			2001		2000
		(Millions of Dollars)
Current Tax Expense
Federal	$		(99.3)	$	(0.8)	$	465.8
State and local			(17.7)		11.0		114.9
Total Current Tax Expense			(117.0)		10.2		580.7
Deferred Tax Expense
Federal			163.8		58.0		(198.3)
State and local			35.5		18.9		(19.5)
Investment tax credits			(2.0)		(3.6)		(21.7)
Total Deferred Tax Expense (Benefit)			197.3		73.3		(239.5)
Total Income Tax Expense	$		80.3	$	83.5	$	341.2

Reconciliation of Consolidated Income Tax Expense
		For the Year Ended December 31,
		2002			2001				2000
		Amount	Rate		Amount		Rate		Amount	Rate
		(Millions of Dollars)
Income Before Income Taxes	$	219.4		$	251.9			$	693.2
Income tax at federal statutory rate	$	76.8	.35	$	88.2	.35		$	242.6	.35
Increases (decreases) resulting from
Depreciation		6.9	.03		3.0	.01			11.7	.02
Removal costs		(2.4)	(.01)		(3.0)	(.01)			(5.6)	(.01)
Allowance for funds used       during construction		(.1)	-		0.4	-			0.9	-
State income taxes, net of       federal effect		11.2	.05		19.4	.08			63.3	.09
Tax credits		(2.4)	(.01)		(3.0)	(.01)			(4.8)	(.01)
Dividends received deduction		(1.1)	(.01)		(2.3)	(.01)			(3.4)	(.01)
Reversal of previously accrued       deferred taxes		-	-		(7.3)	(.03)			(2.1)	-
Taxes related to divestiture at       non-statutory rates		-	-		6.1	.02			48.3	.07
Dutch gas options		-	-		(14.4)	(.06)			-	-
Other		(8.6)	(.03)		(3.6)	(.01)			(9.7)	(.01)
Total Income Tax Expense	$	80.3	.37	$	83.5	.33		$	341.2	.49

Components of Consolidated Deferred Tax Liabilities (Assets)
		At December 31,
	2002		2001
	(Millions of Dollars)
Deferred Tax Liabilities (Assets)
Depreciation and other book to tax basis differences	$	642.3	$	511.9
Pension plan contribution		72.1		-
Deferred taxes on amounts to be collected through     future rates		16.7		22.4
Deferred investment tax credit		(17.3)		(17.3)
Contributions in aid of construction		(57.2)		(48.1)
Conservation costs (demand side management)
Finance and operating leases		-		123.2
Alternative minimum tax
Assets with a tax basis greater than book basis		-		(26.4)
Customer sharing		(3.7)		(4.7)
Transition costs		(14.3)		(14.3)
Property taxes and other		8.9		(6.3)
Total Deferred Tax Liabilities, Net		647.5		540.4
Deferred tax liabilities included in   Other Current Liabilities		58.1		38.8
Total Deferred Tax Liabilities, Net - Non-Current	$	589.4	$	501.6

     The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax bases of assets and liabilities. The portion of the net deferred tax liability applicable to Pepco's operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet. No valuation allowance for deferred tax assets was required or recorded at December 31, 2002 and 2001.

     The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on Pepco's property continues to be normalized over the remaining service lives of the related assets.

     The Company files a consolidated federal income tax return. The Company's federal income tax liabilities for all years through 1997 have been determined. The Company is of the opinion that the final settlement of its federal income tax liabilities for subsequent years will not have a material adverse effect on its financial position or results of operations.

(8)  SERIAL PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK

     The serial preferred stock and redeemable preferred stock outstanding are as follows.

Series	Redemption    Price	Shares Outstanding 2002       2001			December 31,   2002        2001
				(Millions of Dollars)
$2.44 Series of 1957	$51.00	239,641	239,641	$12.0		$12.0
$2.46 Series of 1958	$51.00	173,892	173,912	8.7		8.7
$2.28 Series of 1965	$51.00	291,759	291,759	14.6		14.6
				$35.3		$35.3
$3.40 Series of 1992	(1)	950,000	990,000	$47.5		$49.5
Total Preferred Stock				$82.8		$84.8

(1) The shares of the $3.40 (6.80%) Series are subject to mandatory redemption, at par, through the operation of a sinking fund that began redeeming 50,000 shares annually, on September 1, 2002, with the remaining shares to be redeemed on September 1, 2007. The shares were not redeemable prior to September 1, 2002; thereafter, the shares are redeemable at par. The sinking fund requirements through 2006 with respect to the Redeemable Serial Preferred Stock are $2.5 million in 2004, 2005, and 2006. In the event of default with respect to dividends, or sinking fund or other redemption requirements relating to the serial preferred stock, no dividends may be paid, nor any other distribution made, on common stock. Payments of dividends on all series of serial preferred or preference stock, including series that are redeemable, must be made concurrently.

     On September 3, 2002, Pepco redeemed $2 million or 40,000 shares of its $3.40 Serial Preferred Stock Series of 1992 pursuant to mandatory sinking fund provisions.

(9)  COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
       SECURITIES OF SUBSIDIARY TRUST

     Pepco has a wholly owned financing subsidiary trust which has common and preferred trust securities outstanding and holds Junior Subordinated Debentures (the Debentures) of Pepco. Pepco owns all of the common securities of the trust, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trust. The trust uses interest payments received on the Debentures, which are the trust's only assets, to make cash distributions on the trust securities. The obligations of Pepco pursuant to the Debentures and guarantees of distributions with respect to the trust's securities, to the extent the trust has funds available therefore, constitute full and unconditional guarantees of the obligations of the trust under the trust securities the trust has issued.

     For Pepco's consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2038. The Debentures are subject to redemption, in whole or in part, at the option of Pepco, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events. Details about the trust are as follows:

	Shares Outstanding		Amount
			(Millions of Dollars)
Series	2002	2001	2002	2001
$25 per share, 7.375%	5,000,000	5,000,000	$125.0	$125.0

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Pepco's financial instruments at December 31, 2002 and 2001 are shown below.
	At December 31,
		2002			2001
		(Millions of Dollars)
	Carrying Amount		Fair Value	Carrying Amount		Fair Value
Assets
Marketable Securities	$	-	-		161.2	161.2
Notes Receivable		-	-		22.5	22.1
Liabilities and Capitalization
Long-Term Debt	$	1,083.5	1,152.3		1,602.1	1,591.2
Company Obligated Mandatorily Redeemable     Preferred Securities of Subsidiary Trust     which holds Solely Parent Junior     Subordinated Debentures	$	125.9	126.3		125.0	124.6
Serial Preferred Stock	$	35.3	26.7		35.3	26.1
Redeemable Serial Preferred Stock	$	47.5	49.4		49.5	49.4
Derivative Investments	$	-	-		4.5	4.5

     The methods and assumptions below were used to estimate, at December 31, 2002 and 2001, the fair value of each class of financial instruments shown above for which it is practicable to estimate that value.

     The fair value of the Marketable Securities for 2001 was based on quoted market prices.

     The fair value of the Notes Receivable was based on discounted future cash flows using current rates and similar terms.

     The fair values of the Long-term Debt, which includes First Mortgage Bonds and Medium-Term Notes, excluding amounts due within one year, were based on the current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar terms and remaining maturities.

     The fair values of the Serial Preferred Stock, Redeemable Serial Preferred Stock and Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust, excluding amounts due within one year, were based on quoted market prices or discounted cash flows using current rates of preferred stock with similar terms.

     The carrying amounts of all other financial instruments approximate fair value.

(11)  LEASING ACTIVITIES

     The investments in financing leases are held by PCI and therefore were transferred by Pepco to Pepco Holdings on August 1, 2002, in accordance with the terms of the merger. The finance lease balance was comprised of the following at December 31,:

	2002	2001
	(Millions of Dollars)
Energy leveraged leases	$   -	$658.8
Aircraft leases	-	22.7
Other	-	54.5
Total	$   -	$736.0

     The components of the net investment in finance leases at December 31, 2002 and 2001 are summarized below:

At December 31, 2002:	Leveraged  Leases	Direct  Finance Leases	Total  Finance Leases
	(Millions of Dollars)
Rents receivable, net of recourse debt	$       -	$    -	$       -
Residual value	-	-	-
Less:   Unearned and deferred income	-	-	-
Investment in finance leases	-	-	-
Less:   Deferred taxes	-	-	-
Net Investment in Finance Leases	$       -	$    -	$       -
At December 31, 2001
Rents receivable, net of recourse debt	$1,435.5	$ 70.5	$ 1,506.0
Residual value	-	22.6	22.6
Less:   Unearned and deferred income	(772.7)	(19.9)	(792.6)
Investment in finance leases	662.8	73.2	736.0
Less:   Deferred taxes	(210.2)	(43.2)	(253.4)
Net Investment in Finance Leases	$   452.6	$ 30.0	$   482.6

Income recognized from leveraged leases was comprised of the following:

For the Year Ended December 31,	2002(a)	2001	2000
	(Millions of Dollars)
Pre-tax earnings from leveraged leases	$31.8	$  9.0	$37.5
Investment tax credit recognized	-	.3	.8
Income from leveraged leases, including      investment tax credit	31.8	9.3	38.3
Income tax (benefit) expense	(6.4)	(9.9)	(7.5)
Net Income from Leveraged Leases	$25.4	$ 19.2	$30.8

(a) Due to the consummation of the merger on August 1, 2002, the 2002 amounts represent income from January 1, 2002 through July 31, 2002.

     In December 2001, PCI entered into a $850.0 million leveraged lease transaction with an Austrian municipal-owned entity. This transaction involved PCI's purchase and leaseback of a 56% undivided interest in a hydroelectric facility, over a base term of approximately 33 years. The transaction was financed with approximately $692.0 million of third party, non-recourse debt at commercial rates for a period of approximately 33 years. PCI's equity investment in this leveraged lease was approximately $164.6 million.

(12) COMMITMENTS AND CONTINGENCIES

Regulatory Contingencies

     Final briefs on Pepco's District of Columbia divestiture proceeds sharing application were filed on July 31, 2002 following an evidentiary hearing in June 2002. That application was filed to implement a provision of Pepco's D.C. Commission approved divestiture settlement that provided for a sharing of any net proceeds from the sale of its generation related assets. A principal issue in the case is whether a sharing between customers and shareholders of the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets would violate the normalization provisions of the Internal Revenue Code and implementing regulations. On March 4, 2003, the Internal Revenue Service (IRS) issued a notice of proposed rulemaking (NOPR) that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot p redict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. However, the potential exists that Pepco could be required to make additional gain sharing payments to D.C. customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the D.C. Commission will issue a decision.

     Pepco filed its divestiture proceeds plan application in Maryland in April 2001. Reply briefs were filed in May 2002 and Pepco is awaiting a Proposed Order from the Hearing Examiner. It is a certainty that some party or parties will appeal the Hearing Examiner's Proposed Order to the Maryland Commission. The principal issue in the case is the same normalization issue that was raised in the D.C. case. On March 4, 2003, the IRS issued a NOPR that could be relevant to that principal issue. Comments on the NOPR must be filed by June 2, 2003, and the IRS will hold a public hearing on June 2, 2003. Pepco cannot predict whether the IRS will adopt the regulations as proposed, make changes before issuing final regulations or decide not to adopt regulations. Other issues deal with the inclusion of internal costs and cost allocations. Pepco believes that its calculation of the customers' share of divestiture proceeds is correct. The p otential also exists that Pepco would be required to make additional gain sharing payments to Maryland customers. Such additional payments, which cannot be estimated, would be charged to expense and could have a material adverse effect on results of operations in the quarter and year in which a decision is rendered; however, Pepco does not believe that additional payments, if any, will have a material adverse impact on its financial position. It is impossible to predict when the Hearing Examiner or the Maryland Commission will issue their decisions.

     In Maryland, in accordance with the terms of an agreement approved by the Maryland Commission, customers who are unable to receive generation services from another supplier, or who do not select another supplier, are entitled to receive services from Pepco until July 1, 2004 (Standard Offer Service or SOS). Pepco has entered into a settlement in Phase I of Maryland Case No. 8908 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The settlement provides for SOS to be procured from the wholesale marketplace an d that Pepco will be able to recover its costs of procurement and a return.

Environmental Matters

     Pepco is subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. The Company's subsidiaries may incur costs to clean up facilities found to be contaminated due to current and past disposal practices. The Company's subsidiaries' liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others.

     In October 1995, Pepco received notice from the EPA that it, along with several hundred other companies, may be a potentially responsible party (PRP) in connection with the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. In August 2001, Pepco entered into a Consent Decree for de minimis parties with EPA to resolve its liability at this site. Pursuant to the consent decree, in return for a de minimis payment by Pepco to the United States and a group of PRPs, those parties covenant not to sue Pepco for past and future costs of remediation at the site and the United States will also provide contribution protection against third party claims related to response actions at the site. Natural resource damages, if any, are not covered by the Consent Decree. Court approval of the Consent Decree is pending. Pepco believes that its liabili ty at this site, pursuant to the terms of the Consent Decree, will not have a material adverse effect on its financial position or results of operations.

     In December 1987, Pepco was notified by the EPA that it, along with several other utilities and nonutilities, is a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination of a Philadelphia, Pennsylvania, site owned by a nonaffiliated company. In the early 1970s, Pepco sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the site. In October 1994, a Remedial Investigation/Feasibility Study (RI/FS) including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a ROD that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In June 1998, the EPA issued a unilateral Administrative Order to Pepco and 12 other PRPs to conduct the design and actions called for in the ROD. At December 31, 2002, Pepco has accrued $1.7 million for its share of these costs. Pepco believe s that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     Pepco's Benning Service Center facility operates under a National Pollutant Discharge Elimination System (NPDES) permit. The EPA issued an NPDES permit for this facility in November 2000. Pepco has filed a petition with the EPA Environmental Appeals Board seeking review and reconsideration of certain provisions of the EPA's permit determination. In May 2001, Pepco and the EPA reached a settlement on Pepco's petition, pursuant to which the EPA withdrew certain contested provisions of the permit and agreed to issue a revised draft permit for public comment. As of December 31, 2002, the EPA has not issued a revised permit and Pepco is operating pursuant to the November 2000 permit absent the withdrawn conditions in accordance with the settlement agreement.

Litigation

     During 1993, Pepco was served with Amended Complaints filed in three jurisdictions (Prince George's County, Baltimore City and Baltimore County), in separate ongoing, consolidated proceedings each denominated, "In re: Personal Injury Asbestos Case." Pepco (and other defendants) were brought into these cases on a theory of premises liability under which plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their Complaints. While the pleadings are not entirely clear, it appears that each plaintiff seeks $2 million in compensatory damages and $4 million in punitive damages from each defendant. In a related proceeding in the Baltimore City case, Pepco was served, in September 1993, with a third-party complaint by Owens Corning Fibergl ass, Inc. (Owens Corning) alleging that Owens Corning was in the process of settling approximately 700 individual asbestos-related cases and seeking a judgment for contribution against Pepco on the same theory of alleged negligence set forth above in the plaintiffs' case. Subsequently, Pittsburgh Corning Corp. (Pittsburgh Corning) filed a third-party complaint against Pepco, seeking contribution for the same plaintiffs involved in the Owens Corning third-party complaint. Since the initial filings in 1993, approximately 90 additional individual suits have been filed against Pepco. The third-party complaints involving Pittsburgh Corning and Owens Corning were dismissed by the Baltimore City Court during 1994 without any payment by Pepco. As of December 31, 2002, approximately 200 cases were pending against Pepco. Of the 200 remaining asbestos cases pending against Pepco, approximately 35 of those cases have been tendered to Mirant for defense and indemnification pursuant to the Asset Purchase and Sale Agr eement which was executed in December 2000. While the aggregate amount specified in the remaining suits would exceed $400 million, Pepco believes the amounts are greatly exaggerated, as were the claims already disposed of. The amount of total liability, if any, and any related insurance recovery cannot be precisely determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial position. However, an unfavorable decision rendered against Pepco could have a material adverse effect on results of operations in the year in which a decision is rendered.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP, an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property. As a result of the oil spill, eleven class action lawsuits and two additional lawsuits on behalf of a number of Southern Maryland residents, businesses and watermen were filed against Pepco. On November 27, 2001, Pepco and ST Services entered into a Settlement Agreement with the various plaintiffs to settle all pending class action litigation stemming from the oil spill. Under the Settlement Agreement, a tota l of $2.25 million was placed in an escrow account to be distributed to watermen and property owner class members pursuant to a Plan of Distribution filed with the Court. On December 27, 2001, the Court entered an "Order Certifying Settlement Classes and Preliminarily Approving Proposed Settlement," which was approved in April 2002. In April 2002, the Claims Administrator provided the Court with a list of those members of the Settlement Classes which had timely excluded themselves from the Settlement Agreement. Approximately 80 class members elected to exclude themselves from the terms of the November 27, 2001 Settlement Agreement.

     The Company is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the Company's financial position or results of operations.

(13) QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
		1st Quarter	2nd Quarter	3rd Quarter	4th Quarter	Total
		(Millions of Dollars, except Per Share Data)
2002
Total Operating Revenue	$	489.2	581.2	607.6	310.4	1,988.0
Total Operating Expenses	$	426.3	481.8	468.2	286.7	1,663.1
Operating Income	$	62.9	99.4	139.4	23.7	324.9
Other (Expenses)	$	(24.9)	(25.0)	(21.4)	(25.4)	(96.3)
Distributions on Preferred Securities of   Subsidiary Trust	$	2.3	2.3	2.3	2.3	9.2
Income Tax Expense	$	11.1	25.1	46.4	(2.3)	80.3
Net Income	$	24.6	47.0	69.3	(1.6)	139.1
Dividends on Preferred Stock	$	1.3	1.3	1.3	1.1	5.0
Earnings (Loss) Available for Common Stock	$	23.3	45.7	68.0	(2.7)	134.1
Basic Earnings Per Share of Common Stock	$	.22	.43	-	-	-
Diluted Earnings Per Share of Common Stock	$	.22	.43	-	-	-
Cash Dividends Per Common Share	$	.25	.25	-	-	-
2001
Total Operating Revenue	$	607.0	592.0	720.0	481.9	2,400.5
Total Operating Expenses	$	474.2	492.5	586.8	489.3	2,034.1
Operating Income	$	132.8	99.5	133.2	(7.4)	366.4
Other (Expenses)	$	(19.0)	(28.4)	(25.1)	(32.4)	(105.3)
Distributions on Preferred Securities of   Subsidiary Trust	$	2.3	2.3	2.3	2.3	9.2
Income Tax Expense (Benefit)	$	46.6	19.3	35.8	(26.2)	83.5
Net Income (Loss)		64.9	49.5	70.0	(15.9)	168.4
Dividends on Preferred Stock		1.2	1.3	1.3	1.3	5.0
Earnings (Loss) Available for Common Stock	$	63.7	48.2	68.7	(17.2)	163.4
Basic Earnings (Loss) Per Share of Common Stock	$	.58	.45	.64	(.16)	1.51
Diluted Earnings (Loss) Per Share of Common Stock	$	.57	.45	.64	(.16)	1.50
Cash Dividends Per Common Share	$	.415	.25	.25	.25	1.165

NOTES:	As a result of the merger transaction that was completed on August 1, 2002, the third and fourth quarter 2002 results are not comparable with the prior years presented. For additional information, refer to Pepco's Management's Discussion and Analysis of Financial Condition and Results of Operations "Overview" and "Lack of Comparability of Operating Results with Prior Years" sections, herein.
	The Company's subsidiaries' sales of electric energy are seasonal and, accordingly, comparisons by quarter within a year are not meaningful. The totals of the four quarterly basic earnings per common share and diluted earnings per common share may not equal the basic earnings per common share and diluted earnings per common share for the year due to changes in the number of common shares outstanding during the year and, with respect to the diluted earnings per common share, changes in the amount of dilutive securities.
	All periods presented include the reclassification of revenues and expenses required by EITF 02-3.

THIS PAGE LEFT INTENTIONALLY BLANK.

Report of Independent Accountants

To the Shareholder and Board of Directors
of Conectiv

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in common stockholders' equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Conectiv and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mi sstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements on January 1, 2002, Conectiv adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2003

CONECTIV CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31,	2002		2001		2000
(Millions of Dollars)
Operating Revenue
Electric	$	3,016.5	$	2,752.1	$	2,665.9
Gain on sales of electric generating plants		15.8		297.1		16.6
Gas		386.6		424.3		412.4
Other services		439.2		487.8		542.5
Total Operating Revenue		3,858.1		3,961.3		3,637.4
Operating Expenses
Electric fuel and purchased energy		2,051.9		1,743.1		1,380.6
Gas purchased		313.4		389.9		328.5
Other services' cost of sales		383.6		410.2		478.0
Special charges		-		-		25.2
Merger-related costs		75.4		17.0		-
Other operation and maintenance		516.9		482.2		561.1
Loss on sale of leveraged leases		19.7		-		-
Impairment losses		13.5		-		-
Depreciation and amortization		193.0		228.5		252.8
Other taxes		64.0		74.4		79.5
Deferred electric service costs		(71.3)		(143.2)		(7.5)
Total Operating Expenses		3,560.1		3,202.1		3,098.2
Operating Income		298.0		759.2		539.2
Other Income (Expenses)
Interest and dividend income		13.3		10.7		7.1
Interest expense		(136.6)		(174.5)		(211.4)
Income (loss) from equity investments		(6.9)		(12.2)		31.3
Other income		9.4		61.8		9.3
Total Other Income (Expenses)		(120.8)		(114.2)		(163.7)
Preferred Stock Dividend   Requirements Of Subsidiaries		15.8		18.7		20.4
Income From Continuing Operations   Before Income Taxes		161.4		626.3		355.1
Income Taxes		70.6		251.6		151.3
Income From Continuing Operations		90.8		374.7		203.8
Discontinued Telecommunication Operations
Loss From Operations, Net Of Income Taxes		-		(7.7)		(33.0)
Loss From Disposal, Net Of Income Taxes		-		(118.8)		-
Net Income	$	90.8	$	248.2	$	170.8
The accompanying Notes are an integral part of these Consolidated Financial Statements.

CONECTIV CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Year Ended December 31,		2002			2001			2000
(Millions of Dollars)
Net income	$		90.8	$		248.2	$		170.8
Other comprehensive income / (loss), net of taxes
Energy commodity derivative instruments     designated as cash flow hedges
Unrealized gain / (loss) from cash flow       hedges net of reclassification adjustments       and net of taxes (benefit) of $50.6 million       and $(47.4) million for 2002 and 2001,       respectively			73.3			(68.6)			-
Cumulative effect of a change in accounting       resulting from adoption of Statement of       Financial Accounting Standards No. 133,       "Accounting for Derivative Instruments and        Hedging Activities," net of taxes of $2.4        Million			-			3.4			-
Marketable Securities
Unrealized gain/(loss) on marketable       securities net of reclassification       adjustments and net of taxes (benefit) of       $0.3 million, $0.7 million and $(1.1)       million for 2002, 2001 and 2000 respectively			0.6			1.3			(2.0)
Interest rate swap agreement designated as       cash flow hedge
Unrealized loss from cash flow         hedge net of reclassification         adjustments and net of taxes (benefit) of         $(4.3) million for 2002			(8.0)			-			-
Other comprehensive income / (loss), net of taxes			65.9			(63.9)			(2.0)
Comprehensive income	$		156.7	$		184.3	$		168.8
The accompanying Notes are an integral part of these Consolidated Financial Statements.

CONECTIV CONSOLIDATED BALANCE SHEETS
ASSETS	December 31,     2002	December 31,     2001
(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents, including $16.3     million in restricted cash in 2002	$   66.8	$   52.9
Marketable securities	1.2	5.1
Accounts receivable, net of allowances of     $29.4 million and $32.2 million, respectively	668.6	636.4
Fuel, materials and supplies, at average cost	123.1	126.1
Prepaid expenses and other	27.3	70.5
Total Current Assets	887.0	891.0
INVESTMENTS AND OTHER ASSETS
Goodwill	313.1	313.1
Regulatory assets, net	1,191.4	1,218.4
Investment in finance leases	-	45.3
Prepaid pension costs	96.5	91.9
Other	173.8	118.6
Total Investments and Other Assets	1,774.8	1,786.9
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	5,995.4	5,303.5
Accumulated depreciation	(2,025.8)	(1,784.2)
Net Property, Plant and Equipment	3,969.6	3,519.3
TOTAL ASSETS	$6,631.4	$6,197.6
The accompanying Notes are an integral part of these Consolidated Financial Statements.

CONECTIV CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY	December 31,     2002	December 31,     2001
(Millions of Dollars)
CURRENT LIABILITIES
Short-term debt	$1,404.2	$1,596.3
Accounts payable	368.1	351.4
Capital lease obligations due within one year	0.2	0.1
Interest and taxes accrued	15.2	34.8
Derivative instruments	88.6	87.9
Other	166.8	152.7
Total Current Liabilities	2,043.1	2,223.2
DEFERRED CREDITS
Income taxes	946.4	843.0
Investment tax credits	46.3	49.5
Other postretirement benefits obligation	84.3	89.8
Other	147.2	158.0
Total Deferred Credits	1,224.2	1,140.3
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt	1,824.3	1,355.9
Capital lease obligations	0.6	0.7
Total Long-Term Debt and Capital Lease Obligations	1,824.9	1,356.6
COMPANY OBLIGATED MANDATORILY REDEEMABLE     PREFERRED SECURITIES OF SUBSIDIARY TRUSTS     HOLDING SOLELY COMPANY DEBENTURES	165.0	165.0
PREFERRED STOCK
Redeemable serial preferred stock	27.9	48.3
SHAREHOLDER'S EQUITY
Common stock: $0.01 per share par value; 1,000     shares authorized in 2002, shares outstanding -     100; 150,000,000 shares authorized in 2001,     shares outstanding - 82,957,613
	-	0.8
Class A common stock, $0.01 per share par value;     10,000,000 shares authorized, shares     outstanding - 5,742,315 in 2001	-	0.1
Premium on stock	1,130.8	1,126.8
Capital stock expense	(7.0)	(7.0)
Accumulated other comprehensive loss	-	(65.9)
Retained income	222.5	209.4
Total Shareholder's Equity	1,346.3	1,264.2
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY	$6,631.4	$6,197.6
The accompanying Notes are an integral part of these Consolidated Financial Statements.

CONECTIV CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2002	2001	2000
(Millions of Dollars)
OPERATING ACTIVITIES
Net income	$ 90.8	$248.2	$170.8
Adjustments to reconcile net income to     net cash provided by operating activities:
Impairment loss on plant	13.5	-	-
Depreciation and amortization	193.0	241.4	283.1
Deferred income taxes, net	68.8	87.2	114.3
Gains on sales of electric generating plants	(15.8)	(297.1)	(16.6)
Loss on sale of leveraged leases	19.7	-	-
Deferred electric service costs and gas supply costs	(7.4)	(142.8)	(15.6)
Recognition of deferred gain on contract termination	-	(73.0)	-
Provision for loss on disposal of discontinued operations	-	165.8	-
Special charges	-	-	25.2
Net change in:
Accounts receivable	(436.7)	110.8	(267.5)
Inventories	2.9	(41.1)	5.8
Accounts payable	494.4	(138.3)	182.1
Accrued / prepaid taxes	4.7	(6.2)	24.2
Other current assets & liabilities	32.3	(57.9)	(10.3)
Other, net	23.1	7.7	(30.2)
Net cash from operating activities	483.3	104.7	465.3
INVESTING ACTIVITIES
Capital expenditures	(692.4)	(603.4)	(390.5)
Investments in partnerships	(3.4)	(23.4)	(11.8)
Proceeds from sales of electric generating plants	10.0	671.3	32.5
Proceeds from other assets sold	44.9	28.7	82.2
Net cash of subsidiaries transferred to PHI	(1.5)	-	-
Leveraged leases, net	-	0.6	9.5
Acquisition of businesses, net of cash acquired	-	-	(1.0)
Other, net	(3.9)	0.5	0.6
Net cash from (used by) investing activities	(646.3)	74.3	(278.5)
FINANCING ACTIVITIES
Common stock dividends paid	(98.2)	(87.0)	(92.0)
Common stock issued	-	-	0.2
Common stock redeemed	-	-	(54.7)
Preferred stock redeemed	(20.4)	(71.6)	-
Long-term debt issued	736.0	59.0	70.1
Long-term debt redeemed	(443.9)	(428.5)	(121.1)
Principal portion of capital lease payments	(0.1)	(29.8)	(48.5)
Notes payable to associated companies	596.1	-	-
PHI money pool lendings	109.6	-	-
Net increase (decrease) in short-term debt	(678.0)	330.3	129.8
Cost of issuances and refinancings	(24.1)	(22.1)	(3.3)
Net cash from (used by) financing activities	177.0	(249.7)	(119.5)
Net change in cash and cash equivalents	14.0	(70.7)	67.3
Cash and cash equivalents at beginning of period	52.8	123.5	56.2
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 66.8	$ 52.8	$123.5
The accompanying Notes are an integral part of these Consolidated Financial Statements.

CONECTIV CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
	Shares Outstanding		Par Value		Premium on Stock
	Common Stock	Class A Common Stock	Common Stock	Class A Common Stock	Common Stock	Class A Common Stock
(Dollars in Millions)
Balance as of December 31, 1999	86,173,169	5,742,315	0.9	0.1	1,092.1	93.7
Net Income
Other comprehensive loss   transferred to accumulated   other comprehensive loss
Dividends on common stock
Issuance of common stock for CICP	146,975		-		0.5
Reacquired common stock	(3,411,465)		(0.1)		(54.6)
Incentive compensation
Expense recognition					(1.4)
Forfeited common shares	(48,900)				(0.8)
Balance as of December 31, 2000	82,859,779	5,742,315	0.8	0.1	1,035.8	93.7
Net Income
Other comprehensive loss   transferred to accumulated   other comprehensive loss
Dividends on common stock
Issuance of common stock for CICP	119,434		-		2.0
Incentive compensation
Expense recognition
Forfeited common shares	(21,600)		-		(3.0)
Balance as of December 31, 2001	82,957,613	5,742,315	0.8	0.1	1,034.8	93.7
Net Income
Other comprehensive income   transferred to accumulated   other comprehensive loss
Dividends on common stock
Issuance of common stock for CICP	118,200		-		2.9
Incentive compensation
Expense recognition
Forfeited common shares	(94,600)		-		(3.8)
Spin off subsidiary to PHI					-
Cancellation of Conectiv   outstanding stock	(82,981,213)	(5,742,315)	(0.8)	(0.1)	94.6	(93.7)
Contribution to subsidiary					2.3
Balance as of December 31, 2002	-	-	-	-	1,130.8	-
Continued on Next Page

CONECTIV CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Continued)
	Treasury Stock	Unearned Compensation	Accumulated Other Comprehensive Income (Loss)	Retained Income (Accumulated Deficit)
(Dollars in Millions)
Balance as of December 31, 1999	(3.4)	(1.6)	-	(36.5)
Net Income				170.8
Other comprehensive loss transferred to   accumulated other comprehensive loss			(2.0)
Dividends on common stock				(91.6)
Issuance of common stock for CICP	1.1	(1.4)
Reacquired common stock	-
Incentive compensation
Expense recognition		0.8
Forfeited common shares	(0.3)	1.0
Balance as of December 31, 2000	(2.7)	(1.2)	(2.0)	42.8
Net Income				248.2
Other comprehensive loss transferred to   accumulated other comprehensive loss			(63.9)
Dividends on common stock				(81.6)
Issuance of common stock for CICP	0.1	(2.2)
Incentive compensation
Expense recognition		1.3
Forfeited common shares	2.6	0.4
Balance as of December 31, 2001	-	(1.7)	(65.9)	209.4
Net Income				90.8
Other comprehensive income transferred to   accumulated other comprehensive loss			65.9
Dividends on common stock				(78.0)
Issuance of common stock for CICP		(2.9)
Incentive compensation
Expense recognition		1.9
Forfeited common shares		2.7
Spin off subsidiary to PHI				0.3
Cancellation of Conectiv outstanding stock
Contribution to subsidiary
Balance as of December 31, 2002	-	-	-	222.5
The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONECTIV

(1)  ORGANIZATION

     Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of merger transactions and an exchange of common stock with Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc., which owned Atlantic City Electric Company (ACE) prior to the 1998 Merger. Conectiv owns other subsidiaries in addition to ACE and DPL, including Conectiv Energy Holding Company (CEH). Conectiv, along with CEH and ACE REIT, Inc., is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA).

     References herein to Conectiv may mean the activities of one or more subsidiary companies.

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco each became subsidiaries of PHI. See Note 2 to the Consolidated Financial Statements for additional information.

     ACE and DPL are public utilities that supply and deliver electricity through their transmission and distribution systems to approximately 999,400 customers under the trade name Conectiv Power Delivery. DPL also supplies and delivers natural gas to approximately 115,400 customers in a 275 square mile area in northern Delaware. ACE's regulated service area is located in the southern one-third of New Jersey and DPL's regulated electric service area is located on the Delmarva Peninsula (Delaware and portions of Maryland and Virginia). On a combined basis, ACE's and DPL's regulated electric service areas encompass about 8,700 square miles and have a population of approximately 2.2 million.

     Conectiv Energy Holding Company (CEH) and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading and marketing. CEH's operations began on July 1, 2000, coincident with the transfer of certain electric generating plants from ACE and DPL to CEH subsidiaries. Prior to July 1, 2000, non-regulated electricity production and sales, energy trading and marketing were conducted primarily by DPL. See "Energy Hedging and Trading Activities" in Notes 3 and 13 to the Consolidated Financial Statements for information about energy hedging and trading activities.

     Conectiv has altered the focus of its electric generation operations by building new "mid-merit" electric generating plants and selling electric generating plants designed to serve base load demand. Mid-merit electric generating plants are combined cycle units, which are constructed with combustion turbines, waste heat recovery boilers and a steam turbine. Mid-merit electric generating plants can quickly change their kWh output level on an economic basis and generally are operated during times when demand for electricity rises and prices are higher. During 2001 and 2002, Conectiv developed sites and purchased equipment for future mid-merit electric generating plants and began operating six newly-installed combustion turbines (654 MW). During 2000 and 2001, DPL, ACE, and another Conectiv subsidiary sold ownership interests in non-strategic electric generating plants which included nuclear electric generating plants (714 MW) and fossil fuel-f ired electric generating plants (1,081 MW). See Note 14 to the Consolidated Financial Statements for additional information about the sales of electric generating plants during 2000-2001 and the termination of agreements for the sale of ACE's fossil fuel-fired electric generating plants.

     For information about other businesses conducted by Conectiv subsidiaries, see the discussion of "Other services" revenues under "Revenue Recognition" in Note 3 to the Consolidated Financial Statements.

(2)  ACQUISITION OF CONECTIV BY PEPCO HOLDINGS, INC.

     On August 1, 2002, Conectiv was acquired by PHI in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco each became subsidiaries of PHI. The outstanding shares of Conectiv common stock and Conectiv Class A common stock were cancelled. Additionally, Conectiv issued 100 shares of $0.01 par value per share common stock, all of which are owned by PHI. The change in common stock outstanding resulted in a $0.9 million decrease in the par value of common stock and a $0.9 million increase in additional paid-in capital; total common stockholder's equity was unaffected.

     The holders of Conectiv common stock, par value $.01 per share, and Conectiv Class A common stock, par value $.01 per share, outstanding immediately prior to the Conectiv/Pepco Merger received, in exchange for their shares, cash in the aggregate amount of $1.1 billion and approximately 56.2 million shares of PHI common stock. The number of shares of PHI common stock, cash or combination thereof received by each holder of Conectiv common stock or Class A common stock depended on the stockholder's individual election (or failure to make an election) and the prorationing provisions of the Conectiv/Pepco Merger Agreement. Pursuant to the terms of the Rights Amendment, dated as of February 9, 2001, to the Rights Agreement, dated as of April 23, 1998, between Conectiv and Conectiv Resource Partners, Inc., as Rights Agent, the Conectiv common stock Rights and Conectiv Class A common stock Rights, declared as dividends by the Conectiv board of direct ors on April 23, 1998, expired immediately prior to the consummation of the Conectiv/Pepco Merger.

     Conectiv's consolidated financial statements are presented on a historical basis, as push down accounting was not applied at the date of the Pepco and Conectiv merger. Conectiv's operating results for 2002 and 2001 included costs related to the Conectiv/Pepco Merger of $75.4 million ($46.0 million after income taxes) and $17.0 million ($11.0 million after income taxes), respectively. The $75.4 million of costs for 2002 included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the New Jersey Board of Public Utilities (NJBPU) on July 3, 2002 that required ACE to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $18.4 million for severances and stock options settled in cash; and (iii) $26.5 million for investment banking, legal, consulting and other costs. The $17.0 million of costs for 2001 included investment banking, legal, consul ting and other costs. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over Conectiv, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

     In connection with the Conectiv/Pepco Merger, Conectiv contributed Conectiv Resource Partners, Inc. (the name of which was changed to PHI Service Company on August 8, 2002) (CRP) to PHI, effective August 1, 2002. The contribution of CRP to PHI resulted in a $112.5 million reduction in Conectiv's assets ($56.2 million of current assets, $40.2 million of property plant and equipment, and $16.1 million of other assets), an $88.3 million decrease in current liabilities, a $24.6 million decrease in deferred credits and other liabilities, and a $0.4 million increase in retained earnings.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

     The Consolidated Financial Statements include the accounts of Conectiv and its majority owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

     Ownership interests of 20% or more in entities not controlled by Conectiv are accounted for on the equity method of accounting. Ownership interests of less than 20% in other entities are accounted for on the cost method of accounting. Investments in entities accounted for on the equity and cost methods are included in "Other investments" on the Consolidated Balance Sheets. Earnings from equity method investments and distributions from cost method investments are included in "Other income (expenses)" in the Consolidated Statements of Income.

     As discussed in Note 6 to the Consolidated Financial Statements herein, Conectiv sold substantially all of the assets of its former Telecommunication business segment on November 14, 2001. Accordingly, the operating results for the former Telecommunication business segment are classified as discontinued operations within the Consolidated Statements of Income, including operating results for 2000, which have been reclassified from continuing operations to discontinued operations.

     Certain other reclassifications of prior period data have been made to conform to the current presentation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Regulation of Utility Operations

     The electricity generation businesses of ACE and DPL were restructured in 1999, pursuant to state electric restructuring legislation and the issuance of restructuring orders by state regulatory commissions. Certain aspects of Conectiv's utility businesses are subject to regulation by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively), the New Jersey Board of Public Utilities (NJBPU), the Virginia State Corporation Commission (VSCC), and the Federal Energy Regulatory Commission (FERC). For retail sales subject to price regulation, the percentages of retail electric and gas utility operating revenues regulated by each state regulatory commission for the year ended December 31, 2002, were as follows: NJBPU, 46.0%; DPSC, 36.5%; MPSC, 15.8%; and VSCC, 1.7%. Wholesale sales are subject to Federal Energy Regulatory Commission (FERC) regulation. Retail gas sales are subject to regulation by the DPSC.

     The amount recognized in the Consolidated Statements of Income for the cost of gas purchased to supply DPL's regulated gas customers is adjusted to the amount included in customer billings for such costs since customer rates are periodically adjusted to reflect amounts actually paid by DPL for purchased gas. DPL's purchased gas costs are subject to the approval of the DPSC. A regulatory asset is recorded for under-collections from customers and a liability is recorded for over-collections from customers, which are both included in "regulatory assets, net" as "deferred energy supply costs" on the Consolidated Balance Sheets.

     Information about regulatory assets and liabilities arising from the financial effects of rate regulation is discussed under "Accounting for the Effects of Certain Types of Regulation," shown below.

Revenue Recognition

     "Electric" revenues primarily include revenues from the supply and delivery of electricity to the customers of ACE and DPL and revenues from electricity trading activities and strategic generation of CEH, which is the sale of electricity, capacity, and ancillary services from deregulated electric generating plants.

     "Gas" revenues primarily include revenues from the trading of natural gas and the supply and delivery of natural gas to customers of DPL.

     "Other services" revenues are provided primarily by Conectiv's non-utility subsidiaries and, to a lesser extent, by ACE and DPL. The principal businesses included in revenues from "Other services" are as follows: sales of petroleum products; coal trading; operation of third parties' power plants; leveraged leases; construction and operation of district heating and cooling systems; heating, ventilation, and air conditioning (HVAC) construction and services and investment in leveraged leases. As discussed in Note 7 to the Consolidated Financial Statements, Conectiv sold its HVAC businesses and portions of its district heating and cooling systems business during 2000. As discussed in Note 10 to the Consolidated Financial Statements, Conectiv sold its leveraged lease portfolio during 2002.

     ACE and DPL recognize revenues for the supply and delivery of electricity and gas upon delivery to the customer, including amounts for services rendered, but not yet billed. CEH recognizes revenue when delivery is substantially complete for non-trading activities, and on a marked-to-market basis for trading activities. Similarly, revenues from "Other services" are recognized when services are performed or products are delivered.

Accounting for the Effects of Certain Types of Regulation

     The electric delivery businesses of ACE and DPL and the retail gas business of DPL are subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). Also, ACE recovers through customer rates the costs it incurs in providing BGS, which entails supplying electricity to customers in ACE's service area who do not choose an alternative supplier. When utility revenues are insufficient to recover current period expenses from customers, regulatory commissions may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created du e to the economic impact of an action taken by a regulatory commission.

     The components of Conectiv's regulatory asset balances are displayed below:

	December 31,     2002	December 31,     2001
	(Millions of Dollars)
Recoverable stranded costs	$  920.8	$  944.5
Deferred energy supply costs	136.2	128.8
Deferred recoverable income taxes	74.9	76.7
Regulatory liability for New Jersey income tax benefit	(51.2)	(49.3)
Deferred debt extinguishment costs	29.5	31.3
Deferred other postretirement benefit costs	25.0	27.5
Unrecovered purchased power costs	10.5	12.5
Asbestos removal costs	7.5	7.7
COPCO deferred purchase power costs	14.6	17.5
Other	23.6	21.2
Net Regulatory Assets	$1,191.4	$1,218.4

     Recoverable Stranded Costs: The pre-tax balances of $920.8 million as of December 31, 2002 and $944.5 million as of December 31, 2001 arose from the $228.5 million NUG contract termination payment in December 1999, as discussed in Note 12 to the Consolidated Financial Statements, and discontinuing the application of SFAS No. 71 to the electricity generation business in third quarter of 1999, as discussed in Notes 3 and 11 to the Consolidated Financial Statements. The regulatory asset, "recoverable stranded costs," was established in the third quarter of 1999 to recognize amounts to be collected from regulated delivery customers for stranded costs that resulted from deregulation of the electricity generation businesses of ACE and DPL. Due to the terms of the 1999 restructuring orders, $918.5 million of the balance as of December 31, 2002 is for pre-tax stranded costs of ACE, which are subject to the jurisdiction of the NJBPU, and the remaining $2.3 million is for pre-tax stranded costs of DPL related to orders in Delaware and Maryland. DPL's pre-tax stranded costs are being amortized over a three-year period for each respective jurisdiction.

     Deferred Energy Supply Costs: See discussion under "Regulation of Utility Operations," shown above. This line also includes deferred electric service costs; see "Basic Generation Service" in Note 11 to the Consolidated Financial Statements for further discussion, as well as the discussion of merger costs included in operating results in Note 2 to the Consolidated Financial Statements.

     Deferred Recoverable Income Taxes: Represents the portion of deferred income tax liabilities applicable to utility operations of ACE and DPL that has not been reflected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized.

     Regulatory Liability for New Jersey Income Tax Benefit: In 1999, a deferred tax asset arising from the write down of ACE's electric generating plants was established. The deferred tax asset represents the future tax benefit expected to be realized when the higher tax basis of the generating plants is deducted for New Jersey state income tax purposes. To recognize the probability that this tax benefit will be given to ACE's regulated electricity delivery customers through lower electric rates, ACE established a regulatory liability.

     Deferred Debt Extinguishment Costs: The costs of debt extinguishment for which recovery through regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.

     Deferred Other Postretirement Benefit Costs: Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period that began on January 1, 1998.

     Unrecovered Purchased Power Costs: Includes costs incurred by ACE for renegotiation of a long-term capacity and energy contract. These costs are included in current customer rates with the balance scheduled for full recovery over the next 12 years.

     Asbestos Removal Costs: Represents costs incurred by ACE to remove asbestos insulation from a wholly owned electric generating station. These costs are included in current customer rates with the balance scheduled for full recovery over the next 27 years.

     COPCO Deferred Purchase Power Costs: Represents recovery of COPCO's deferred regulatory asset relating to an approved rate phase-in prior to DPL's acquisition of COPCO. This asset was approved by Maryland for recovery subsequent to the DPL acquisition of COPCO.

Energy Trading and Hedging Activities

     Through December 31, 2002, Conectiv actively participated in the wholesale energy markets and engaged in trading and hedging activities. Energy contracts, including derivative instruments, entered into in connection with energy trading activities were marked to market, with gains and losses (unrealized and realized) included in earnings.

     In 2002, a pronouncement was issued by the Emerging Issues Task Force entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenues and expenses associated with "energy trading book" contracts on a gross versus net basis. Previously, the EITF concluded that presentation on a gross basis was acceptable and Conectiv presented the revenues and expenses of its energy trading business on that basis in its public financial disclosures. Effective for the third quarter of 2002, based on EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, energy trading revenues and expenses are required to be presented on a net basis for all reporting periods. As a result, energy trading revenues and expenses previously reported on a gross basis have been reclassified to a net presentation, as shown in the table below. The reclassification had no effect on operating income and net income.

	Year Ended December 31, 2001	Year Ended December 31, 2000
	(Dollars in Millions)
Operating revenues,   as previously reported	$5,790.0	$4,987.7
Reclassification	(1,828.7)	(1,350.3)
Operating revenues,   as reclassified	$3,961.3	$3,637.4
Operating expenses,   as previously reported	$5,030.8	$4,448.5
Reclassification	(1,828.7)	(1,350.3)
Operating expenses,   as reclassified	$3,202.1	$3,098.2

     On October 25, 2002, the EITF rescinded Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Conectiv's derivatives are accounted for in accordance with SFAS No. 133. Management does not believe that rescinding EITF 98-10 will impact its financial position or results of operations.

     Conectiv's commodity hedging activities are intended to minimize the risk of market price fluctuations associated with the purchase and sale of energy commodities (natural gas, petroleum, electricity, and other energy commodities). Some of Conectiv's hedging activities are conducted using derivative instruments (futures, options, swap agreements, and forward contracts) designated as "cash flow hedges," which are designed to hedge the variability in cash flows of forecasted transactions. The remainder of Conectiv's hedging activity is conducted by backing physical transactions with offsetting physical positions. During 2002, Conectiv did not hold any derivative instruments designated as "fair value hedges," which include hedges of exposure to changes in the fair value of unrecognized firm commitments.

     Conectiv's energy commodity hedging objectives, in accordance with its risk management policy, are primarily the assurance of stable and known cash flows and the fixing of favorable prices and margins when they become available. These hedging objectives generally apply to all of Conectiv's energy commodity hedging activities, including hedging activities conducted through derivative instruments designated as cash flow hedges and physical transactions. Some derivative instruments are held by Conectiv for trading purposes with the intention of enhancing earnings.

     Conectiv implemented the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 2001. SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholder's equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. If a forecasted transaction is no longer probable, the deferred gain or loss in accumulated other comprehensive income is immediately reclassified to earnings. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately.

     During 2000, realized gains and losses related to derivative hedging instruments were deferred, as deferred credits or current assets, and then recognized in operating results when the underlying transaction occurred. If, subsequent to being hedged, the underlying transaction was no longer likely to occur or the hedge was no longer effective, the gain or loss on the related derivative was recognized in operating results.

     Gains and losses on hedges of the cost of energy that are included in the Consolidated Statements of Income are classified as "Electric fuel and purchased energy and capacity" or "Gas purchased," as appropriate for the hedged transaction. Gains and losses on hedges of the selling price of generated electricity are recognized in revenues. Margin requirements for futures contracts are recorded as current assets.

     The cash flows from derivatives are included in the "Cash Flows From Operating Activities" section of the Consolidated Statements of Cash Flows.

     For additional information concerning energy trading and risk management activities, refer to Note 13 to the Consolidated Financial Statements.

Accounting for Marketable Securities

     Conectiv holds marketable equity securities which are included in Other Investments in the Consolidated Balance Sheets. The marketable equity securities held as of December 31, 2002 and 2001 were classified as "available-for-sale securities" under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and are reported in other comprehensive income. However, if a decline in fair value of an available-for-sale security is determined to be other than temporary, then the cost basis of the security is written down to fair value and the decline in fair value is included in earnings. When an available-for-sale security is sold, any previously unrealized gain or loss is reclassified from accumulated other comprehensive income into earnings.

Goodwill

     Effective January 1, 2002, Conectiv implemented SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," is no longer amortized. The portion of goodwill included in regulated utility rates ($14.6 million as of December 31, 2002 and $17.5 million as of December 31, 2001) has been reclassified from goodwill to "other non-current regulatory assets" and continues to be amortized as a regulatory asset. Conectiv's goodwill balance of $313.1 million as of December 31, 2002 and December 31, 2001 is associated with the Power Delivery business segment, as defined in Note 25 to the Consolidated Financial Statements included herein. Conectiv has completed the test for impairment of goodwill in accordance with the implementation requirements of SFAS No. 142. The test resulted in no impairment of goodwill, as of January 1, 2002, because the fair value of the Power Delivery business segment exceeded its book value carrying amount, including goodwill.

     The following table reconciles reported net income to amounts adjusted to exclude the amortization of goodwill, after income taxes.

	Year Ended     December 31,2001	Year Ended    December 31, 2000
	(Dollars in Millions)
Reported net income	$248.2	$170.8
Add back: Goodwill amortization	8.1	8.9
Adjusted net income	$256.3	$179.7

Cash and Cash Equivalents

     Cash and cash equivalents include cash on hand, money market funds, and commercial paper with original maturities of three months or less. Cash and cash equivalents includes cash of $16.3 million in 2002 that is restricted for costs incurred on the Conectiv Bethlehem LLC (CB) construction project.

Property, Plant and Equipment

At December 31, 2002	Original   Cost	Accumulated Depreciation	Net    Book Value
	(Millions of Dollars)
Generation	1,659.0	666.2	992.8
Distribution	2,060.3	799.6	1,260.7
Transmission	880.4	358.0	522.4
Gas	304.4	107.8	196.6
General	215.5	21.8	193.7
Construction work in progress	690.0	-	690.0
Nonoperating and other property	185.8	72.4	113.4
Total	5,995.4	2,025.8	3,969.6
At December 31, 2001
Generation	1,188.4	484.7	703.7
Distribution	1,914.6	739.2	1,175.4
Transmission	847.0	351.2	495.8
Gas	285.0	97.0	188.0
General	224.8	20.1	204.7
Construction work in progress	582.2	-	582.2
Nonoperating and other property	261.5	92.0	169.5
Total	5,303.5	1,784.2	3,519.3

     Electric generating plants that became impaired as a result of restructuring of the electric utility industry in 1999 are stated at the estimated fair value of the plants at the time of restructuring, based on amounts included in agreements for the sales of the plants. All other property, plant and equipment is stated at original cost.

     Utility plant is generally subject to a first mortgage lien.

     Conectiv's Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. Conectiv's subsidiaries have ownership interests in electric generating plants, transmission facilities, and other facilities in which other parties have ownership interests. Conectiv's proportionate shares of operating and maintenance expenses of the jointly owned plant are included in the corresponding expenses in Conectiv's Consolidated Statements of Income. Conectiv is responsible for providing its share of financing for the jointly owned facilities. Conectiv's jointly owned plant is shown in the table below.

Jointly Owned Plant	Ownership Share	Megawatt Capability Owned	Plant in Service	Accumulated Depreciation	Construction Work in Progress
			(Dollars in Millions)
Coal-Fired Electric Generating Plants
Keystone	2.47%	42	$14.6	$ 5.1	$3.8
Conemaugh	3.83%	65	37.0	11.9	0.5
Transmission Facilities	Various		29.5	15.3	-
Other Facilities	Various		3.0	1.0	-
Total			$84.1	$33.3	$4.3

Depreciation Expense

     The annual provision for depreciation on electric and gas property, plant, and equipment is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, including removal costs less salvage and other recoveries. The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.1% for 2002, 3.2% for 2001, and 3.4% for 2000.

     Property, plant and equipment other than electric and gas facilities is generally depreciated on a straight-line basis over the useful lives of the assets.

Capitalized Interest and Allowance for Funds Used During Construction

     The cost of financing the construction of electric generating plants is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost" (SFAS No. 34). Other non-utility construction projects also include financing costs in accordance with SFAS No. 34. Interest costs were capitalized on these projects at the rates of 2.5% during 2002, 5.3% during 2001, and 6.8% during 2000.

     Allowance for Funds Used During Construction (AFUDC) is included in the cost of regulated transmission and distribution utility plant and represents the cost of borrowed and equity funds used to finance construction. In the Consolidated Statements of Income, both the borrowed funds component and equity funds component of AFUDC is reported as a reduction of interest expense. AFUDC was capitalized on utility plant construction at the rates of 8.4% in 2002, 8.4% in 2001, and 8.4% in 2000.

Interest Expense

     The amortization of debt discount, premium, and expense, including deferred debt extinguishment costs, is included in interest expense.

Income Taxes

     Conectiv, as a subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to Conectiv and each of its subsidiaries based upon the taxable income or loss, determined on a separate return basis.

     The Consolidated Financial Statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on Conectiv's state income tax returns and the amount of federal income tax allocated from PHI. Deferred income taxes are discussed below.

     Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of Conectiv's deferred tax liability applicable to the utility operations of ACE and DPL that has not been recovered from utility customers represents income taxes recoverable in the future (deferred recoverable income taxes) and is included in "regulatory assets, net" on the Consolidated Balance Sheets. For additional information, see the discussion under "Accounting for the Effects of Certain Types of Regulation," shown above.

     Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

     Investment tax credits from utility plant purchased in prior years are reported on the Consolidated Balance Sheets as "Deferred investment tax credits." These investment tax credits are being amortized to income over the useful lives of the related utility plant.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (first quarter 2003 financial statements for the Company). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. Conectiv has completed its assessment of the provisions of SFAS No. 143. The implementation of the Statement will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in Conectiv's Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, which amends FASB Statement No. 123, Accounting for Stock-Based Compensation," which is effective for interim periods ending after December 15, 2002 (the Company's first quarter 2003 financial statements). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 "Accounting for Stock Based Compensation" to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Conectiv is in the process of assessing the provisions of SFAS 148 in order to determine its impact on the Company's financial position and results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002 (the Company's first quarter 2003 financial statements). The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made an initial assessment of the provisions of FIN 45 in order to determine its impact on the Company's financial position, results of operations and disclosure requirements. Based on this initial assessment, the Company does not believe the implementation of the Interpretation will have a material impact on the Company's financial position or results of operation.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Conectiv has made an initial assessment of the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations. Based on this initial assessment, the Company does not believe the implementation of the Interpretation will have a material impact on the Company's financial position or results of operation.

(4)  SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year
	2002	2001	2000
	(Dollars in Millions)
Interest, net of capitalized amounts of   $19.8 million, $17.9 million, and $11.8   million for 2002, 2001, and 2000,   respectively	$132.2	$176.9	$200.7
Income taxes, net of refunds	$  9.9	$140.5	$ 10.1

     During 2000, Conectiv received $118 million of income tax refunds. Approximately $91 million of the income tax refunds received in 2000 were related to the tax benefit associated with ACE's payment of $228.5 million on December 28, 1999 to terminate ACE's purchase of electricity under a contract with the Pedricktown Co-generation Limited Partnership (Pedricktown). For additional information concerning the Pedricktown contract termination, see Note 12 to the Consolidated Financial Statements.

Non-cash Investing and Financing Activities Excluded From the Consolidated Statements of Cash Flows

     See Note 2 to the Consolidated Financial Statements for information concerning (i) Conectiv's contribution of CRP to PHI, and (ii) the cancellation of Conectiv's common stock and Class A common stock.

     During the first half of 2002, Conectiv received a distribution from the EnerTech funds (which are discussed in Note 10 to the Consolidated Financial Statements) of marketable equity securities, which had a fair value of approximately $0.9 million at the time of distribution. During the first quarter of 2001, Conectiv received a distribution from the EnerTech funds of marketable equity securities, which had a fair value of approximately $29.8 million at the time of distribution.

     The Consolidated Statements of Cash Flows for 2001 and 2000 exclude the assumption of former nuclear decommissioning liabilities of ACE and DPL, respectively, by the purchasers of the ownership interests of ACE and DPL in nuclear electric generating plants and also exclude the transfer of nuclear decommissioning trust funds to the purchasers. The nuclear decommissioning trust funds that were transferred in 2001 and 2000 had fair values of approximately $115.8 million and $68.0 million, respectively. For information about the sale of the ownership interests of ACE and DPL in nuclear electric generating plants, refer to Note 14 to the Consolidated Financial Statements.

     As discussed in Note 6 to the Consolidated Financial Statements, Conectiv sold substantially all of the telecommunication business assets of Conectiv Communications, Inc. (CCI) to Cavalier Telephone, L.L.C. (Cavalier) on November 14, 2001. The consideration for the assets sold included $4.0 million of cash, a $10.0 million note from Cavalier, and future services to be provided by Cavalier valued at $9.0 million. Only the cash consideration is included in the Consolidated Statements of Cash Flows.

(5)  INCOME TAXES

     Conectiv, as a subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to Conectiv and each of its subsidiaries based upon the taxable income or loss, determined on a separate return basis.

     The provision for income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

Components of Consolidated Income Tax Expense
		2002	2001	2000
		(Dollars in Millions)
Operations
Federal:	Current	$(13.2)	$ 79.8	$ 25.7
	Deferred	61.4	119.6	99.2
State:	Current	18.2	43.2	21.0
	Deferred	7.4	23.8	15.5
Investment tax credit adjustments, net (1)		(3.3)	(14.8)	(10.1)
		70.6	251.6	151.3
Discontinued Telecommunication Operations
Federal:	Current	-	(6.4)	(17.3)
	Deferred	-	(59.8)	8.9
State:	Current	-	-	-
	Deferred	-	3.6	(9.4)
		-	(62.6)	(17.8)
Total Income Tax Expense		$ 70.6	$189.0	$133.5
Deferred federal and state income taxes   included in other comprehensive income		$ 46.6	$(44.3)	$ (1.1)

(1)  Includes credits of $10.4 million in 2001 and $4.4 million in 2000 which resulted from reversal of deferred investment tax credits in connection with sale of the ownership interests in electric generating plants, as discussed in Note 14 to the Consolidated Financial Statements.

Reconciliation of Effective Income Tax Rate

	For the Year Ended December 31,
	2002		2001		2000
	Amount	Rate	Amount	Rate	Amount	Rate
	(Amounts in Millions)
Statutory federal   income tax expense	$56.5	35%	$220.9	35%	$124.3	35%
State income taxes,   net of federal   benefit	16.6	11	43.8	7	17.6	5
Depreciation	2.0	1	4.3	1	4.7	2
Non-deductible goodwill	-	-	2.5	-	7.3	2
Investment tax credit   amortization	(3.3)	(2)	(14.8)	(2)	(10.1)	(3)
Resolution of income   tax matters*	-	-	(12.8)	(5)	-	-
Other, net	(1.3)	(1)	9.6	4	7.5	2
Income tax expense on   continuing   operations	$70.6	44%	$253.5	40%	$151.3	43%

     * Reflects changes in estimates of previously accrued income taxes due to resolution of uncertainties.

     State income taxes are higher than statutory rates due to required valuation allowances against deferred tax assets for net operating losses being carried forward into future tax years.

Components of Deferred Income Taxes

     The tax effects of temporary differences that give rise to Conectiv's net deferred tax liability are shown below. There were no valuation allowances for deferred tax assets as of December 31, 2002 and 2001.

	As of December 31
	2002	2001
	(Dollars in millions)
Deferred Tax Liabilities
Plant basis differences	$ 831.4	$ 745.1
Leveraged leases	-	57.2
Deferred recoverable income taxes	40.5	41.2
Termination of purchased energy contract	97.0	96.8
Prepaid pension costs	47.5	40.8
Deferred fuel and BGS expenses	80.6	56.4
Investments in partnerships	25.6	27.0
Deferred debt extinguishment costs	10.2	10.9
Other	60.4	53.5
Total deferred tax liabilities	1,193.2	1,128.9
Deferred Tax Assets
Deferred investment tax credits	21.5	17.8
Electric restructuring liabilities	72.4	55.6
Other postretirement benefits obligation	22.9	23.5
Accumulated other comprehensive income	-	45.4
Unrealized losses due to fair value declines	13.0	12.4
Allowance for uncollectible accounts	13.6	14.2
Disposal of telecommunications business	14.9	15.1
Other	94.1	100.2
Total deferred tax assets	252.4	284.2
Total net deferred tax liability	$940.8	$844.7

(6)  DISCONTINUED TELECOMMUNICATION OPERATIONS

     On June 4, 2001, Conectiv reached an agreement to sell substantially all of the telecommunication business assets of CCI to Cavalier. On November 14, 2001, the sale was completed. The consideration for the assets sold included $4.0 million of cash, a $10.0 million note from Cavalier, and future services to be provided by Cavalier valued at $9.0 million. An amendment to the agreement dated June 4, 2001, provided for Conectiv to accept a $10.0 million note from Cavalier instead of cash.

     CCI's telecommunication business was previously reported as the Telecommunication business segment in Conectiv's Notes to Consolidated Financial Statements and the MD&A. Due to the sale of the telecommunication assets, the operating results for CCI's telecommunication business, including previously reported periods, are classified in Conectiv's Consolidated Statements of Income as "Discontinued Telecommunication Operations." No interest expense has been allocated to discontinued operations. In 2001, Conectiv realized a loss on the disposal of the telecommunication business segment of $177.2 millionbefore taxes ($118.7 million loss after taxes). The $118.7 million disposal loss after taxes includes $7.4 million after taxes for operating losses from June 4, 2001 to November 14, 2001, which had been estimated at $13.7 million after taxes in the second quarter of 2001.

     For 2000, the operating result of the Discontinued Telecommunication Operations was a $50.7 million pre-tax loss ($33.0 million loss after taxes).

     Revenues from the discontinued telecommunication operations were $45.6 million in 2001 and $50.5 million in 2000. Conectiv's Consolidated Balance Sheet as of December 31, 2000 included $21.0 million of current assets, $154.9 million of property, plant and equipment, and $9.3 million of current liabilities for assets and liabilities associated with the discontinued telecommunication business segment.

(7)  SPECIAL CHARGES

     "Special charges" recorded in the second quarter of 2000 of $25.2 million before income taxes, or $23.4 million after income taxes, resulted from losses on the sale of Conectiv Services, Inc. (CSI) and portions of Conectiv Thermal Systems, Inc. (CTS). CSI provided HVAC services and its results of operations are presented as the HVAC business segment in Note 25 to the Consolidated Financial Statements. CTS constructs and operates district heating and cooling systems and its results of operations are included in the Energy business segment in Note 25 to the Consolidated Financial Statements included herein. Proceeds of $56 million were received from the sales of these operations, which had total assets of $79 million at the time of sale.

(8)  IMPAIRMENT LOSSES

     As a result of Conectiv's decision to sell an office building during 2002, Conectiv was required to test the building's carrying value for impairment and the test showed that Conectiv's carrying value for the office building was impaired as of September 30, 2002. Accordingly, a $4.0 million before-tax impairment charge ($2.4 million after-tax) was recorded in the third quarter of 2002. Conectiv's assessment of the carrying value of the office building was based on offers received from potential purchasers of the building. The sale of the office building was completed in December 2002.

     In connection with Conectiv's second competitive bidding process for the sale of ACE's fossil fuel-fired electric generating plants, an impairment of the carrying value of ACE's Deepwater power plant was identified. Accordingly, a $9.5 million before-tax impairment charge ($5.6 million after-tax) was recorded in December 2002. Conectiv's assessment of the carrying value of the Deepwater power plant was based on offers received from the competitive bidding process. In addition to the impairment charge on the Deepwater power plant, Conectiv recorded a $7 million before-tax charge ($4.1 million after-tax) to operating expenses for anticipated environmental clean-up costs at the Deepwater power plant. See Notes 14 and 24 to the Consolidated Financial Statements for additional information regarding the termination of the competitive bidding process and Conectiv's environmental matters.

(9)  RELATED PARTY PURCHASES AND SALES

     Conectiv's operating expenses and revenues include amounts for transactions with other PHI subsidiaries. Conectiv Energy Supply, Inc. (CESI), an indirect subsidiary of Conectiv, purchased electric capacity and natural gas from PHI subsidiaries in the amount of $1.1 million for 2002. Conectiv subsidiaries also sold electric energy, electric capacity and natural gas and leased certain assets to other PHI subsidiaries. Amounts included in operating revenues for these transactions include $11.8 million for 2002.

(10) INVESTMENTS

     On July 3, 2002, Conectiv sold its leveraged lease portfolio of three aircraft and two containerships, which had a carrying value of $44.6 million, before an impairment reserve associated with the sale. The assets were sold for net book value. In consideration for the assets sold, Conectiv received cash of $24.4 million and a note, which had an estimated fair value of $3.0 million. As a result of the sale, operating results for 2002 include a loss of $19.7 million before taxes, or $11.2 million after-taxes.

     An indirect Conectiv subsidiary holds a limited partner interest in EnerTech Capital Partners, L.P. and EnerTech Capital Partners II, L.P. (the EnerTech funds). The EnerTech funds are venture capital funds that invest in technology and service companies related to energy, utility, and communication industries. The EnerTech funds record their investments at fair value and include gains and losses on changes in the fair value of their investments in income. Conectiv's subsidiary accounts for its investment in the EnerTech funds on the equity method of accounting.

     In addition to investments in the EnerTech funds, Conectiv also has investments in other venture capital funds and marketable equity securities, including securities distributed to Conectiv by the various venture capital funds. Investments associated with the EnerTech funds, other venture capital funds, and marketable securities resulted in a loss of $8.4 million after-taxes in 2002, a loss of $7.9 million after-taxes in 2001, and earnings of $11.1 million after taxes in 2000. Due to the nature of Conectiv's investments and equity markets, Conectiv's investment earnings may be volatile from period to period.

     As of December 31, 2002, the carrying amounts of Conectiv's investments in marketable equity securities and the EnerTech funds were $1.2 million and $8.8 million, respectively. As of December 31, 2001, the carrying amounts of Conectiv's investments in marketable equity securities and the EnerTech funds were $5.1 million and $14.3 million, respectively. Unrealized net holding losses on marketable equity securities of $0.2 million and $0.8 million after taxes were included in accumulated other comprehensive income as of December 31, 2002 and December 31, 2001, respectively. During 2002, $0.2 million after taxes was charged to other comprehensive income for unrealized net holding losses on marketable equity securities and unrealized net holding losses on marketable securities of $0.8 million after taxes were reclassified into earnings (and credited to other comprehensive income), due to impairments considered to be other-than-temporary. During 2001, $12.7 million after taxes was charged to other comprehensive income for unrealized net holding losses on marketable equity securities and unrealized net holding losses on marketable securities of $13.9 million after taxes were reclassified into earnings (and credited to other comprehensive income), due to impairments considered to be other-than-temporary.

(11) REGULATORY MATTERS

New Jersey

Restructuring

     On February 9, 1999, New Jersey enacted the Electric Discount and Energy Competition Act (the New Jersey Act). The New Jersey Act provided for restructuring of the electric utility industry in New Jersey and established that customers of New Jersey electric utilities could choose alternative electricity suppliers beginning August 1, 1999. Restructuring the New Jersey electric utility industry resulted in "stranded costs," which include the portion of electric generating plants, other assets, and long-term contracts that became uneconomic as a result of the restructuring. Pursuant to the New Jersey Act, on July 15, 1999, the NJBPU issued a Summary Order to ACE concerning stranded costs, unbundled rates, and other matters related to restructuring. In mid-May 2001, the NJBPU issued a Final Decision and Order, which had substantially the same provisions as the Summary Order. The NJBPU determined that ACE will have the opportunity to recover 10 0% of the net stranded costs related to certain generation units and the stranded costs associated with power purchased from non-utility generators (NUGs), subject to further NJBPU proceedings. See the section "Securitization" below for additional information.

Rate Changes

     As part of the New Jersey Act, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999, an additional 2% rate reduction by January 1, 2001, and a final 3% rate reduction by August 1, 2002. Thus, by August 1, 2002, rates were reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual revenues by approximately $50 million. The additional 2%, or $20 million, rate reduction required by January 1, 2001 was implemented through two separate 1%, or $10 million, rate reductions effective January 1, 2000 and 2001, respectively. The final rate reduction, which was effective August 1, 2002, reduced revenues by an additional $30 million, resulting in a cumulative rate reduction of $100 million since August 1, 1999.

     On February 3, 2003, ACE filed a petition with the NJBPU to increase its electric distribution rates and the Regulatory Asset Recovery Charge in New Jersey. The rate increase equates to an increase in average, total electricity rates of 6.9% overall, and will increase ACE's annual revenues by approximately $68.4 million. The petition was filed in accordance with the NJBPU's Final Order in restructuring, which mandated that ACE file a plan to set rates that will be in place when the New Jersey Act's transition period ends July 31, 2003.

Securitization

     Under the New Jersey Act, up to 100% of recovery-eligible stranded costs related to electric generating plants and the costs to effect buyouts or buydowns of NUG contracts may be recovered through customer rates. On September 9, 2002, New Jersey enacted an amendment (Amendment) to the New Jersey Act. The Amendment permits the NJBPU to authorize the securitization of deferred balances of electric public utilities resulting from the provisions of the New Jersey Act. The NJBPU may authorize the issuance of transition bonds by an electric public utility or other financing entity in order to (i) recover stranded costs deemed eligible for rate recovery in a stranded cost recovery order; (ii) recover rate reduction requirements determined by the NJBPU to be necessary under the provisions of the New Jersey Act; or (iii) recover basic generation service transition costs. The NJBPU may approve transition bonds with scheduled amortization of up to fif teen years if related to stranded cost recoveries or recoveries of basic generation service transition costs, or the remaining term of a purchase power agreement if related to the buyout or buydown of long-term purchase power contracts with NUGs.

     On September 20, 2002, the NJBPU issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. The Financing Order also authorized (i) the collection from ACE's customers of a non-bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (ii) the collection from ACE's customers of a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iii) the sale of "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. ACE, through a wholly owned subsidiary described below, issued Transition Bonds totaling $440 million on December 19, 2002, in accordance with this Financing Order. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buy down of the American Ref-Fuel NUG contract. Also included in the amount authorized was $20 million of transaction costs and capital reduction costs. See Note 12 to the Consolidated Financial Statements for additional information regarding the Pedricktown NUG contract buyout.

     ACE formed ACE Transition Funding, LLC (ACE Transition Funding) during 2001 for the sole purpose of purchasing and owning the bondable transition property (BTP), issuing transition bonds (Bonds), pledging ACE Transition Funding's interest in BTP and other collateral to the bond trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Proceeds from the sale of Bonds were transferred to ACE in consideration for the BTP, and ACE will repurchase debt and/or equity related to the stranded costs and NUG contracts noted above. The Bonds of ACE Transition Funding are included in Conectiv's Consolidated Balance Sheet.

     On January 31, 2003, ACE filed a petition seeking from the NJBPU an administrative valuation of a portion of the B.L. England Station stranded costs and a finding that such costs may be included as part of the principal amount of transition bonds for which ACE may seek approval under the New Jersey Act. Management anticipates that the necessary approvals will be received from the NJBPU and that a bondable stranded costs rate petition will ultimately be approved, leading to the issuance of additional transition bonds.

Basic Generation Service

     Under the provisions of New Jersey's 1999 Electric Discount and Energy Competition Act (the New Jersey Act) and the NJBPU's Final Decision and Order concerning restructuring ACE's electric utility business, ACE was obligated to provide Basic Generation Service (BGS) through July 31, 2002, which entails supplying electricity to customers in ACE's service area who do not choose an alternative supplier. The Final Decision and Order provides for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from NUGs, and the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACE's customers for BGS, the under-recovered costs are def erred as a regulatory asset. ACE deferred costs related to providing BGS in the amounts of $71.3 million for 2002, $143.2 million for 2001, and $7.5 million for 2000. Pursuant to the terms of the 1999 restructuring of ACE's electric generation business, during 2000-2002, the under-recovered costs were first applied to a deferred energy cost liability which was eliminated and then a regulatory asset was established ($153.0 million as of December 31, 2002). After the initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the under-recovered cost balance over a reasonable period of time to be determined by the NJBPU. ACE's recovery of the deferred costs is subject to review by the NJBPU.

     On August 1, 2002, in accordance with the provisions of the New Jersey Act and the NJBPU's Final Decision and Order, ACE petitioned the NJBPU for a $71.6 million, or 8.4%, annualized increase in electric rates, effective August 1, 2003. This proposed rate increase is intended to recover ACE's deferred cost balance as of August 1, 2003 over a four-year period and reset ACE's rates such that an under-recovery of certain costs is no longer embedded in rates. ACE's recovery of the deferred costs is subject to review by the NJBPU, which will determine the amount of cost recovery in accordance with the New Jersey Act.

     BGS electricity supply beyond July 31, 2002 was provided for by a BGS auction held in February 2002, which awarded about 1,900 MW, or 80% of ACE's BGS load to four suppliers for the period from August 1, 2002 to July 31, 2003. The remaining 20% of ACE's BGS load is supplied utilizing ACE's electric supply, consisting of its fossil fuel-fired electric generating plants (excluding Deepwater), which are used first to meet such BGS load, and its NUG contracts, to the extent such electric generating plants are not sufficient to satisfy such load.

     Any portion of ACE's electric supply that exceeds the load requirement of the BGS customers is sold in the wholesale market. In addition, if any of the four suppliers awarded 80% of ACE's BGS load default on performance, ACE will offer the defaulted load to the other winning bidders. If they are not interested, ACE will then procure the needed supply from the wholesale market. Any costs related to this new supply that are not covered by remuneration from the supplier in default will be included in the calculation of deferred electric service costs, which are subject to NJBPU review and future recovery in customer rate increases.

     By Decision and Order dated December 18, 2002, the NJBPU approved the process for the procurement of BGS supply for the period starting August 1, 2003. The decision included holding two separate but simultaneous auctions to procure BGS supply. The first auction will be for the supply needed to serve large commercial and industrial customers who will be paying an hourly energy price. There are approximately 50 customers in this group for ACE. The auction will determine the capacity price to be paid by these customers. The period covered by this auction is August 1, 2003 through May 31, 2004. The second auction will be for the supply needs of the remainder of the BGS customers, and would be for full requirement service (energy, capacity, transmission, and ancillary services) for these customers. In this auction, two thirds of the needs will be procured for the same period as the first auction, while the remaining one third of the needs wil l be procured for a period of 34 months. The results of these auctions will be used to set the rates paid by the customers in each group. The decision also established working groups to deal with metering issues and customer education. The auctions were conducted February 3^rd and 4^th, 2003. The NJBPU approved the results of the auctions on February 5, 2003. ACE has entered into BGS Supplier Agreements with the winning bidders. If any of the winning bidders were to default on their commitments, ACE will offer the defaulted load to other winning bidders, or will make arrangements to purchase the needed supply from PJM-administered markets.

Delaware

     In August 1999, the DPSC issued an order that approved DPL's plan for complying with the Electric Utility Restructuring Act of 1999 (Delaware Act), which restructured the electric utility industry in Delaware. In connection with the restructuring, all retail electric customers of DPL obtained the option to choose an alternative electricity supplier by October 2000. The Delaware Act requires DPL to be the provider of default service to customers who do not choose an alternative electricity supplier for the 3 years ending September 30, 2002 for non-residential customers and the 4 years ending September 30, 2003 for residential customers. Effective October 1, 1999, the restructuring resulted in a 7.5% decrease in DPL's Delaware residential electric rates, which reduced revenues $17.5 million on an annual basis. In addition, DPL agreed to keep residential and non-residential rates at their October 1, 1999 levels until September 30, 2003 and Sep tember 30, 2002, respectively.

     Under the terms of an order issued April 16, 2002 by the DPSC in Docket No. 01-194 approving the Conectiv/Pepco Merger, retail electric rates increased by approximately $4.4 million, or 0.9%, on an annualized basis, effective October 1, 2003. In general, retail electric rates in effect on October 1, 2003 are to remain unchanged through May 1, 2006, although the order provides some mechanisms for rate changes in special circumstances. The order also provides that DPL would continue providing default electricity supply service to customers until May 1, 2006.

Maryland

     In October 1999, the MPSC issued an order that approved a settlement agreement for implementing the provisions of the Electric Customer Choice and Competition Act of 1999 (the Maryland Act), which restructured the electric utility industry in Maryland. In connection with the restructuring, all of DPL's Maryland retail customers could elect to choose an alternative electricity supplier beginning July 1, 2000. The settlement agreement provided for DPL to be the default service supplier to customers who do not choose an alternative electricity supplier during the 3 years ending July 1, 2003 for non-residential customers and the 4 years ending July 1, 2004 for residential customers. On November 22, 2002, the MPSC issued an order approving a settlement with DPL to extend its obligation to provide default service (also known as standard offer service, or SOS) to non-residential customers through July 1, 2004. Effective July 1, 2000, the restructu ring also resulted in a 7.5% decrease in DPL's Maryland residential electric rates, which reduced revenues $12.5 million on an annual basis. In addition, DPL agreed to keep residential and non-residential rates at their July 1, 2000 levels until June 30, 2004 and June 30, 2003, respectively.

     Under the terms of an order issued April 11, 2002 by the MPSC approving the Conectiv/Pepco Merger, retail electric rates for electricity distribution are to be capped (not permitted to increase) through December 31, 2006 and DPL is to file certain information with the MPSC by December 1, 2003 in order to determine if a rate decrease is warranted. Also, delivery rates for non-residential customers will be decreased by approximately $5.6 million, effective July 1, 2003. The settlement agreement does not address electricity supply rates for periods on and after July 1, 2003 for non-residential customers or on and after July 1, 2004, for residential customers.

     DPL has entered into a settlement in Phase I of Maryland Case No. 8980 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The settlement provides for SOS to be procured from the wholesale marketplace and that DPL will be able to recover its costs of procurement and a return.

Virginia

     On December 21, 2001, the VSCC approved DPL's proposal to offer choice of electricity suppliers to all of its retail Virginia customers as of January 1, 2002.

(12) TERMINATION OF PURCHASED POWER CONTRACTS

     On November 8, 2002, Conectiv terminated its 500 MW long-term purchased power contract with NRG Energy, Inc. (NRG), which was entered into at the time of the Indian River Power Plant sale in 2001. The term of the purchased power contract was through December 2005. Included in Other Operation and Maintenance expense for 2002 is a $1.0 million payment made by Conectiv on November 13, 2002 to terminate the contract. See Note 14 to the Consolidated Financial Statements for additional information regarding the sale of electric generating plants in 2001.

     On November 10, 1999, the NJBPU issued a Decision and Order approving termination of a contract under which ACE had purchased energy and capacity from Pedricktown, a NUG partnership which was owned 50% by Conectiv subsidiaries prior to June 29, 2001. The NJBPU decided that ACE is entitled to recover from customers the contract termination payment of $228.5 million, transaction costs, and interim financing costs. The NJBPU also found that the contract termination payment and related transaction costs are eligible for long-term financing through the issuance of transition bonds. On December 28, 1999, ACE paid $228.5 million to terminate the contract. The contract termination payment and related costs are reflected as "recoverable stranded costs" as part of "Regulatory assets, net" on the Consolidated Balance Sheets. Effective January 1, 2000, ACE's customer rates were reduced by about 1% (approximately $10 million of revenues on an annualize d basis) as a result of the net savings from the contract termination. See Note 11 to the Consolidated Financial Statements for additional information regarding the issuance of transition bonds.

     On December 28, 1999, the Conectiv subsidiaries that owned 50% of the Pedricktown NUG partnership received an $82.2 million distribution from Pedricktown, primarily for the gain realized by Pedricktown from the contract termination. The Conectiv subsidiaries' share of the gain, $75.0 million as of December 31, 2000, was deferred on Conectiv's Consolidated Balance Sheet because ACE had not received the Final Decision and Order of the NJBPU concerning restructuring ACE's electric generation business.

     On June 29, 2001, the 50% interest owned by Conectiv's subsidiaries in Pedricktown was redeemed for approximately $9 million and Pedricktown became owned solely by entities not affiliated with Conectiv. Also, as a result of ACE receiving the Final Decision and Order of the NJBPU, the previously deferred pre-tax gain discussed above was recognized as "Other Income" in the second quarter of 2001. The redemption of Conectiv's subsidiaries' 50% interest in Pedricktown and recognition of the previously deferred gain resulted in a net pre-tax gain of $73.0 million ($41.4 million after income taxes) that is included in 2001 earnings.

(13) ENERGY HEDGING AND TRADING ACTIVITIES

Hedging

     See "Energy Hedging and Trading Activities" in Note 3 to the Consolidated Financial Statements for the accounting policies related to such activities. Effective January 1, 2001, Conectiv adopted SFAS No. 133 and the initial impact of adopting SFAS No. 133 was accounted for as a change in accounting principle.

     The cumulative effect of this accounting change resulted in a $3.4 million after-tax ($5.8 million before-tax) credit to other comprehensive income in 2001.

     The following table summarizes the after-tax 2002 activity in the portion of other comprehensive income arising from transactions related to derivative instruments designated as cash flow hedges:

	Millions   of Dollars
Accumulated other comprehensive income as of December 31, 2001     for energy commodity derivative instruments	$  (65.2)
Net unrealized hedging gains	34.4
Reclassifications to earnings because the forecasted energy     commodity transactions were no longer expected to occur     within the forecast period	-
Reclassification to earnings because the forecasted energy     commodity transaction occurred	38.9
Accumulated other comprehensive income as of December 31, 2002      for energy commodity derivative instruments *	8.1
* Primarily associated with natural gas used for electric generation

     During 2002, for derivative instruments designated as cash flow hedges and for the related hedged transaction, the net gain recognized in earnings for hedge ineffectiveness was $0.8 million before taxes ($0.5 million after taxes). These gains and losses are reported as operating revenues in the Consolidated Statement of Income. There were no net gains or losses recognized in earnings for the portion of the derivative instruments' gain excluded from the assessment of hedge effectiveness in 2002.

     During the twelve-month period ending December 31, 2003, a net gain of $9.9 million before taxes ($5.8 million after taxes) associated with energy commodity hedging is expected to be reclassified from accumulated other comprehensive income into earnings. As of December 31, 2002, the maximum length of time over which Conectiv was hedging the variability in future cash flows for forecasted energy commodity transactions was 36 months; however, most of such hedges are for 12 months or less.

     During 2002 and 2001, Conectiv did not hold any derivative instruments designated as "fair value hedges," which include hedges of exposure to changes in the fair value of unrecognized firm commitments.

Trading

     The pre-tax gains and losses from energy trading activities (physical and financial combined) which were recognized in earnings are shown below.

Energy Commodity	2002	2001	2000
	(Dollars in Millions)
Natural gas	$ 28.0	$(16.0)	$ 19.7
Electricity	21.2	28.2	12.5
Petroleum	0.8	9.7	6.6
Coal	1.9	-	-
Total (a)	$ 51.9	$  35.7	$ 38.8
(a) Realized gain / (loss)	$ 65.1	$  39.7	$(1.0)
Unrealized gain / (loss)	(13.2)	(4.0)	39.8
	$ 51.9	$  35.7	$ 38.8

(14) SALES OF ELECTRIC GENERATING PLANTS

Sales of Electric Generating Plants Completed in 2001

     On June 22, 2001, the ownership interests of DPL and another Conectiv subsidiary in plants and related inventory that had a net carrying value of $310.8 million and electric generating capacity of 1,080.8 MW were sold to NRG Energy, Inc. (NRG)for cash proceeds of approximately $641.7 million, subject to final adjustments for inventory and other items. A gain of $297.1 million before taxes ($175.0 million after taxes) resulted from the sale and is included in operating revenues in the 2001 Consolidated Statement of Income.

     The second quarter 2001 gain on the sale of electric generating plants was recorded net of estimated selling expenses, including anticipated environmental clean-up costs for the Indian River electric generating plant. In the first quarter of 2002, DPL reached an agreement with an insurer to settle DPL's insurance claim for environmental clean-up costs associated with the Indian River electric generating plant. Due to DPL's insurance claim settlement and revised estimates of selling expenses, the gain on the sale of the plants increased by $15.8 million before income taxes ($9.4 million after income taxes) in the first quarter of 2002 and is included in operating revenues in the 2002 Consolidated Statement of Income.

     On October 18, 2001, ACE sold for $29.6 million its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station (Peach Bottom), 7.41% interest (167 MW) in Salem Nuclear Generating Station (Salem) and 5.0% interest (52 MW) in Hope Creek Nuclear Generating Station (Hope Creek) and the related nuclear fuel to the utilities that operate the plants. ACE's trust funds and obligation for decommissioning the plants were transferred to the purchasers in conjunction with the sale. The net assets sold had a carrying value of $27.3 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. ACE used $20.5 million of the proceeds to repay the lease obligations related to the nuclear fuel. There was a $2.4 million pre-tax gain on the sale, which did not affect earnings due to the terms of the 1999 restructuring of the electricity generation business of ACE; instead, the pre-tax gain on the sale decreased the balance of deferred re coverable stranded costs.

Sales of Electric Generating Plants Completed in 2000

     On December 29, 2000, DPL sold for $32.5 million its 7.51% (164 MW) interest in Peach Bottom and 7.41% (167 MW) interest in Salem and the related nuclear fuel to the utilities that operate the plants. DPL's trust funds and obligation for decommissioning the plants were transferred to the purchasers in conjunction with the sale. The net assets sold had a carrying value of $15.1 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. DPL used $25.6 million of the proceeds to repay the lease obligations related to the nuclear fuel. A gain of $16.6 million before income taxes ($12.8 million after income taxes) resulted from these sales, which is included in operating revenues in the 2000 Consolidated Statement of Income.

Termination of Agreements for Sale of ACE Electric Generating Plants

     As of December 31, 2002, ACE's fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station) were no longer under agreements for sale to NRG. Under the terms of agreements between ACE and NRG for the sale of the fossil fuel-fired electric generating plants, they were subject to termination by either party after February 28, 2002. NRG delivered notice to Conectiv on April 1, 2002 terminating these agreements. On January 13, 2003, Conectiv announced the termination of a second competitive bidding process initiated on May 23, 2002 to sell these ACE-owned fossil fuel-fired electric generating plants. Conectiv noted that while the competitive bidding process identified a number of interested parties, current conditions in the electric energy market prevented the Company from reaching agreements for the sale of these generating assets. Conectiv remains interested in selling these asset s on acceptable terms, but cannot predict whether or not any or all of the plants will be sold, whether the NJBPU will grant the required approval of any sales agreements, or any related impacts upon recoverable stranded costs.

Wholesale Transaction Confirmation Letter Agreements

     On October 3, 2000, ACE entered into Wholesale Transaction Confirmation letter agreements (Letter Agreements). The Letter Agreements provided for the sale of the electricity output and capacity associated with the former ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. Under the Letter Agreements, the operators of the nuclear plants purchased the electricity output and capacity from ACE during the period from October 7, 2000 through October 18, 2001 (the date ACE sold its interests in the plants). In exchange for the electricity output and capacity purchased from a given plant, the plant operators reimbursed ACE for the nuclear fuel burned and paid ACE's share of operation and maintenance costs, inventories, and capital expenditures.

     DPL also was a party to Letter Agreements, similar to those entered into by ACE, for the sale of the electricity output and capacity associated with the ownership interests of DPL in Peach Bottom and Salem, from October 7, 2000 through December 29, 2000 (the date DPL sold its interests in the plants).

(15) TERMINATION OF MEMBERSHIP IN MUTUAL INSURANCE COMPANY

     Prior to February 19, 2001, DPL was a member of NEIL, which is a nuclear industry mutual insurance company that provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. NEIL members that sold their interests in nuclear electric generating plants on or before December 31, 2000 could elect prior to February 28, 2001 to receive cash for their member account balances. DPL sold its ownership interests in nuclear electric generating plants on December 29, 2000 and elected to terminate its NEIL membership on February 19, 2001. As a result of DPL's NEIL membership termination, DPL received $16.3 million ($9.8 million after taxes), which is classified as a credit in Conectiv's operation and maintenance expenses for 2001.

     ACE sold its interests in nuclear electric generating plants on October 18, 2001. ACE has continued its membership in NEIL through insurance coverages offered by NEIL for property other than nuclear power plants.

(16) CONECTIV COMMON STOCK AND CONECTIV CLASS A COMMON STOCK

     As a result of the Conectiv/Pepco Merger on August 1, 2002, the outstanding shares of Conectiv common stock and Conectiv Class A common stock were cancelled. Additionally, Conectiv issued 100 shares of $0.01 par value per share common stock, all of which are owned by PHI. For additional information, see Note 2 to the Consolidated Financials Statements herein.

     Prior to the merger in 2002, Conectiv's Board of Directors declared $50.7 million of dividends on common stock and $4.8 million of dividends on Class A common stock, including a special dividend declared in connection with the closing of the Conectiv/Pepco Merger of $5.8 million on common stock and $0.5 million on Class A common stock.

(17) PREFERRED STOCK

     ACE is authorized to issue 799,979 shares of $100 par value Cumulative Preferred Stock, 2,000,000 shares of No Par Preferred Stock, and 3,000,000 shares of Preference Stock. DPL has $1, $25, and $100 par value per share preferred stock for which 10,000,000, 3,000,000, and 1,800,000 shares are authorized, respectively. Dividends on ACE and DPL preferred stock are cumulative. Information concerning shares of preferred stock outstanding is shown below.

Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption

     The amounts which were outstanding as of December 31, 2002, and 2001 for ACE's and DPL's preferred stock not subject to mandatory redemption are presented below.

			Shares Outstanding		Amount
Issuer	Series	Current Redemption Price	2002	2001	2002	2001
				(Dollars in Millions)
ACE	$100 per share par value     4.00%-5.00%	$100.00-$105.50	62,305	62,305	$ 6.2	$ 6.2
DPL	$25 per share par value     7-3/4%	(1)	-	316,500	-	7.9
DPL	$100 per share par value     3.70%-5.00%	$103.00-$105.00	181,698	181,698	18.2	18.2
	6-3/4%	(2)	35,000	35,000	3.5	3.5
					$27.9	$35.8

(1)	Redeemable beginning September 30, 2002, at $25 per share.
(2)	Redeemable beginning November 1, 2003, at $100 per share.

     On December 30, 2002, DPL redeemed at par 316,500 shares of its $25 par preferred stock with an annual dividend rate of 7.75%.

Preferred Stock of Subsidiaries Subject to Mandatory Redemption

     On May 1, 2002, ACE redeemed 124,500 shares of its $7.80 annual dividend rate preferred stock, under mandatory and optional redemption provisions, at the $100 per share stated value, or $12.45 million in total.

     As of December 31, 2001, ACE had 124,500 shares outstanding of $7.80 annual dividend rate preferred stock, $100 per share stated value, or $12.45 million.

(18) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
      SUBSIDIARY TRUSTS HOLDING SOLELY COMPANY DEBENTURES

		Shares Outstanding		Amount
Issuer	Series	2002	2001	2002	2001
				(Dollars in Millions)
DPL financing trust	$25 per share, 8.125%	2,800,000	2,800,000	$ 70.0	$ 70.0
ACE financing trust	$25 per share, 8.25%	2,800,000	2,800,000	70.0	70.0
ACE financing trust	$25 per share, 7.375%	1,000,000	1,000,000	25.0	25.0
				$165.0	$165.0

     ACE and DPL have wholly owned financing subsidiary trusts shown in the table above. The financing subsidiary trusts have common and preferred trust securities outstanding and hold Junior Subordinated Debentures (the Debentures) of ACE and DPL. ACE and DPL own all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trusts. The trusts use interest payments received on the Debentures, which are the trusts' only assets, to make cash distributions on the trust securities. The obligations of ACE and DPL pursuant to the Debentures and guarantees of distributions with respect to the trusts' securities, to the extent the trusts have funds available therefore, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have issued.

     For consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2026 to 2036. The Debentures are subject to redemption, in whole or in part, at the option of DPL and/or ACE, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events.

(19) DEBT

     As a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), Conectiv is required to obtain SEC authorization for certain financing transactions. On July 31, 2002, the Securities and Exchange Commission (SEC) issued an order to PHI (PHI Financing Order) authorizing certain financing transactions. The PHI Financing Order superseded orders that the SEC has previously issued to Conectiv concerning Conectiv financing authorizations.

     PUHCA regulations prohibit Conectiv from borrowing from its subsidiaries.

     Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 2003 -$221.8 million; 2004 - $143.3 million; 2005 - $342.8 million; 2006 - $130.4 million; and 2007 - $102.1 million.

     Conectiv had a $1,404.2 million consolidated short-term debt balance as of December 31, 2002, which included (i) $361.8 million of short-term notes held by financial institutions (2.99% average interest rate); (ii) $596.1 million of short-term notes payable to PHI (2.02% average interest rate); (iii) $66.1 million of short-term borrowings from PHI's money pool, which PHI subsidiaries invest in and borrow from; (iv) $221.8 million of current portion of long-term debt; and (v) $158.4 million of variable rate demand bonds (1.4% average interest rate). Conectiv's consolidated short-term debt balance of $1,596.3 million as of December 31, 2001 had an average interest rate of 2.9%.

     Effective with the Conectiv/Pepco Merger, Conectiv's credit agreements of $1.035 billion in the aggregate and DPL's credit agreement of $105 million were terminated. PHI entered into a $1.5 billion credit agreement for general corporate purposes, including commercial paper back-up. Under the PHI credit agreement, a borrowing sublimit of $1.0 billion exists for PHI and a borrowing sublimit of $500 million exists for aggregate borrowings by Pepco, DPL, and ACE, limited to $300 million for each such borrower. Conectiv is not a party to the PHI credit agreement. Conectiv expects that its future funding requirements will be satisfied primarily through dividends received from its subsidiaries and funding from PHI.

     On June 1, 2002, Conectiv redeemed at maturity $100 million of unsecured 6.73% Medium Term Notes.

     On June 4, 2002, Conectiv sold $250 million in principal amount of 5.30% Notes due June 1, 2005 (the Initial Notes). In November 2002, the Initial Notes were exchanged for Notes registered under the Securities Act of 1933, as amended, the form and terms of which are substantially the same as the Initial Notes.

     On January 28, 2003, Conectiv paid down a $200 million Floating Rate Note with an original maturity of February 28, 2003.

     On February 1, 2002, DPL redeemed $27.5 million of 8.5% First Mortgage Bonds, due February 1, 2022.

     On behalf of DPL, the Delaware Economic Development Authority issued $46 million of long-term bonds and loaned the proceeds to DPL on May 30, 2002. The bonds issued included $15.0 million of variable rate Exempt Facilities Refunding Bonds, due May 1, 2032, and $31.0 million of 5.2% Pollution Control Refunding Revenue Bonds, due February 1, 2019. The bonds that were issued are not secured by a mortgage or security interest in property of DPL. On June 3, 2002, DPL used the proceeds to redeem $46.0 million of bonds outstanding, including $15.0 million of 6.85% bonds, due May 1, 2022, and $31.0 million of 6.75% bonds, due May 1, 2019.

     On June 1, 2002, DPL redeemed $2.0 million of 6.95% Amortizing First Mortgage Bonds.

     On October 1, 2002, DPL redeemed $30.0 million of 6.95% First Mortgage Bonds and $12.0 million of 6.59% Medium Term Notes.

     On November 15, 2002, DPL redeemed at maturity $3 million of 9.26% Medium Term Notes A and $1 million of its 9.29% Medium Term Notes A.

     On April 1, 2002, ACE redeemed at maturity $20 million of unsecured 6.46% Medium Term Notes.

     On May 28, 2002, ACE redeemed at maturity $5 million of secured 7.04% Medium Term Notes.

     On August 23, 2002, ACE redeemed at maturity $25.0 million of secured 7.01% Medium Term Notes.

     On December 1, 2002, ACE redeemed $75 thousand of 6.38% mandatory sinking fund Tax Exempt bonds.

     On December 19, 2002, ACE retired at maturity a term loan in the amount of $171.4 million.

     ACE will redeem on March 24, 2003, Secured Medium Term Notes totaling $58 million with interest rates ranging from 7.125% - 7.98%.

     On December 19, 2002, ACE Transition Funding issued $440 million of Bonds, consisting of four classes. The transition bonds issued included $109.0 million, 2.80%, due July 10, 2010; $66.0 million, 4.21%, due April 20, 2013; $118.0 million, 4.91%, due July 20, 2017; and $147.0 million, 5.55%, due October 20, 2023. The proceeds from the sale of Bonds will be used to fund the purchase of Bondable Transition Property (BTP) from ACE. The Bonds are collateralized on a pro-rata basis by the BTP and the equity and other assets of ACE Transition Funding. Amounts on deposit with the Trustee are classified as restricted funds on the Balance Sheet.

     The First Mortgage Bonds of ACE and DPL are secured by a first lien on the properties of ACE and DPL, respectively. ACE's and DPL's respective Mortgages require that electric generating plants sold (as discussed in Note 14 to the Consolidated Financial Statements) be released from the liens. Assets may be released with a combination of cash, bondable property additions and credits representing previously issued and retired First Mortgage Bonds. Pursuant to these terms, the electric generating plants of ACE and DPL sold during 2000-2001 were released from the liens.

     On June 25, 2002, Conectiv Bethlehem, LLC (CB) entered into a Credit Agreement (CB Credit Agreement) with various banks and financial institutions. CB is constructing new mid-merit power plants in Bethlehem, Pennsylvania. Under the CB Credit Agreement, CB may borrow up to $365 million as a construction loan and convert the construction loan to a term loan after completing construction of the two 545 MW combined cycle power plants (CB Project). Borrowings under the CB Credit Agreement are secured by a lien on CB and all tangible, intangible, and real property of CB. As of December 31, 2002, the balance of CB's outstanding borrowings under the CB Credit Agreement was $161.8 million (5.34.4% interest rate).

     CB expects to convert the construction loan to a term loan on April 30, 2004 (the actual date on which the construction loan is converted is referred to herein as the Term Loan Conversion Date), as provided for in the CB Credit Agreement. CB is required to repay any portion of the construction loan not converted to a term loan at the Term Loan Conversion Date or no later than September 30, 2004. Four semi-annual principal payments begin six months after the Term Loan Conversion Date. Depending on the Term Loan Conversion Date, the amount of the term loan principal, which is repaid by the total of the four semi-annual payments, is approximately 12.89% to 14.7%. The remaining principal of the term loan (and any unpaid accrued interest or fees) is due upon the loan's maturity, which is the later of June 25, 2006, or the second anniversary of the Term Loan Conversion Date.

     For borrowings under the CB Credit Agreement, CB has the option of choosing an interest rate based on the London inter-bank offering rate (LIBOR) plus (i) 1.625%, or (ii) 1.75%, for construction and term loans, respectively. The CB Credit Agreement requires CBI to hedge the interest rate on at least 50% of principal borrowings and on at least 75% of principal borrowings if LIBOR exceeds 4.0% for three- or six- month borrowing periods, respectively. On July 11, 2002, CB entered into an interest rate swap agreement on 75% of the anticipated forward monthly loan balances outstanding. The notional amount of the swap will increase with the expected draw schedule of the construction loan. As of December 31, 2002, the notional amount of the swap was increased from $39.8 million to $125.0 million. The notional amount of the swap increases to $273.8 million on or before the term loan conversion date. The swap agreement provides for CB to receive i nterest based on a variable rate and to pay interest based on a fixed rate of 4.15%. The swap agreement is expected to effectively convert the variable interest rate on 75% of the expected average loan balance to the fixed rate of 4.15%.

     In connection with the CB Credit Agreement, Conectiv provides a guarantee associated with the Conectiv Energy Supply, Inc. (CESI) agreement to purchase energy and capacity from CB (CESI/CB Power Agreement) and other guarantees related to obligations of Conectiv subsidiaries under agreements related to constructing and operating the CB Project. Generally, Conectiv's guarantee obligations will not exceed the amount of the debt outstanding under the CB Credit Agreement and do not guarantee CB's obligation to repay the debt. If Conectiv's credit ratings fall below the "Minimum Ratings Requirement" specified by the CB Credit Agreement, then, in an amount equal to Conectiv's outstanding guarantees, Conectiv is required to either: (i) deposit cash, (ii) obtain a letter of credit, or (iii) have another qualified party provide such guarantees. The "Minimum Ratings Requirement" of the CB Credit Agreement is not met if Conectiv's unsecured senior long- term debt (i) is rated lower than Baa3 by Moody's Investor Service (Moody's) or BBB- by Standard & Poors (S&P) or (ii) Conectiv's unsecured senior long-term debt is rated Baa3 by Moody's or BBB- by S&P and Conectiv receives a "negative outlook" or is placed on "credit watch negative" by Moody's or S&P.

     Upon substantial completion of construction of the CB Project, the CB Credit Agreement requires that revenues from the CB Project be deposited with a bank that administers the disbursement of cash (Administrative Agent) based on the terms of a "depository agreement." The depository agreement requires that cash be applied to (i) pay operating costs and principal and interest on the loans and (ii) establish reserves for debt service and major scheduled maintenance of the CB Project, before cash is released to CB for other uses, such as the payment of dividends by CB to Conectiv or Conectiv subsidiaries.

     The CB Credit Agreement contains a number of events of default that could be triggered by defaults on Conectiv or CB debt, bankruptcy, CB's loss of collateral, defaults by CB under CB Project agreements such as the CESI/CB Power Agreement, and material adverse changes in CB's regulatory status. Conectiv and CB were in compliance with covenants of the CB Credit Agreement during the year ended, and as of, December 31, 2002.

     Long-term debt outstanding as of December 31, 2002, and 2001 is presented below:

Type of Debt	Interest Rates	Due	2002	2001
			(Dollars in Millions)
First Mortgage Bonds:
	6.95%	2002	$      -	$   30.0
	6.38%	2002-2006	2.0	2.1
	6.40%	2003	85.0	85.0
	6.63%-8.15%	2011-2015	101.6	101.6
	5.90%-7.30%	2019-2021	57.1	88.1
	5.60%-8.50%	2022-2025	166.5	209.0
	6.05%-7.20%	2028-2032	144.7	144.7
Amortizing First Mortgage Bonds	6.95%	2002-2008	17.9	19.8
			574.8	680.3
Pollution Control Bonds and Notes:
	5.20%	2019	31.0	-
	5.50%	2025(1)	15.0	15.0
	4.90%	2026(2)	34.5	34.5
	5.65%	2028-2029(3)	16.2	16.2
	Variable	2030-2031	78.4	63.4
			175.1	129.1
Medium-Term Notes (secured):
	7.02%	2002	-	30.0
	6.00%-7.20%	2003	40.0	40.0
	6.18%-7.98%	2004-2008	223.0	223.0
	7.25%-7.63%	2010-2014	8.0	8.0
	7.68%	2015-2016	17.0	17.0
			288.0	318.0
Medium-Term Notes (unsecured):
	6.46%-9.29%	2002	-	136.0
	6.63%-6.73%	2003	80.0	80.0
	6.73%-8.30%	2004	54.5	54.5
	6.73%	2005	280.0	30.0
	6.73%-6.75%	2006	40.0	40.0
	7.06%-8.13%	2007	76.5	76.5
	7.54%-7.62%	2017	14.0	14.0
	6.81%	2018	4.0	4.0
	7.61%	2019	12.0	12.0
	7.72%	2027	10.0	10.0
			571.0	457.0
Transition Bonds:
	2.89%	2010	109.0	-
	4.21%	2013	66.0	-
	4.91%	2017	118.0	-
	5.50%	2023	147.0	-
			440.0	-
Other Obligations:
	2.95%	2002	-	171.4
	9.65%	2002	-	1.0
			-	172.4
Total long-term debt			2,048.9	1,756.8
Unamortized premium and discount, net			(2.8)	(2.9)
Current maturities of long-term debt			(221.8)	(398.0)
Total net long-term debt			$1,824.3	$1,355.9

(1)  The bonds are subject to mandatory tender on July 1, 2010.

(2)  The bonds are subject to mandatory tender on May 1, 2011.

(3)  The bonds are subject to mandatory tender on July 1, 2010.

     The debt obligations of Conectiv's subsidiaries included $158.4 million of Variable Rate Demand Bonds (VRDB) as of December 31, 2002 and 2001. The VRDB are included in short-tem debt because the VRDB are due on demand by the bondholder. However, bonds submitted to Conectiv's subsidiaries for purchase are remarketed by a remarketing agent on a best efforts basis. Management expects that bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of Conectiv's subsidiaries and the bonds' interest rates being set at market. Conectiv's subsidiaries also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, management considers the VRDB to be a source of long-term financing. The $158.4 million balance of VRDB outstanding as of December 31, 2002, matures in 2009 ($12.5 million), 2014 ($18.2 million), 2017 ($30.4 million), 2024 ($33.33 million); 2028 ($15.5 million), 2029 ($ 30.0 million) and 2031 ($18.5 million). Average annual interest rates on the VRDB were 1.4% in 2002 and 2.7% in 2001.

(20) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The year-end fair values of certain financial instruments are listed below. The fair values were based on quoted market prices of Conectiv's securities or securities with similar characteristics.

	2002		2001
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
	(Dollars in Millions)
Funds held by trustee	$   15.3	$   15.3	$   12.1	$   12.1
Investments in marketable equity securities	1.2	1.2	5.1	5.1
Preferred stock subject to mandatory   redemption	-	-	12.4	12.9
Company obligated mandatorily redeemable   preferred securities of subsidiary trusts   holding solely company debentures	165.0	165.2	165.0	166.7
Long-term debt	1,824.3	1,924.2	1,355.9	1,379.1
Energy derivative instruments classified as   accounts receivable within:
Current Assets	102.9	102.9	28.2	28.2
Other Assets	29.0	29.0	-	-
Energy derivative instruments classified as   derivative instruments within:
Current Liabilities	88.0	88.0	87.9	87.9
Deferred Credits and Other Liabilities	15.0	15.0	28.9	28.9

(21) LONG-TERM PURCHASED POWER CONTRACTS

     As of December 31, 2002, the commitments of Conectiv's subsidiaries under long-term purchased power contracts included 1,900 MW of capacity and varying amounts of firm electricity per hour during each month of a given year. Commitments for purchased capacity under contracts existing as of December 31, 2002 decreased by approximately 1,200 MW from 2001, primarily due to the replacement of the capacity supplied by these contracts with the capacity and energy provided by the BGS suppliers that were selected by the auction process discussed in Note 11 to the Consolidated Financial Statements. Based on existing contracts as of December 31, 2002, the commitments of Conectiv's subsidiaries during the next five years for capacity and energy under long-term purchased power contracts are estimated to be as follows: $384 million in 2003, $346 million in 2004; $336 million in 2005; $269 million in 2006; and $237 million in 2007.

(22) LEASES

Nuclear Fuel

     As discussed in Note 14 to the Consolidated Financial Statements, ACE and DPL sold their respective ownership interests in nuclear electric generating plants and the related nuclear fuel on December 29, 2000 and October 18, 2001, respectively. Prior to the sales, the ownership interests of ACE and DPL in nuclear fuel were financed through nuclear fuel energy contracts, which were accounted for as capital leases. The obligations of ACE and DPL under the contracts were repaid upon the sales of the interests in the nuclear electric generating plants on December 29, 2000 and October 18, 2001, respectively, with proceeds from the sales.

Lease Commitments

     DPL leases an 11.9% interest in the Merrill Creek Reservoir. The lease is an operating lease and payments over the remaining lease term, which ends in 2032, are $131.5 million in aggregate. DPL, ACE and other Conectiv subsidiaries also have long-term leases for certain other facilities and equipment. Minimum commitments as of December 31, 2002, under the Merrill Creek Reservoir lease and other lease agreements are as follows: 2003--$19.5 million; 2004--$16.9 million; 2005--$17.5 million; 2006--$17.5 million; 2007--$17.4 million; after 2007--$124.7 million; total--$213.5 million.

Rentals Charged To Operating Expenses

     The following amounts were charged to operating expenses for rental payments under both capital and operating leases.

	2002	2001	2000
	(Dollars in Millions)
Interest on capital leases	$ 0.1	$ 1.3	$ 3.3
Amortization of capital leases	0.1	9.4	23.0
Operating leases	26.4	35.2	35.2
	$26.6	$45.9	$61.5

(23) PENSIONS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (OPEB)

Pension Benefits

     The Pepco Holdings Retirement Plan (Plan) is a noncontributory plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries. Effective December 31, 2002, following the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan.

     As a result of the Conectiv/Pepco Merger, PHI adjusted Conectiv's accrued pension liability on August 1, 2002 to recognize all previously unrecognized gains and losses arising from past experience different from that assumed, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.87, "Employers' Accounting for Pensions." The Conectiv Plan transferred a projected benefit obligation of $804 million and plan assets of $744 million on August 1, 2002.

     PHI's pension expense/(income) included in net periodic benefit cost was $9.0 million in 2002, $(3.0) million in 2001, and $3.0 million in 2000. The 2002 net periodic benefit cost amount of $9.0 million includes $2.9 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002. The 5-month net benefit cost of Conectiv includes provision for eligible employees of PHI Service Company who are heritage CRP employees. The components of net periodic benefit cost for PHI were computed as follows.

	Pension Benefits
		2002			2001			2000
		(Millions of Dollars)
Components of PHI's Net Periodic Benefit Cost
Service cost	$	16.0		$	9.7		$	12.8
Interest cost		54.1			36.3			37.2
Expected return on plan assets		(69.0	)		(50.9	)		(48.7	)
Amortization of prior service cost		1.0			1.0			1.4
Recognized actuarial loss		6.9			.9			.3
Net Periodic Benefit Cost	$	9.0		$	(3.0	)	$	3.0

     The portion of net periodic benefit cost included as retirement expense in Conectiv's consolidated net income for the twelve months ended December 31, 2002 is $(2.6) million. This expense excludes provision during the period August 1, 2002 through December 31, 2002 for eligible employees of PHI Service Company who are heritage CRP employees.

     PHI pension program assets are stated at fair value and are composed of approximately 42% of fixed income investments (including cash equivalents) with the balance in equity investments at December 31, 2002. No Pepco Holdings stock is included in the pension program assets.

     The changes in PHI benefit obligation and fair value of PHI plan assets are presented in the following table.

	Pension Benefits
		2002			2001
	(Millions of Dollars)
Change in PHI's Benefit Obligation
Projected Benefit obligation at beginning of year	$	548.3		$	532.3
Service cost		16.0			9.7
Interest cost		54.1			36.3
Acquisition		804.1			-
Actuarial loss		40.7			3.2
Benefits paid		(64.3	)		(33.2	)
Projected Benefit Obligation at End of Year	$	1,398.9		$	548.3
Accumulated Benefit Obligation at December 31	$	1,228.2		$	489.0
Change in Fair Value of PHI's Plan Assets
Fair value of plan assets at beginning of year	$	555.0		$	576.9
Actual return on plan assets		(37.2	)		(14.6	)
Company contributions		35.0			25.0
Acquisition		744.3			-
Benefits paid		(56.5	)		(32.3	)
Fair Value of Plan Assets at End of Year	$	1,240.6		$	555.0

     The following table sets forth the PHI Program's prepaid benefit cost.

	Pension Benefits
		2002			2001
		(Millions of Dollars
Funded status	$	(158.3	)	$	6.7
Unrecognized actuarial loss		278.1			139.6
Unrecognized prior service cost		5.1			6.1
Prepaid Benefit Cost	$	124.9		$	152.4

     The actuarial assumptions for Pepco and Conectiv at December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.0	%
Expected return on plan assets
Pepco	9.0	%	9.0	%
Conectiv	9.5	%	-
Rate of compensation increase
Pepco	4.0	%	4.0	%
Conectiv	4.5	%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plan for 2003.

Other Post-Employment Benefits

     In addition to providing pension benefits, Conectiv provides certain health care and life insurance benefits for eligible employees (OPEBS), including the eligible employees of PHI Service Company who are heritage CRP employees.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic benefit cost of PHI and in the 2002 net periodic benefit cost information for Conectiv listed in the table below. Under such accounting, PHI adjusted Conectiv's accrued postretirement liability on August 1, 2002 to recognize all previously unrecognized actuarial gains and losses, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.106. The Conectiv Plan transferred a projected benefit obligation of $320 million and plan assets of $100 million on August 1, 2002. The net periodic benefit cost included in Conectiv's 2002 consolidated results of operations is stated at historical cost and does not reflect the purchase accounting adjustment recorded by PHI.

	Other Post     Employment Benefits
		2002			2001			2000
	(Millions of Dollars)
Components of Conectiv's Net Periodic Benefit Cost
Service cost	$	4.9		$	4.4		$	3.9
Interest cost		22.0			17.1			14.5
Expected return on plan assets		(8.7	)		(9.0	)		(8.6	)
Amortization of transition obligation		-			3.1			3.1
Amortization of prior service cost		-			0.1			0.1
Recognized actuarial (gain) loss		7.3			-			(3.1	)
Net Periodic Benefit Cost	$	25.5		$	15.7		$	9.9
Portion of net periodic benefit cost included as   postemployment benefit expense in Conectiv   consolidated net income	$	19.2		$	15.7		$	9.9

     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed health care cost trend rate used to measure the expected cost benefits covered by the plan is 10% for the Conectiv plan. This rate is expected to decline to 5.0% over the next four-year period. A one percentage point change in the assumed health care cost trend rate would have the following effects for fiscal year 2002.

	1 Percentage- Point Increase	1 Percentage- Point Decrease
	(Millions of Dollars)
Effect on total of service and interest cost components	$ 0.4	$ (0.4)
Effect on postretirement benefit obligation	$12.4	$(12.3)

     The changes in Conectiv benefit obligation and fair value of Conectiv plan assets are presented in the following table.

		Other Post Employment Benefits
		2002			2001
	(Millions of Dollars)
Change in Conectiv Benefit Obligation
Benefit obligation at beginning of year	$	263.8		$	201.5
Service cost		4.9			4.4
Interest cost		22.0			17.1
Plan participants' contributions		0.6			0.5
Actuarial loss		58.0			57.3
Benefits paid		(19.2	)		(17.0	)
Benefit Obligation at End of Year	$	330.1		$	263.8
Change in Fair Value of Conectiv Plan Assets
Fair value of plan assets at beginning of year	$	117.1		$	119.7
Actual return on plan assets		(11.1	)		(2.3	)
Company contributions		20.6			16.2
Plan participants' contributions		0.6			0.5
Benefits paid		(19.2	)		(17.0	)
Fair Value of Plan Assets at End of Year	$	108.0		$	117.1

     The following table sets forth the Conectiv Program's accrued benefit cost.

		Other Post Employment Benefits
		2002				2001
		(Millions of Dollars)
Funded status	$	(222.1	)	)	$	(146.7	)
Unrecognized actuarial loss		70.4				22.4
Unrecognized prior service cost		-				0.1
Unrecognized initial net obligation		57.0				34.4
Accrued Benefit Cost	$	(94.7	)	)	$	(89.8	)

     Actuarial assumptions as of December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.25	%
Expected return on plan assets	9.5	%	9.5	%
Rate of compensation increase	4.5	%	4.5	%

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for 2002 net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plans for 2003.

     Conectiv funded a portion of its 2002 and 2001 estimated liability for Conectiv postretirement medical and life insurance costs through the use of an Internal Revenue Code (IRC) 501(c)(9) Voluntary Employee Beneficiary Association (VEBA). Assets are composed of cash equivalents, fixed income investments and equity investments.

     Conectiv also sponsors defined contribution savings plans covering all eligible employees. Under these plans, the Company makes contributions on behalf of participants. Company contributions to the plans totaled $3.5 million in 2002, $4.6 million in 2001, and $4.9 million in 2000.

(24) COMMITMENTS AND CONTINGENCIES

Commitments

     See Note 21 to the Consolidated Financial Statements for commitments related to long-term purchased power contracts and Note 22 to the Consolidated Financial Statements for commitments related to leases.

Environmental Matters

     Conectiv's subsidiaries are subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Costs may be incurred to clean up facilities found to be contaminated due to current and past disposal practices. Conectiv's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including whether a Conectiv subsidiary or a corporate pred ecessor is responsible for conditions on a particular parcel). Conectiv's current liabilities include $22.7 million as of December 31, 2002 ($17.7 million as of December 31, 2001) for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a potentially responsible party (PRP), alleged to be a third party contributor, or has made a decision to clean up contamination on its own property. The accrued liability as of December 31, 2002 includes $11.2 million for remediation and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with the Delaware Department of Natural Resources and Environmental Control during 2001. As a result of discontinuing the second competitive bidding process for ACE's fossil fuel-fired generating stations and management's decision to clean up contamination on its own property, ACE's anticipat ed $7 million costs to clean up the Deepwater generating station is included in the previously stated $22.7 million liability. The costs of cleaning up ACE's B.L. England generating station have not yet been quantified. Conectiv does not expect such future costs to have a material effect on its financial position or results of operations.

     In April 2002, the United States Environmental Protection Agency (EPA) proposed regulations addressing best technology available for minimizing environmental impact from existing power production cooling water intake structures. The ACE Deepwater electric generating station's New Jersey Pollution Discharge Elimination System (NJPDES) renewal permit, effective through September 30, 2007 will require a study to evaluate the efficiency of recent changes to the intake structure and other biological impact studies that will be submitted with a permit renewal application in 2007. The NJPDES permit for the B.L. England Station expired in December 1999, but has been administratively extended, through submittal of a renewal application, and the plant continues to operate under the conditions of the existing permit until a renewal permit is issued by the New Jersey Department of Environmental Protection (NJDEP).

     A Conectiv subsidiary holds a National Pollution Discharge Elimination System (NPDES) permit for the Edge Moor Power Plant. Studies to determine impacts on aquatic organisms by the plant's intake structures, required by the existing permit which expires in October 2003, were completed in 2002. The results of these studies and additional site specific studies on alternative technologies are expected to determine whether changes to intake structures are required to comply with any final rule that the EPA adopts.

     On May 4, 2002, ACE, Conectiv Atlantic Generation, LLC (CAG), and the NJDEP entered into an Administrative Consent Order (ACO) to address ACE's and CAG's inability to procure Discrete Emission Reductions (DER) credits to comply with New Jersey's NOx Reasonable Available Control Technology (RACT) requirements and NJDEP's allegations that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The ACO eliminates requirements for ACE and CAG to purchase DER credits for certain ACE and CAG electric generating units through May 1, 2005 and provides, among other things, for installation of new controls on CAG's electric generating units ($7 million estimated cost), a $1.0 million penalty, a $1.0 million contribution to promote, develop and enhance an urban airshed reforestation project, and operating hour limits at ACE's Deepwater Unit No. 4.

     On July 11, 2001, the NJDEP denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a number of stays of the denial to authorize ACE to operate Unit 1 with the current fuel until May 29, 2003. NJDEP also issued addendums to the permit/certificate to operate for Unit 1 authorizing trial burns of coal with a sulfur content less than 2.6%. ACE is requesting an extension of the current stay of the denial and submitted final wrap-up reports on the results of its test burns to NJDEP on January 28, 2003. Management is not able to predict the outcome of ACE's appeal, including the effects, if any, of trial burn results on NJDEP's position with regard to the denial or the appeal.

     In February 2000, the EPA and NJDEP requested information from ACE regarding the operation of coal-fired boilers at ACE's B.L. England and Deepwater generating stations. As of December 2002, in responding to this request and numerous subsequent requests, ACE has provided more than 24,000 pages of documents covering activities at B.L. England and Deepwater since 1978 to the EPA and NJDEP. The EPA has sought this information pursuant to its authority under Clean Air Act Section 114, and the ACE requests are similar to those that the EPA has made of other electric utilities to determine compliance with New Source Review (NSR) Prevention of Significant Deterioration (PSD) and non-attainment NSR requirements. Similar inquiries have resulted in the filing of federal lawsuits against utilities in the South and Midwest. A number of settlements of litigation brought as a result of such inquiries alleging violations of NSR standards have been announc ed. In January 2002, the Department of Justice completed its review of the EPA's enforcement actions and concluded that the EPA has a reasonable basis on which to pursue NSR enforcement. On December 31, 2002, the EPA published an NSR reform package including both proposed and final rules. The proposed rule offers options for clarifying the routine maintenance, repair and replacement exclusion to the NSR rules. It is unclear how the EPA's proposed reform rules will ultimately impact the on-going NSR enforcement actions; however, EPA officials have indicated their intention to continue with the NSR enforcement initiative targeting alleged past violations under the current rules. ACE met with the EPA and NJDEP in May 2002 to discuss NSR issues. Since then, ACE entered into a confidentiality agreement with the government agencies. Conectiv does not believe that it has violated NSR requirements. Management cannot predict the impact of the EPA/NJDEP inquiries or proposal on B.L. England or Deepwater operat ions.

     In June 1992, the EPA identified ACE as a PRP at the Bridgeport Rental and Oil Services (BROS) superfund site in Logan Township, New Jersey. In September 1996, ACE along with other PRPs signed a consent decree with the EPA and NJDEP to address remediation of the Site. ACE's liability is limited to 0.232 percent and ACE has made contributions of approximately $105,000. The Phase 2 Remedial Investigation/Feasibility Study (RI/FS) to address groundwater and wetlands contamination is scheduled to be completed in September 2003. ACE believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     In November 1991, NJDEP identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with other PRPs, signed an ACO with NJDEP to remediate the Site. The soil cap remedy for the Site has been completed and the NJDEP conditionally approved the Remedial Action Report in January 2003. The results of groundwater monitoring over the next year will help to determine the extent of post-remedy operation and maintenance costs.

     In the late 1980's DPL was identified by the EPA as a PRP at the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. The PRP Group determined that in 1987 and 1988 DPL sent 440 gallons of waste paint to the site. DPL paid $290.40 in connection with a Consent Agreement as a Non-Performing Settling Party to resolve its liability for Phase I activities at the site. In September 1991 DPL made an additional $500 payment pursuant to a second ACO initiating Phase II activities. The site was added to the National Priorities List in 1994. In February 2003, the PRP Group informed DPL that DPL was a de micromis party at the Site because its 440 gallon contribution to the Site was less than EPA's 890 gallon threshold for de minimis status and that DPL has no further liability for contribution to the Site's remediation fund.

     In the late 1980's, DPL was notified by the EPA that it, along with several other utilities and nonutilities, was a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination at the Metal Bank/Cottman Avenue site located in Philadelphia, Pennsylvania at which the Site owner, from 1968 to 1972, drained oil from used transformers to reclaim copper. Based on the PRP group's determination that DPL sent 102 transformers to the Site, DPL was allocated responsibility for 0.24 percent of remediation costs. In October 1994, a RI/FS including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a Record of Decision (ROD) that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In 1999, DPL entered into a de minimis settlement with the EPA and paid approximately $107,000 to resolve its liability for cleanup costs at the Site. The de min imis settlement did not resolve DPL's responsibility for natural resource damages, if any, at the Site. DPL believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

Litigation

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by Delmarva and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provisions of the mas ter power purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe that the Co mpany has material financial exposure related to the Enron bankruptcy.

     On October 24, 2000, the City of Vineland, New Jersey (City), filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities located within the City limits by eminent domain. On March 13, 2002, ACE and the City signed an agreement that provides for ACE to sell the electric distribution facilities within the City limits, and the related customer accounts, for $23.9 million. The proceeds are being received in installments as milestones are met, and are proceeding on schedule. The remaining proceeds should be received in the second quarter of 2004, when the final milestones will be completed. At that time the assets and customers will be transferred to the City and the sale will be recorded by ACE.

     Conectiv, through its subsidiaries, is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on Conectiv's financial position or results of operations.

Third Party Guarantees

     At December 31, 2002, Conectiv guaranteed $201.1 million of third party obligations as follows: $136.3 million in guaranteed payments to counter-parties related to routine energy trading obligations of CESI, including requirements under BGS contracts for ACE; $36.6 million in construction payment guarantees related to a portion of Conectiv's mid-merit plant program; and $28.2 million of other guarantees related to certain payment and performance obligations associated with Conectiv's investments in partnerships and joint ventures, which are accounted for under the equity method of accounting.

(25) BUSINESS SEGMENTS

     The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). In accordance with SFAS No. 131, Conectiv's business segments were determined from Conectiv's internal organization and management reporting, which are based primarily on differences in products and services. Amounts previously reported for the business of supplying electricity to customers of ACE and DPL who have not chosen an alternative electricity supplier have been reclassified from the Energy business segment to the Power Delivery business segment. Conectiv's business segments under SFAS No. 131 are as follows:

"Energy" includes (a) electricity generation by mid-merit electric generating plants, and the purchase, trading and sale of electricity, including wholesale sales between affiliated subsidiaries; (b) gas and other energy supply and trading activities; (c) power plant operation services; and (d) district heating and cooling systems operation and construction services provided by Conectiv Thermal Systems, Inc.

"Power Delivery" includes (a) activities related to delivery and supply of electricity at regulated rates to customers of ACE and DPL; (b) the operations of ACE's electric generating plants; (c) the operations of DPL's electric generating plants through their sale on June 22, 2001; and (d) the delivery and supply of natural gas at regulated rates to DPL's customers.

"HVAC" represents heating, ventilation, and air conditioning services that were provided by CSI prior to the sale of this business in the latter-half of 2000.

     The results of CCI's discontinued Telecommunication business, which was sold on November 14, 2001, have been excluded from "Income From Continuing Operations" and, accordingly, are excluded from the business segment results shown below. For information about the disposal of CCI's telecommunication business, see Note 6 to the Consolidated Financial Statements.

     Intercompany (intersegment) revenues and expenses are not eliminated at the segment level for purposes of presenting segment financial results. Elimination of these intercompany amounts is accomplished for Conectiv's consolidated results through the "Corporate and Other" column. Net Income of "Corporate and Other" business segments include the equity in earnings of the EnerTech funds and other investment income, as discussed in Note 10 to the Consolidated Financial Statements.

	December 31, 2002 (in Millions)
	Energy	Power Delivery	Corporate & Other	Conectiv Consolidated
Operating Revenue	$2,371.8	$2,303.4	$(817.1)	$3,858.1
Operating Expense	2,231.6	1,976.3	(647.8)	3,560.1
Operating Income	140.2	327.1	(169.3)	298.0
Net Income	72.2	123.4	(104.8)	90.8
Total Assets	2,090.1	4,250.3	291.0	6,631.4

	December 31, 2001 (in Millions)
	Energy	Power Delivery	Corporate & Other	Conectiv Consolidated
Operating Revenue	$1,977.2	$2,423.7	$(439.6)	$3,961.3
Operating Expense	1,847.6	2,035.6	(681.1)	3,202.1
Operating Income	129.6	388.1	241.5	759.2
Net Income	98.8	377.8	(228.4)	248.2
Total Assets	1,543.4	4,228.6	425.6	6,197.6

	December 31, 2000 (in Millions)
	Energy	Power Delivery	HVAC	Corporate & Other	Conectiv Consolidated
Operating Revenue	$2,030.0	$2,277.5	$89.6	$(759.7)	$3,637.4
Operating Expense	1,910.1	1,819.9	97.9	(729.7)	3,098.2
Operating Income	119.9	457.6	(8.3)	(30.0)	539.2
Net Income	95.4	462.3	(10.8)	(376.1)	170.8
Total Assets	1,162.7	4,489.1	-	726.0	6,377.8

(26) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units. Due to the discontinuation of Conectiv's Telecommunication business segment during the second quarter of 2001, as discussed in Notes 3 and 6 to the Consolidated Financial Statements, the operating results of the discontinued Telecommunications business segment are classified as discontinued operations in the quarterly financial information presented below.

     As discussed in Note 3 to the Consolidated Financial Statements, adjustments for under-recoveries of BGS expenses, which were reported as revenues during the first three quarters of 2001, have been reclassified within the Consolidated Statements of Income from electric operating revenues to operating expenses. This reclassification is reflected in the amounts presented below for operating revenues.

     As discussed in Note 3 to the Consolidated Financial Statements, adjustments to report energy trading revenues and expenses associated with "energy trading book" contracts on a net basis in accordance with EITF 02-3, instead of a gross basis as previously reported during the first two quarters of 2002 and each quarter of 2001, have been reclassified within the Consolidated Statements of Income. These reclassifications are reflected in the amounts presented below for operating revenues and operating expenses.

	2002
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Total Operating Revenue	$784.3	$819.2	$1,242.3	$1,012.3	$3,858.1
Total Operating Expenses	705.2	719.9	1,172.5	962.5	3,560.1
Operating Income	79.1	99.3	69.8	49.8	298.0
Other (Expenses)	(32.6)	(30.3)	(29.0)	(28.9)	(120.8)
Preferred Stock Dividend   Requirements of Subsidiaries	4.0	4.0	3.8	4.0	15.8
Income From Continuing   Operations Before Income Taxes	42.5	65.0	37.0	16.9	161.4
Income Taxes	18.5	27.5	18.3	6.3	70.6
Net Income	24.0	37.5	18.7	10.6	90.8

	2001
	First  Quarter	Second Quarter		Third   Quarter		Fourth   Quarter		Total
	(Dollars in Millions)
Total Operating Revenue	$964.6	$1,202.8		$1,040.8		$  753.1		$3,961.3
Total Operating Expenses	832.8	774.1		907.2		688.0		3,202.1
Operating Income	131.8	428.7		133.6		65.1		759.2
Other Income (Expenses)	(45.3)	21.2		(40.1)		(50.0)		(114.2)
Preferred Stock Dividend   Requirements of Subsidiaries	5.2	5.0		4.5		4.0		18.7
Income From Continuing   Operations Before Income Taxes	81.3	444.9		89.0		11.1		626.3
Income Taxes	35.5	186.1		29.9		0.1		251.6
Income From Continuing Operations	45.8	258.8		59.1		11.0		374.7
Discontinued Telecommunications   Operations
Loss From Operations       Net of Income Taxes	(5.0)	(2.7)		-		-		(7.7)
Loss From Disposal       Net of Income Taxes	-	(118.8)		-		-		(118.8)
Net Income	40.8	137.3	59.1		11.0		248.2

      The first table shown below reconciles operating revenues from the amounts originally reported in the 2002 quarterly reports on Form 10-Q to the amounts reported above in this Note, which are reflected in the 2002 Consolidated Statement of Income. The second table below reconciles operating revenues from the amounts reported in the 2001 annual report on Form 10-K to the amounts reported above in this Note, which are reflected in the 2001 Consolidated Statement of Income included herein.

	2002
	First  Quarter	Second Quarter	Third   Quarter
	(Dollars in Millions)
Operating revenues as reported in 2002   quarterly reports on Form 10-Q	$1,051.8	$1,100.2	$1,242.3
Adjustments for EITF 02-3 (1)	(267.5)	(281.0)	-
Restated operating revenues	$  784.3	$  819.2	$1,242.3

(1)  As discussed in Note 3 to the Consolidated Financial Statements, energy trading revenues and expenses associated with "energy trading book" contracts have been reclassified within the Consolidated Statements of Income to be reported on a net basis. The third quarter 2002 operating revenues were reported on a net basis, and thus, no reclassification is necessary here.

	2001
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Operating revenues as reported   in 2001 on Form 10-K	$1,536.1	$1,698.6	$1,601.9	$  953.4	$5,790.0
Adjustments for EITF 02-3 (1)	(571.5)	(495.8)	(561.1)	(200.3)	(1,828.7)
Restated operating revenues	$  964.6	$1,202.8	$1,040.8	$  753.1	$3,961.3

(1)  As discussed in Note 3 to the Consolidated Financial Statements, energy trading revenues and expenses associated with "energy trading book" contracts have been reclassified within the Consolidated Statements of Income to be reported on a net basis.

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Report of Independent Accountants

To the Shareholder and Board of Directors
of Delmarva Power & Light Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings and retained income and shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of Delmarva Power & Light Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materi al misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements on January 1, 2002, Delmarva Power & Light Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2003

DELMARVA POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,	2002	2001	2000
(Millions of dollars)
Operating Revenue
Electric	$1,039.8	$1,059.1	$1,452.5
Gas	178.1	230.6	616.4
Gain on divestiture of generation assets	11.6	221.3	16.6
Other	11.1	22.1	28.8
Total Operating Revenue	1,240.6	1,533.1	2,114.3
Operating Expenses
Fuel and purchased energy	677.0	646.9	815.0
Gas purchased	124.9	178.7	566.8
Other services' cost of sales	10.3	20.5	23.8
Other operation and maintenance	178.7	162.3	255.1
Merger-related costs	9.7	-	-
Depreciation and amortization	82.1	95.3	112.5
Other taxes	35.5	34.4	40.4
Total Operating Expenses	1,118.2	1,138.1	1,813.6
Operating Income	122.4	395.0	300.7
Other Income (Expenses)
Interest and dividend income	4.9	13.5	4.1
Interest expense	(42.6)	(66.5)	(76.3)
Other income	4.4	4.3	0.5
Total Other Expenses	(33.3)	(48.8)	(71.7)
Distributions on Preferred Securities of Subsidiary Trust	5.7	5.7	5.7
Income Before Income Taxes	83.4	340.5	223.3
Income Taxes	33.7	139.9	81.5
Net Income	49.7	200.6	141.8
Dividends on Preferred Stock	1.7	3.7	4.9
Earnings Available for Common Stock	$   48.0	$  196.9	$  136.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEETS
	December 31, 2002	December 31, 2001
ASSETS
(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents	$109.7	$174.9
Accounts receivable, less allowance for uncollectible      accounts of $14.2 million and $17.3 million	168.7	187.3
Fuel, materials and supplies - at average cost	25.4	30.0
Prepaid expenses and other	15.6	6.9
Total Current Assets	319.4	399.1
INVESTMENTS AND OTHER ASSETS
Goodwill	48.5	48.5
Regulatory assets, net	99.3	145.6
Prepaid pension costs	192.8	182.6
Other	17.9	26.4
Total Investments and Other Assets	358.5	403.1
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	2,120.5	2,051.5
Accumulated depreciation	824.0	770.3
Net Property, Plant and Equipment	1,296.5	1,281.2
TOTAL ASSETS	$1,974.4	$2,083.4
The accompanying Notes are an integral part of these Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY	December 31, 2002	December 31, 2001
(Millions of Dollars)
CURRENT LIABILITIES
Short-term debt	$  192.0	$  180.3
Accounts payable and accrued payroll	66.3	64.4
Accounts payable to associated companies	17.5	20.0
Capital lease obligations due within one year	0.2	0.1
Interest and taxes accrued	48.3	102.1
Other	61.8	79.2
Total Current Liabilities	386.1	446.1
DEFERRED CREDITS
Income taxes	364.3	290.3
Investment tax credits	13.6	14.5
Above-market purchased energy contracts and other       electric restructuring liabilities	53.0	68.7
Other	4.7	15.5
Total Deferred Credits	435.6	389.0
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt	482.6	569.7
Capital lease obligations	0.6	0.7
	483.2	570.4
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES    OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR    SUBORDINATED DEBENTURES	70.0	70.0
PREFERRED STOCK
Serial preferred stock	21.7	29.6
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $2.25 par value, authorized 1,000,000      shares, - issued 1,000 shares	-	-
Premium on stock and other capital contributions	223.5	223.5
Capital stock expense	(10.1)	(10.1)
Retained income	364.4	364.9
Total Shareholder's Equity	577.8	578.3
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY	$1,974.4	$2,083.4
The accompanying Notes are an integral part of these Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2002	2001	2000
(Millions of Dollars)
OPERATING ACTIVITIES
Net income	$ 49.7	$200.6	$141.8
Adjustments to reconcile net income to net cash    from (used by) operating activities:
Depreciation and amortization	82.1	95.4	123.2
Gain on divestiture of generation assets	(11.6)	(221.2)	(16.6)
Deferred income taxes	67.9	(46.3)	74.2
Investment tax credit adjustments, net	(0.9)	(6.0)	(6.8)
Pension expense credit	(10.2)	(18.6)	(43.8)
Changes in:
Accounts receivable	18.1	107.9	2.7
Inventories	4.6	(11.3)	7.8
Accounts payable and accrued payroll	(12.4)	(90.2)	(35.6)
Taxes accrued	(51.8)	92.4	(6.6)
Other current assets & liabilities	(1.4)	(16.1)	(15.2)
Net other operating activities	23.5	(25.8)	(4.7)
Net Cash From Operating Activities	157.6	60.8	220.4
INVESTING ACTIVITIES
Net investment in property, plant and equipment	(82.5)	(85.6)	(111.1)
Proceeds from/changes in:
Divestiture of generation assets	10.0	528.2	32.5
Sale of other assets	0.8	8.5	11.6
Net other investing activities	0.2	1.1	(1.5)
Net Cash From (Used By) Investing Activities	(71.5)	452.2	(68.8)
FINANCING ACTIVITIES
Common dividends paid	(62.8)	(80.7)	(25.0)
Preferred dividends paid	(1.7)	(3.5)	(4.8)
Redemption of preferred stock	(7.9)	(60.1)	-
Long-term debt issued	46.0	59.0	70.1
Long-term debt redeemed	(121.5)	(329.9)	(73.8)
Principal portion of capital lease payments	(0.1)	(0.1)	(36.2)
Costs of issuances and refinancings	(3.3)	(17.4)	(1.4)
Net Cash Used By Financing Activities	(151.3)	(432.7)	(71.1)
Net Change In Cash and Cash Equivalents	(65.2)	80.3	80.5
Cash and Cash Equivalents at Beginning of Period	174.9	94.6	14.1
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$109.7	$174.9	$ 94.6
The accompanying Notes are an integral part of these Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
	Common Stock		Premium on Stock	Retained Income
	Shares	Par Value
(Dollar Amounts in Millions)
BALANCE, DECEMBER 31, 1999	1,000	$--	$528.9	$147.3
Net Income				141.8
Dividends:
Preferred stock				(4.9)
Common stock				(24.3)
Contribution to Conectiv of a subsidiary     which owned certain electric generating     plants			(316.3)
Contribution of other property to Conectiv				(2.0)
BALANCE, DECEMBER 31, 2000	1,000	--	212.6	257.9
Net Income				200.6
Dividends:
Preferred stock				(3.7)
Common stock				(89.1)
Repurchase and retirement of preferred stock			0.8	(0.8)
BALANCE, DECEMBER 31, 2001	1,000	--	213.4	364.9
Net Income				49.7
Dividends:
Preferred stock				(1.7)
Common stock				(48.5)
BALANCE, DECEMBER 31, 2002	1,000	$--	$213.4	$364.4
The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DELMARVA POWER & LIGHT COMPANY

(1)  ORGANIZATION

     DPL is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with DPL and Atlantic Energy, Inc.

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco and their respective subsidiaries (including DPL) each became subsidiaries of PHI. DPL continues as a wholly-owned, direct subsidiary of Conectiv. See Note 2 to the Consolidated Financial Statements for additional information.

     DPL is a public utility that supplies and delivers electricity and natural gas to its customers under the trade name Conectiv Power Delivery. DPL delivers electricity to approximately 485,100 regulated customers through its transmission and distribution systems and also supplies electricity to most of its electricity delivery customers, who have the option of choosing an alternative supplier. DPL's regulated electric service territory is located on the Delmarva Peninsula (Delaware and portions of Maryland and Virginia). DPL's electric service area encompasses about 6,000 square miles and has a population of approximately 1.2 million.

     DPL provides regulated gas service (supply and/or delivery) to approximately 115,400 customers located in a service territory that covers about 275 square miles with a population of approximately 500,000 in New Castle County, Delaware. DPL also sells gas off-system and in markets that are not subject to price regulation.

     The divestiture of the electric generating plants of DPL was completed on June 22, 2001 with the sale of the ownership interests of DPL in various electric generating plants that had 954 megawatts (MW) of capacity. The divestiture of the electric generating plants of DPL started in 2000. DPL contributed electric generating plants with 1,501 MW of capacity to Conectiv on July 1, 2000, in connection with the formation of Conectiv Energy Holding Company (CEH), which has subsidiaries engaged in non-regulated electricity production, energy trading and marketing. Divestiture of the electric generating plants also included the sale of DPL's ownership interests in nuclear electric generating plants (331 MW) on December 29, 2000.

     Prior to the formation of CEH on July 1, 2000, DPL's business activities included trading electricity and natural gas and the sale of electricity produced by non-regulated electric generating units. The transition of these activities from DPL to CEH and its subsidiaries occurred during the latter-half of 2000.

(2)  ACQUISITION OF CONECTIV BY PEPCO HOLDINGS, INC.

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco and their respective subsidiaries (including DPL) each became subsidiaries of PHI. DPL continues as a wholly-owned, direct subsidiary of Conectiv.

     The Maryland Public Service Commission (MPSC) and the Delaware Public Service Commission (DPSC) issued orders on April 11 and 16, 2002, respectively, approving the Conectiv/Pepco Merger. The orders issued by the DPSC and MPSC require approximately $1.5 million of contributions to certain funds.

     DPL's operating results for 2002 included costs related to the Conectiv/Pepco Merger of $9.7 million ($5.8 million after income taxes). The $9.7 million of costs included the following: (i) $8.2 million for severances and stock options settled in cash; and (ii) $1.5 million for contributions to certain funds based on the terms of orders issued by the MPSC and DPSC, as noted above. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over DPL, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

     The Consolidated Financial Statements include the accounts of DPL's wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

     The 2000 gain on the sale of DPL's interests in nuclear electric generating plants was reclassified to operating revenues from operating expenses to conform to the presentation of the 2001 and 2002 gain on sale of electric generating plants. Certain other reclassifications of prior period data have been made to conform to the current presentation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Regulation of Utility Operations

     Certain aspects of DPL's utility businesses are subject to regulation by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively), the Virginia State Corporation Commission (VSCC), and the Federal Energy Regulatory Commission (FERC). Excluding sales not subject to price regulation, the percentages of retail electric and gas utility operating revenues regulated by each state regulatory commission for 2002, were as follows: DPSC, 67.5%; MPSC, 29.4%; and VSCC, 3.1%. Wholesale sales and the transmission of electricity and gas are subject to FERC regulation. Retail gas sales are subject to regulation by the DPSC.

     As discussed in Note 7 to the Consolidated Financial Statements, DPL's electricity generation business was restructured in the latter half of 1999, pursuant to enactment of Delaware and Maryland electric restructuring legislation and the issuance of restructuring orders by the DPSC and MPSC. Based on these orders, DPL determined that the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) no longer applied to its electricity generationbusiness.

     DPL's electric delivery business and retail gas business are subject to the requirements of SFAS No. 71.When utility revenues are insufficient to recover current period expenses from customers, regulatory commissions may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory commission.

     The amount recognized in the Consolidated Statements of Income for the cost of gas purchased to supply DPL's regulated gas customers is adjusted to the amount included in customer billings for such costs since customer rates are periodically adjusted to reflect amounts actually paid by DPL for purchased gas. DPL's purchased gas costs are subject to the approval of the DSPSC. A regulatory asset is recorded for under-collections from customers and a liability is recorded for over-collections from customers, which are both included in "regulatory assets, net" as "deferred energy supply costs" on the Consolidated Balance Sheets.

     Information about regulatory assets and liabilities arising from the financial effects of rate regulation is discussed under "Accounting for the Effects of Certain Types of Regulation," shown below.

Revenue Recognition

     DPL recognizes revenues for the supply and delivery of electricity and gas upon delivery to the customer, including amounts for services rendered, but not yet billed. Similarly, revenues from "Other services" are recognized when services are performed or products are delivered. Revenues from non-regulated electricity and gas sales are included in "Electric" revenues and "Gas" revenues, respectively.

     "Other services" revenues include certain non-regulated services provided by DPL to its customers and rental income for administrative facilities owned by DPL which are used by an affiliated company.

Accounting for the Effects of Certain Types of Regulation

     The electric and gas delivery businesses of DPL are subject to the requirements of SFAS No. 71. When utility revenues are insufficient to recover current period expenses from customers, regulatory commissions may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory commission.

     The components of DPL's regulatory asset balances are displayed below:

	December 31, 2002	December 31, 2001
	(Millions of Dollars)
Deferred energy supply costs	$(8.0)	$ 25.5
Deferred recoverable income taxes	64.5	65.7
Deferred debt extinguishment costs	19.0	19.9
COPCO deferred purchase power costs	14.6	17.5
Recoverable stranded costs	2.3	14.5
Other	6.9	2.5
Net Regulatory Assets	$99.3	$145.6

     Deferred Energy Supply Costs: See discussion under "Regulation of Utility Operations," shown above.

     Deferred Recoverable Income Taxes: Represents the portion of deferred income tax liabilities applicable to DPL's utility operations that has not been reflected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized.

     Deferred Debt Extinguishment Costs: The costs of debt extinguishment costs for which recovery through regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.

     COPCO Deferred Purchase Power Costs: Recovery of COPCO's deferred regulatory asset relating to an approved rate phase-in prior to DPL's acquisition of COPCO. This asset was approved by Maryland for recovery subsequent to the DPL acquisition of COPCO.

     Recoverable Stranded Costs: Represents remaining amounts to be collected from regulated delivery customers for stranded costs which resulted from deregulation of the electricity supply business in 1999.

Derivative Instruments

     As of December 31, 2002 and 2001, DPL held derivative instruments (futures, options, swap agreements, and forward contracts) solely for the purpose of limiting regulated gas customers' exposure to commodity price uncertainty.

     DPL implemented the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 2001. SFAS No. 133 established accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 13, are recognized in earnings. DPL's derivative instruments associated with the regulated gas supply business are not designated as hedges under SFAS No. 133; however, because gains and losses on these derivative instruments are included in rates charged to regulated gas customers, the provisions of SFAS No. 71 apply and earnings are not affected. The initial effects of adopting SFAS No. 133 were recognition of $14.4 million as set for the fair value of the derivative instruments and a $14.4 million regulatory liability for the effects of regulation.

     Prior to the transfer on July 1, 2000 of certain electric generating plants and energy-trading activities to Conectiv, DPL used derivative instruments in connection with energy commodity trading and sales of the electricity produced by non-regulated electric generating plants. Energy trading activities were recorded on a gross basis, with the sales reported as revenues and purchases included in operating expenses.

     During 1999-2000, realized gains and losses related to derivative hedging instruments were deferred, as deferred credits or current assets, and then recognized in operating results when the underlying transaction occurred. If, subsequent to being hedged, the underlying transaction was no longer likely to occur or the hedge was no longer effective, the gain or loss on the related derivative was recognized in operating results.

     The cash flows from derivatives are included in the "Cash Flows from Operating Activities" section of the Consolidated Statements of Cash Flows.

     In 2002, a pronouncement was issued by the Emerging Issues Task Force entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenues and expenses associated with "energy trading book" contracts on a gross versus net basis. Previously, the EITF concluded that presentation on a gross basis was acceptable and DPL presented the revenues and expenses of its energy trading business on that basis in its public financial disclosures. Effective for the third quarter of 2002, based on EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, energy trading revenues and expenses are required to be presented on a net basis for all reporting periods. As a result, energy trading revenues and expenses previously reported on a gross basis have been reclassified to a net presentation. The reclassification had no effect on operating income and net income.

Goodwill

     Effective January 1, 2002, DPL implemented SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," is no longer amortized. The portion of goodwill included in regulated utility rates ($14.6 million as of December 31, 2002 and $17.5 million as of December 31, 2001) has been reclassified from goodwill to "regulatory assets, net" and continues to be amortized as a regulatory asset.

     For 2001, net income was $200.6 million and net income adjusted to exclude the $.8 million charge for goodwill amortization was $201.4 million. For 2000, net income was $141.8 million and net income adjusted to exclude the $.8 million charge for goodwill amortization was $142.6 million.

     DPL's goodwill balance of $48.5 million as of December 31, 2002 and December 31, 2001 is associated with Conectiv's Power Delivery business segment. Effective January 1, 2002, Conectiv redefined its business segments. Conectiv's Power Delivery business segment, which had previously included the operating results for delivering electricity to DPL's customers, as well as delivering and supplying natural gas at regulated rates to DPL's customers, now also includes the operating results for supplying electricity to DPL's customers. As a result, all material aspects of DPL's operations are conducted in Conectiv's Power Delivery business segment.

     Based on the requirements of SFAS No. 142, DPL conducted a test for the impairment of goodwill as of January 1, 2002, by comparing the fair value of its Power Delivery business to its book value carrying amount, including goodwill. The test resulted in no impairment of goodwill, as of January 1, 2002, because the fair value of DPL's Power Delivery business exceeded its book value carrying amount, including goodwill.

Cash and Cash Equivalents

     Cash and cash equivalents include cash on hand, money market funds, and commercial paper with original maturities of three months or less. Investments in PHI's "money pool," which PHI and Conectiv subsidiaries may invest in, or borrow from, are considered cash equivalents.

Property, Plant and Equipment

     Property, plant and equipment is comprised of the following:

At December 31, 2002	Original   Cost	Accumulated Depreciation	Net    Book Value
	(Millions of Dollars)
Generation	$      -	$    -	$      -
Distribution	1,082.7	413.8	668.9
Transmission	490.9	200.4	290.5
Gas	304.4	107.8	196.6
General	140.0	74.3	65.7
Construction work in progress	49.9	-	49.9
Nonoperating and other property	52.6	27.7	24.9
Total	$2,120.5	$824.0	$1,296.5
At December 31, 2001
Generation	$      -	$    -	$      -
Distribution	1,025.8	387.8	638.0
Transmission	471.5	191.1	280.4
Gas	285.0	97.0	188.0
General	141.6	71.5	70.1
Construction work in progress	76.7	-	76.7
Nonoperating and other property	50.9	22.9	28.0
Total	$2,051.5	$770.3	$1,281.2

     The balances of all property, plant and equipment, which is primarily electric transmission and distribution property, are stated at original cost. Utility plant is generally subject to a first mortgage lien.

Depreciation Expense

     The annual provision for depreciation on electric and gas property, plant and equipment is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, including removal costs less salvage and other recoveries. The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.2% for 2002, 3.4% for 2001, and 3.4% for 2000. For periods prior to the sale of the ownership interests of DPL in nuclear electric generating plants on December 29, 2000, depreciation expense includes a provision for the estimated cost of decommissioning nuclear power plant reactors based on amounts billed to customers for such costs.

     Property, plant and equipment other than electric and gas facilities is generally depreciated on a straight-line basis over the useful lives of the assets.

Capitalized Interest and Allowance for Funds Used During Construction

     The cost of financing the construction of non-utility projects is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost" (SFAS No. 34).

     Allowance for Funds Used During Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction. In the Consolidated Statements of Income, both the borrowed funds component and equity funds component of AFUDC is reported as a reduction of interest expense. AFUDC was capitalized on utility plant construction at the rates of 8.7% in 2002, 8.6% in 2001, and 8.5% in 2000.

Interest Expense

     The amortization of debt discount, premium, and expense, including deferred debt extinguishment costs associated with the regulated electric and gas transmission and distribution businesses, is included in interest expense.

Income Taxes

     DPL, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to DPL based upon the taxable income or loss, determined on a separate return basis.

     The Consolidated Financial Statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on DPL's state income tax returns and the amount of federal income tax allocated from PHI. Deferred income taxes are discussed below.

     Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of DPL's deferred tax liability applicable to its utility operations that has not been recovered from utility customers represents income taxes recoverable in the future and is included in "regulatory assets, net" on the Consolidated Balance Sheets. For additional information, see the discussion under "Accounting for the Effects of Certain Types of Regulation," shown above.

     Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

     Investment tax credits from utility plant purchased in prior years are reported on the Consolidated Balance Sheets as "Deferred investment tax credits." These investment tax credits are being amortized to income over the useful lives of the related utility plant.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (first quarter 2003 financial statements for the Company). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. DPL has completed its assessment of the provisions of SFAS No. 143. The implementation of the Statement will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in DPL's Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002 (the Company's first quarter 2003 financial statements). The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made an initial assessment of the provisions of FIN 45 in order to determine its impact on the Company's financial position, results of operations, and disclosure requirements. Based o n this initial assessment, the Company does not believe that the implementation of FIN 45 will have a material impact on its financial position or results of operations.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). DPL has made an initial assessment of the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations. Based on this initial assessment, the Company does not believe that the implementation of FIN 46 will have a material impact on its financial position or results of operations.

(4)  SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year
	2002	2001	2000
	(Dollars in Millions)
Interest, net of capitalized amounts of   $0.6 million, $0.7 million, and $0.9 million   for 2002, 2001, and 2000, respectively	$39.3	$67.9	$74.7
Income taxes, net of refunds	$11.9	$111.0	$33.2

Non-cash Investing and Financing Activities Excluded From the Consolidated Statements of Cash Flows

     The Consolidated Statement of Cash Flows for 2000 excludes the assumption of DPL's former nuclear decommissioning liability by the purchasers of the ownership interests of DPL in nuclear electric generating plants and also excludes the transfer of nuclear decommissioning trust funds to the purchasers. The nuclear decommissioning trust funds which were transferred had a fair value of approximately $68.0 million. For information about the sale of the ownership interests of DPL in nuclear electric generating plants, refer to Note 8 to the Consolidated Financial Statements.

     The 2000 Consolidated Statement of Cash Flows excludes the non-cash transaction for DPL's contribution of electric generating plants to Conectiv. See "Contribution of Electric Generating Plants to Conectiv in 2000" in Note 8 to the Consolidated Financial Statements for additional information.

(5)  INCOME TAXES

     DPL, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to DPL based upon the taxable income or loss, determined on a separate return basis.

     The provision for income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

Components of Consolidated Income Tax Expense
		2002	2001	2000
		(Dollars in Millions)
Operations
Federal:	Current	$(26.7)	$151.6	$10.2
	Deferred	54.1	(35.6)	58.9
State:	Current	(6.5)	40.6	3.9
	Deferred	13.7	(10.7)	15.3
Investment tax credit adjustments, net (1)		(0.9)	(6.0)	(6.8)
Total Income Tax Expense		$ 33.7	$139.9	$81.5

(1) Includes credits of $4.4 million in 2001 and $4.4 million in 2000 which resulted from recognition of deferred investment tax credits in connection with sale of the ownership interests in electric generating plants, as discussed in Note 8 to the Consolidated Financial Statements.

Reconciliation of Effective Income Tax Rate

	For the Year Ended December 31,
	2002		2001		2000
	Amount	Rate	Amount	Rate	Amount		Rate
	(Amounts in Millions)
Statutory federal    income tax expense	$29.2	35%	$120.8	35%	$78.2	35%
State income taxes,    net of federal    benefit	4.7	6	19.9	6	12.5	6
Investment tax credit    amortization	(0.9)	(1)	(6.0)	(2)	(6.8)	(3)
Other, net	0.7	-	7.1	2	(2.4)	(1)
Income tax expense on   continuing   operations	$33.7	40%	$141.8	41%	$81.5	37%

Components of Deferred Income Taxes

The tax effects of temporary differences that give rise to DPL's net deferred tax liability are shown below. There were no valuation allowances for deferred tax assets as of December 31, 2002 and December 31, 2001.

	As of December 31,
	2002	2001
	(Dollars in Millions)
Deferred Tax Liabilities
Plant basis differences	$282.1	$222.9
Deferred recoverable income taxes	36.9	37.4
Prepaid pension costs	75.9	71.8
Other	30.3	35.2
Total deferred tax liabilities	425.2	367.3
Deferred Tax Assets
Deferred investment tax credits	7.3	7.8
Above-market purchased energy contracts     and other Electric restructuring liabilities	30.1	33.9
Other	28.9	33.4
Total deferred tax assets	66.3	75.1
Total net deferred tax liability	$358.9	$292.2

(6)  RELATED PARTY PURCHASES AND SALES

     DPL's operating expenses and revenues include amounts for transactions with other Conectiv and PHI subsidiaries. DPL purchased electric energy, electric capacity and natural gas from Conectiv subsidiaries in the amounts of $627.5 million for 2002, $149.0 million for 2001 and $101.7 million for 2000. DPL also sold natural gas and electricity and leased certain assets to other Conectiv and PHI subsidiaries. Amounts included in operating revenues for these transactions are as follows: 2002- $10.6 million; 2001- $19.3 million; 2000-$33.7 million.

     DPL had a contract with Conectiv Energy Supply, Inc. (CESI), a Conectiv subsidiary, which provided a fixed price for substantially all of DPL's electric energy and capacity needs for the period April 1, 2001 through August 31, 2001. Effective September 1, 2001, DPL entered into an agreement with CESI under which DPL purchases from CESI the electricity required for DPL to fulfill its obligation to supply customers who have not chosen an alternative supplier (default service). In connection with the agreement, CESI assumed the rights and obligations that DPL had under agreements to purchase electricity on a long-term basis. DPL's contract with CESI extends until May 31, 2006. The pricing of the electricity purchased under the contract was structured with the intent to transfer the risk, or reward, associated with DPL's default service business to CESI. As of December 31, 2002, CESI's sources of electricity supply include 2,727 MW of generati ng capacity, through affiliated subsidiaries, 400 MW of capacity under long-term purchased power agreements, and short-term purchased power arrangements.

(7)  REGULATORY MATTERS

Delaware

     In August 1999, the DPSC issued an order that approved DPL's plan for complying with the Electric Utility Restructuring Act of 1999 (Delaware Act), which restructured the electric utility industry in Delaware. In connection with the restructuring, all retail electric customers of DPL obtained the option to choose an alternative electricity supplier by October 2000. The Delaware Act requires DPL to be the provider of default service to customers who do not choose an alternative electricity supplier for the 3 years ending September 30, 2002 for non-residential customers and the 4 years ending September 30, 2003 for residential customers. Effective October 1, 1999, the restructuring resulted in a 7.5% decrease in DPL's Delaware residential electric rates, which reduced revenues $17.5 million on an annual basis. In addition, DPL agreed to keep residential and non-residential rates at their October 1, 1999 levels until September 30, 2003 and Sep tember 30, 2002, respectively.

     Under the terms of an order issued April 16, 2002 by the DPSC in Docket No. 01-194 approving the Conectiv/Pepco Merger, retail electric rates will increase by approximately $4.4 million, or 0.9%, on an annualized basis, effective October 1, 2003. In general, retail electric rates in effect on October 1, 2003 are to remain unchanged through May 1, 2006, although the order provides some mechanisms for rate changes in special circumstances. The order also provides that DPL would continue providing default electricity supply service to customers until May 1, 2006.

Maryland

     In October 1999, the MPSC issued an order that approved a settlement agreement for implementing the provisions of the Electric Customer Choice and Competition Act of 1999 (the Maryland Act), which restructured the electric utility industry in Maryland. In connection with the restructuring, all of DPL's Maryland retail customers could elect to choose an alternative electricity supplier beginning July 1, 2000. The settlement agreement provided for DPL to be the default service supplier to customers who do not choose an alternative electricity supplier during the 3 years ending July 1, 2003 for non-residential customers and the 4 years ending July 1, 2004 for residential customers. On November 22, 2002, the MPSC issued an order approving a settlement with DPL to extend its obligation to provide default service (also known as standard offer service, or SOS) to non-residential customers through July 1, 2004. Effective July 1, 2000, the re structuring also resulted in a 7.5% decrease in DPL's Maryland residential electric rates, which reduced revenues $12.5 million on an annual basis. In addition, DPL agreed to keep residential and non-residential rates at their July 1, 2000 levels until June 30, 2004 and June 30, 2003, respectively.

     Under the terms of an order issued April 11, 2002 by the MPSC approving the Conectiv/Pepco Merger, retail electric rates for electricity distribution are to be capped (not permitted to increase) through December 31, 2006 and DPL is to file certain information with the MPSC by December 1, 2003 in order to determine if a rate decrease is warranted. Also, delivery rates for non-residential customers will be decreased by approximately $5.6 million, effective July 1, 2003. The settlement agreement does not address electricity supply rates for periods on and after July 1, 2003 for non-residential customers or on and after July 1, 2004, for residential customers.

     DPL has entered into a settlement in Phase I of Maryland Case No. 8980 to extend its provision of SOS services in Maryland. The Settlement is awaiting approval from the Maryland Commission. The Settlement provides for an extension of SOS for four years for residential and small commercial customers, an extension of two years for medium sized commercial customers, and an extension of one year for large commercial customers. The settlement provides for a policy review by the Commission to consider how SOS will be provided after the current extension expires. The settlement provides for SOS to be procured from the wholesale marketplace and that DPL will be able to recover its costs of procurement and a return.

Virginia

     On December 21, 2001, the VSCC approved DPL's proposal to offer choice of electricity suppliers to all of its retail Virginia customers as of January 1, 2002.

(8)  DIVESTITURE OF ELECTRIC GENERATING PLANTS

     The divestiture of the electric generating plants of DPL, which began in 2000, was completed on June 22, 2001 with the sale of the ownership interests of DPL in various electric generating plants that had 954 MW of capacity. As a result of the divestiture, DPL's principal business is the transmission and distribution of electricity, and DPL supplies the load requirements of its default electric service customers entirely with purchased power.

Sales of Electric Generating Plants Completed in 2001

     On June 22, 2001, DPL's ownership interests in various electric generating plants, which had a net book value of approximately $247 million and electric generating capacity of 954 MW, were sold to NRG Energy, Inc. (NRG) for approximately $528.2 million. The sales proceeds are subject to final adjustments for inventory and other items. As a result of these sales, DPL's results of operations for 2001 include a gain of $221.2 million before taxes ($129.4 million after taxes). The $221.2 million before-tax gain is included in operating revenues in the 2001 Consolidated Statement of Income.

     The second quarter 2001 gain on the sale of electric generating plants was recorded net of estimated selling expenses, including anticipated environmental clean-up costs for the Indian River electric generating plant. In the first quarter of 2002, DPL reached an agreement with an insurer to settle DPL's insurance claim for environmental clean-up costs associated with the Indian River electric generating plant. Due to DPL's insurance claim settlement and revised estimates of selling expenses, the gain on the sale of the plants increased by $11.6 million before income taxes ($6.9 million after income taxes) in the first quarter of 2002 and is included in operating revenues in the 2002 Consolidated Statement of Income.

Sales of Electric Generating Plants Completed in 2000

     On December 29, 2000, DPL sold for $32.5 million its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station and 7.41% (167 MW) interest in Salem Nuclear Generating Station and the related nuclear fuel to the utilities that operate the plants. DPL's trust funds and obligation for decommissioning the plants were transferred to the purchasers in conjunction with the sale. The net assets sold had a carrying value of $15.1 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. DPL used $25.6 million of the proceeds to repay the lease obligations related to the nuclear fuel. A gain of $16.6 million before income taxes ($12.8 million after income taxes) resulted from these sales, which is included in operating revenues in the 2000 Consolidated Statement of Income.

Contribution of Electric Generating Plants to Conectiv in 2000

     Effective July 1, 2000, DPL contributed at book value its ownership interests in electric generating plants (1,501 MW of capacity) and related transmission equipment, inventories, other assets and liabilities to a wholly-owned subsidiary (Conectiv Delmarva Generation, Inc., or CDG). DPL then contributed CDG to Conectiv in conjunction with the formation of an energy-holding company by Conectiv, which is engaged in non-regulated electricity production and sales, and energy trading and marketing. The contribution of CDG to Conectiv resulted in a $316.3 million decrease in the additional paid-in capital portion of DPL's common stockholder's equity.

(9)  TERMINATION OF MEMBERSHIP IN MUTUAL INSURANCE COMPANY

     Prior to February 19, 2001, DPL was a member of NEIL, which is a nuclear industry mutual insurance company that provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. NEIL members that sold their interests in nuclear electric generating plants on or before December 31, 2000 could elect prior to February 28, 2001 to receive cash for their member account balances. DPL sold its ownership interests in nuclear electric generating plants on December 29, 2000 and elected to terminate its NEIL membership on February 19, 2001. As a result of DPL's NEIL membership termination, DPL received $16.3 million ($9.8 million after taxes), which is classified as a credit in Conectiv's operation and maintenance expenses for 2001.

(10) COMMON STOCKHOLDER'S EQUITY

     Conectiv owns all 1,000 outstanding shares of DPL's common stock ($2.25 par value per share).

     For information concerning changes in DPL's common stockholder's equity during 2002, 2001, and 2000, see the Statement of Changes in Common Stockholder's Equity.

     DPL's certificate of incorporation requires payment of all preferred dividends in arrears (if any) prior to payment of common dividends to Conectiv, and has certain other limitations on the payment of common dividends. DPL's certificate of incorporation contains limitations on the cash dividends DPL can pay to Conectiv if DPL's common stockholder's equity was less than 25% of DPL's total capitalization. As of December 31, 2002, DPL's common stockholder's equity represented 43.0% of DPL's total capitalization.

     As a subsidiary of a registered holding company under PUHCA, DPL can pay dividends only to the extent of its retained earnings unless SEC approval is obtained.

(11) PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION

     DPL has $1, $25, and $100 par value per share preferred stock for which 10,000,000, 3,000,000, and 1,800,000 shares are authorized, respectively. Dividends on DPL preferred stock are cumulative. No shares of the $1 par value per share preferred stock are outstanding. Shares outstanding for each series of the $25 and $100 par value per share preferred stock are listed below.

		Shares Outstanding		Amount
Series	Current Redemption Price	2002	2001	2002	2001
		(Dollars in Millions)
$25 per share par value, 7 3/4%	(1)	-	316,500	$   -	$ 7.9
$100 per share par value:      3.70%-5.00%	$103.00-$105.00	181,698	181,698	18.2	18.2
6-3/4%	(2)	35,000	35,000	3.5	3.5
				$21.7	$29.6

(1)  Redeemable beginning September 30, 2002, at $25 per share.

(2)  Redeemable beginning November 1, 2003, at $100 per share.

     On December 30, 2002, DPL redeemed at par 316,500 shares of its $25 par preferred stock with an annual dividend rate of 7.75%.

(12) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
       SUBSIDIARY TRUST HOLDING SOLELY COMPANY DEBENTURES

     DPL has a wholly owned financing subsidiary trust that has common and preferred trust securities outstanding and holds Junior Subordinated Debentures (the Debentures) of DPL. DPL owns all of the common securities of the trust, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trust. The trust uses interest payments received on the Debentures, which are the trust's only assets, to make cash distributions on the trust securities. DPL's obligations pursuant to the Debentures and guarantees of distributions with respect to the trust's securities, to the extent the trust has funds available therefore, constitute full and unconditional guarantees of the obligations of the trust under the trust securities the trusts have issued.

     As of December 31, 2002 and 2001, the trust had $70 million of 8.125% Cumulative Trust Preferred Capital Securities outstanding, representing 2,800,000 trust preferred securities with a stated liquidation value of $25 per security.

     For consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2036. The Debentures are subject to redemption, in whole or in part, at the option of DPL, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events.

(13) DEBT

     Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 2003-$87.2 million; 2004-$7.0 million; 2005-$2.7 million; 2006-$22.9 million; and 2007-$64.7 million.

     On February 1, 2002, DPL redeemed $27.5 million of 8.5% First Mortgage Bonds, due February 1, 2022.

     On behalf of DPL, the Delaware Economic Development Authority issued $46 million of long-term bonds and loaned the proceeds to DPL on May 30, 2002. The bonds issued included $15.0 million of variable rate Exempt Facilities Refunding Bonds, due May 1, 2032, and $31.0 million of 5.2% Pollution Control Refunding Revenue Bonds, due February 1, 2019. The bonds that were issued are not secured by a mortgage or security interest in property of DPL. On June 3, 2002, DPL used the proceeds to redeem $46.0 million of bonds outstanding, including $15.0 million of 6.85% bonds, due May 1, 2022, and $31.0 million of 6.75% bonds, due May 1, 2019.

     On June 1, 2002, DPL redeemed $2.0 million of 6.95% Amortizing First Mortgage Bonds.

     On October 1, 2002, DPL redeemed $30.0 million of 6.95% First Mortgage Bonds and $12.0 million of 6.59% Medium Term Notes.

     On November 15, 2002, DPL redeemed at maturity $3 million of 9.26% Medium Term Notes A and $1 million of its 9.29% Medium Term Notes A.

     Effective with the Conectiv/Pepco Merger, Pepco Holdings, Inc. entered into a $1.5 billion credit agreement for general corporate purposes, including commercial paper back-up. Under the Pepco Holdings, Inc. credit agreement, a borrowing sublimit of $1.0 billion exists for Pepco Holdings Inc. and a borrowing sublimit of $500 million exists for aggregate borrowings by Pepco, DPL, and Atlantic City Electric Company (ACE), limited to $300 million for each such borrower. DPL's previous credit agreement of $105 million was terminated.

     Substantially all utility property of DPL is subject to the liens of the mortgage collateralizing DPL's First Mortgage Bonds. DPL's mortgage requires that the electric generating plants sold (as discussed in Note 8 to the Consolidated Financial Statements) be released from the liens of the mortgage. Assets may be released with a combination of cash, bondable property additions, and credits representing previously issued and retired first mortgage bonds. Pursuant to these terms, the electric generating plants of DPL sold during 2000-2001 were released from the liens.

     Long-term debt outstanding as of December 31, 2002, and 2001 is presented below:

Type of Debt	Interest Rates	Due	2002	2001
			(Dollars in Millions)
First Mortgage Bonds:
	6.95%	2002	$     -	$ 30.0
	6.40%	2003	85.0	85.0
	7.15%-8.15%	2011-2015	33.0	33.0
	5.90%-7.30%	2019-2021	18.2	49.2
	6.85%-8.50%	2022-2025	100.0	142.5
	6.05%	2032	15.0	15.0
Amortizing First Mortgage Bonds	6.95%	2003-2008	17.8	19.9
			269.0	374.6
Pollution Control Bonds and Notes:
	5.20%	2019	31.0	-
	5.50%	2025 (1)	15.0	15.0
	4.90%	2026 (2)	34.5	34.5
	5.65%	2028 (1)	16.2	16.2
	Variable	2030-2032	78.4	63.4
			175.1	129.1
Medium-Term Notes (unsecured):
	6.59%-9.29%	2002	-	16.0
	8.30%	2004	4.5	4.5
	6.84%	2006	20.0	20.0
	7.06%-8.125%	2007	61.5	61.5
	7.54%-7.62%	2017	14.0	14.0
	6.81%	2018	4.0	4.0
	7.61%	2019	12.0	12.0
	7.72%	2027	10.0	10.0
			126.0	142.0
Total long-term debt			570.1	645.7
Unamortized premium and discount, net			(0.3)	(0.5)
Current maturities of long-term debt			(87.2)	(75.5)
Total net long-term debt			$482.6	$569.7

(1)  The bonds are subject to mandatory tender on July 1, 2010.

(2)  The bonds are subject to mandatory tender on May 1, 2011.

     The debt obligations of DPL included $104.8 million of Variable Rate Demand Bonds (VRDB) as of December 31, 2002 and 2001. The VRDB are included in short-tem debt because the VRDB are due on demand by the bondholder. However, bonds submitted to DPL for purchase are remarketed by a remarketing agent on a best efforts basis. Management expects that bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of DPL and the bonds' interest rates being set at market. DPL also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, management considers the VRDB to be a source of long-term financing. The $104.8 million balance of VRDB outstanding as of December 31, 2002, matures in 2017 ($26.0 million), 2024 ($33.33 million); 2028 ($15.5 million) and 2029 ($30.0 million). Average annual interest rates on the VRDB were 1.5% in 2002 and 2.8% in 2001.

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The year-end fair values of certain financial instruments are listed below. The fair values were based on quoted market prices of DPL's securities or securities with similar characteristics.

	2002		2001
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
	(Dollars in Millions)
Investments	$  7.1	$  7.1	$  5.2	$  5.2
Company obligated mandatorily redeemable   preferred securities of subsidiary trusts   holding solely company debentures	70.0	70.0	70.0	70.8
Long-term debt	482.6	521.3	569.7	589.1
Energy derivative instruments classified as   Accounts receivable	9.9	9.9	3.2	3.2
Energy derivative instruments classified as   Other current liabilities	9.9	9.9	9.8	9.8

(15) LEASES

Lease Commitments

     DPL leases an 11.9% interest in the Merrill Creek Reservoir. The lease is an operating lease and payments over the remaining lease term, which ends in 2032, are $131.5 million in aggregate. DPL also has long-term leases for certain other facilities and equipment. Minimum commitments as of December 31, 2002, under the Merrill Creek Reservoir lease and other lease agreements are as follows: 2003-$13.9 million; 2004-$11.3 million; 2005-$11.8 million; 2006-$11.8 million; 2007-$11.8 million; beyond 2007-$119.1 million; total-$179.7 million.

Rentals Charged To Operating Expenses

     The amounts charged to operating expenses for rental payments under both capital and operating leases are shown in the table below. As discussed in Note 8 to the Consolidated Financial Statements, DPL sold its ownership interests in Peach Bottom and Salem and the related nuclear fuel on December 29, 2000. Prior to the sales, DPL leased its share of nuclear fuel at Peach Bottom and Salem. The decreases in the amounts shown below for interest and amortization of capital leases were primarily due to termination of DPL's nuclear fuel leases.

	2002	2001	2000
	(Dollars in Millions)
Interest on capital leases	$ 0.1	$ 0.2	$ 1.4
Amortization of capital leases	0.1	0.1	10.7
Operating leases	15.3	15.7	15.7
	$15.5	$16.0	$27.8

(16) PENSIONS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (OPEB)

Pension Benefits

     The Pepco Holdings Retirement Plan (Plan) is a noncontributory plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries. Effective December 31, 2002, following the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan.

     As a result of the Conectiv/Pepco Merger, PHI adjusted Conectiv's accrued pension liability on August 1, 2002 to recognize all previously unrecognized gains and losses arising from past experience different from that assumed, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.87, "Employers' Accounting for Pensions." The Conectiv Plan transferred a projected benefit obligation of $804 million and plan assets of $744 million on August 1, 2002.

     PHI's pension expense/(income) included in net periodic benefit cost was $9.0 million in 2002, $(3.0) million in 2001, and $3.0 million in 2000. The 2002 net periodic benefit cost amount of $9.0 million includes $2.9 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002. The 5-month net benefit cost of Conectiv includes provision for eligible employees of PHI Service Company who are heritage CRP employees. The components of net periodic benefit cost for PHI were computed as follows.

	Pension Benefits
		2002			2001			2000
		(Millions of Dollars)
Components of PHI's Net Periodic Benefit Cost
Service cost	$	16.0		$	9.7		$	12.8
Interest cost		54.1			36.3			37.2
Expected return on plan assets		(69.0	)		(50.9	)		(48.7	)
Amortization of prior service cost		1.0			1.0			1.4
Recognized actuarial loss		6.9			.9			.3
Net Periodic Benefit Cost	$	9.0		$	(3.0	)	$	3.0

     The portion of net periodic benefit cost included as retirement expense in Conectiv's consolidated net income for the twelve months ended December 31, 2002 is $(2.6) million. This expense excludes provision during the period August 1, 2002 through December 31, 2002 for eligible employees of PHI Service Company who are heritage CRP employees.

     PHI pension program assets are stated at fair value and are composed of approximately 42% of fixed income investments (including cash equivalents) with the balance in equity investments at December 31, 2002. No Pepco Holdings stock is included in the pension program assets.

     The changes in PHI benefit obligation and fair value of PHI plan assets are presented in the following table.

	Pension Benefits
		2002			2001
	(Millions of Dollars)
Change in PHI's Benefit Obligation
Projected Benefit obligation at beginning of year	$	548.3		$	532.3
Service cost		16.0			9.7
Interest cost		54.1			36.3
Acquisition		804.1			-
Actuarial loss		40.7			3.2
Benefits paid		(64.3	)		(33.2	)
Projected Benefit Obligation at End of Year	$	1,398.9		$	548.3
Accumulated Benefit Obligation at December 31	$	1,228.2		$	489.0
Change in Fair Value of PHI's Plan Assets
Fair value of plan assets at beginning of year	$	555.0		$	576.9
Actual return on plan assets		(37.2	)		(14.6	)
Company contributions		35.0			25.0
Acquisition		744.3			-
Benefits paid		(56.5	)		(32.3	)
Fair Value of Plan Assets at End of Year	$	1,240.6		$	555.0

     The following table sets forth the PHI Program's prepaid benefit cost.

	Pension Benefits
		2002			2001
		(Millions of Dollars
Funded status	$	(158.3	)	$	6.7
Unrecognized actuarial loss		278.1			139.6
Unrecognized prior service cost		5.1			6.1
Prepaid Benefit Cost	$	124.9		$	152.4

     The actuarial assumptions for Pepco and Conectiv at December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.0	%
Expected return on plan assets
Pepco	9.0	%	9.0	%
Conectiv	9.5	%	-
Rate of compensation increase
Pepco	4.0	%	4.0	%
Conectiv	4.5	%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plan for 2003.

Other Post-Employment Benefits

     In addition to providing pension benefits, Conectiv provides certain health care and life insurance benefits for eligible employees (OPEBS), including the eligible employees of PHI Service Company who are heritage CRP employees.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic benefit cost of PHI and in the 2002 net periodic benefit cost information for Conectiv listed in the table below. Under such accounting, PHI adjusted Conectiv's accrued postretirement liability on August 1, 2002 to recognize all previously unrecognized actuarial gains and losses, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.106. The Conectiv Plan transferred a projected benefit obligation of $320 million and plan assets of $100 million on August 1, 2002. The net periodic benefit cost included in Conectiv's 2002 consolidated results of operations is stated at historical cost and does not reflect the purchase accounting adjustment recorded by PHI.

	Other Post     Employment Benefits
		2002			2001			2000
	(Millions of Dollars)
Components of Conectiv's Net Periodic Benefit Cost
Service cost	$	4.9		$	4.4		$	3.9
Interest cost		22.0			17.1			14.5
Expected return on plan assets		(8.7	)		(9.0	)		(8.6	)
Amortization of transition obligation		-			3.1			3.1
Amortization of prior service cost		-			0.1			0.1
Recognized actuarial (gain) loss		7.3			-			(3.1	)
Net Periodic Benefit Cost	$	25.5		$	15.7		$	9.9
Portion of net periodic benefit cost included as   postemployment benefit expense in Conectiv   consolidated net income	$	19.2		$	15.7		$	9.9

     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed health care cost trend rate used to measure the expected cost benefits covered by the plan is 10% for the Conectiv plan. This rate is expected to decline to 5.0% over the next four-year period. A one percentage point change in the assumed health care cost trend rate would have the following effects for fiscal year 2002.

	1 Percentage- Point Increase	1 Percentage- Point Decrease
	(Millions of Dollars)
Effect on total of service and interest cost components	$ 0.4	$ (0.4)
Effect on postretirement benefit obligation	$12.4	$(12.3)

     The changes in Conectiv benefit obligation and fair value of Conectiv plan assets are presented in the following table.

		Other Post Employment Benefits
		2002			2001
	(Millions of Dollars)
Change in Conectiv Benefit Obligation
Benefit obligation at beginning of year	$	263.8		$	201.5
Service cost		4.9			4.4
Interest cost		22.0			17.1
Plan participants' contributions		0.6			0.5
Actuarial loss		58.0			57.3
Benefits paid		(19.2	)		(17.0	)
Benefit Obligation at End of Year	$	330.1		$	263.8
Change in Fair Value of Conectiv Plan Assets
Fair value of plan assets at beginning of year	$	117.1		$	119.7
Actual return on plan assets		(11.1	)		(2.3	)
Company contributions		20.6			16.2
Plan participants' contributions		.6			0.5
Benefits paid		(19.2	)		(17.0	)
Fair Value of Plan Assets at End of Year	$	108.0		$	117.1

     The following table sets forth the Conectiv Program's accrued benefit cost.

		Other Post Employment Benefits
		2002				2001
		(Millions of Dollars)
Funded status	$	(222.1	)	)	$	(146.7	)
Unrecognized actuarial loss		70.4				22.4
Unrecognized prior service cost		-				0.1
Unrecognized initial net obligation		57.0				34.4
Accrued Benefit Cost	$	(94.7	)	)	$	(89.8	)

     Actuarial assumptions as of December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.25	%
Expected return on plan assets	9.5	%	9.5	%
Rate of compensation increase	4.5	%	4.5	%

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for 2002 net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plans for 2003.

     Conectiv funded a portion of its 2002 and 2001 estimated liability for Conectiv postretirement medical and life insurance costs through the use of an Internal Revenue Code (IRC) 501(c)(9) Voluntary Employee Beneficiary Association (VEBA). Assets are composed of cash equivalents, fixed income investments and equity investments.

     Conectiv also sponsors defined contribution savings plans covering all eligible employees. Under these plans, the Company makes contributions on behalf of participants. DPL's contributions to the plans totaled $1.0 million in 2002, $1.0 million in 2001, and $1.2 million in 2000.

(17)  COMMITMENTS AND CONTINGENCIES

Commitments

     See Note 6 to the Consolidated Financial Statements for information concerning DPL's contract to purchase power from CESI and Note 15 to the Consolidated Financial Statements for information about commitments related to leases.

Environmental Matters

     DPL is subject to regulation with respect to the environmental effect of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. DPL's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including whether DPL or a corporate predecessor is responsible for conditions on a particular parcel ). DPL's current liabilities include $14.5 million as of December 31, 2002 and December 31, 2001 for potential clean-up and other costs related to sites at which the Company is a potentially responsible party (PRP), alleged to be a third party contributor, or has made a decision to clean up contamination on its own property. The accrued liability as of December 31, 2002 includes $11.2 million for remediation and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with the Delaware Department of Natural Resources and Environmental Control during 2001. DPL does not expect such future costs to have a material effect on its financial position or results of operations.

     In the late 1980's DPL was identified by the EPA as a PRP at the Spectron Superfund Site located in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling, and processing facility from 1961 to 1988. The PRP Group determined that in 1987 and 1988 DPL sent 440 gallons of waste paint to the site. DPL paid $290.40 in connection with a Consent Agreement as a Non-Performing Settling Party to resolve its liability for Phase I activities at the site. In September 1991 DPL made an additional $500 payment pursuant to a second ACO initiating Phase II activities. The site was added to the National Priorities List in 1994. In February 2003, the PRP Group informed DPL that DPL was a de micromis party at the Site because its 440 gallon contribution to the Site was less than EPA's 890 gallon threshold for de minimis status and that DPL has no further liability for contribution to the Site's remediation fund.

     In the late 1980's, DPL was notified by the EPA that it, along with several other utilities and nonutilities, was a PRP in connection with the polychlorinated biphenyl compounds (PCBs) contamination at the Metal Bank/Cottman Avenue site located in Philadelphia, Pennsylvania at which the Site owner, from 1968 to 1972, drained oil from used transformers to reclaim copper. Based on the PRP group's determination that DPL sent 102 transformers to the Site, DPL was allocated responsibility for 0.24 percent of remediation costs. In October 1994, a RI/FS including a number of possible remedies was submitted to the EPA. In December 1997, the EPA signed a Record of Decision (ROD) that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In 1999, DPL entered into a de minimis settlement with the EPA and paid approximately $107,000 to resolve its liability for cleanup costs at the Site. The de minimis settlement did not resolve DPL's responsibility for natural resource damages, if any, at the Site. DPL believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

Litigation

     On December 2, 2001, Enron North America Corp. and several of its affiliates filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy Supply, Inc. (CESI) terminated all transactions under various agreements with Enron North America Corp. and Enron Power Marketing, Inc. (EPMI and, together with Enron North America Corp., Enron). In late January 2003, after several months of discussions attempting to arrive at a settlement with Enron concerning the amount owed by DPL and CESI, EPMI filed an adversary complaint (the Complaint) against CESI in the Bankruptcy Court for the Southern District of New York. The Complaint seeks an order from the Bankruptcy Court that, among other things, (1) awards damages in the amount of approximately $11.7 million, plus interest and attorney's fees and additional damages (in an amount to be determined at trial), (2) declares unenforceable the provisions of the master p ower purchase and sale agreement (MPPSA) between CESI and EPMI that permitted CESI to set off against any amounts CESI owes EPMI under the MPPSA any amounts due by EPMI or any of its affiliates to CESI or any of its affiliates under any agreements among EPMI or any of its affiliates and CESI and any of its affiliates, and (3) declares that the arbitration provision in the MPPSA should not be enforced. CESI disagrees with Enron's calculation of the amount due (CESI's calculations result in an amount due of approximately $3.8 million) and believes that Enron's other claims are without merit. CESI's response to the Complaint is due on April 7, 2003. At the present time, it is not possible to predict the outcome of this suit or to estimate with specificity the amount that CESI will ultimately pay Enron; however, based on, among other factors, the specific provisions in the applicable contracts of the Conectiv subsidiaries with Enron and applicable legal principles, Management does not believe that the Company has material financial exposure related to the Enron bankruptcy.

     DPL is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on its financial position or results of operations.

(18) BUSINESS SEGMENTS

     Conectiv's organizational structure and management reporting information is aligned with Conectiv's business segments, irrespective of the subsidiary, or subsidiaries, through which a business is conducted. Businesses are managed based on lines of business, not legal entity. Business segment information is not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a Conectiv subsidiary, no business segment information (as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information") is available for DPL on a stand-alone basis.

     Changes in business activities subsequent to the restructuring of DPL's electric utility business in 1999 have resulted in electricity transmission and distribution representing a greater proportion of DPL's business. As discussed in Note 8 to the Consolidated Financial Statements, DPL completed the divestiture of its electric generating plants on June 22, 2001. After June 22, 2001, DPL supplied the load requirements of its default electric service customers entirely with purchased power.

(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates and the scheduled downtime and maintenance of electric generating units.

	2002
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Total Operating Revenue	$323.6	$286.4	$344.0	$286.6	$1,240.6
Total Operating Expenses	277.9	261.3	320.4	258.6	1,118.2
Operating Income	45.7	25.1	23.6	28.0	122.4
Other (Expenses)	(8.8)	(9.4)	(8.7)	(6.4)	(33.3)
Preferred Stock Dividend   Requirements of Subsidiaries	1.4	1.4	1.4	1.5	5.7
Income From Continuing   Operations Before Income Taxes	35.5	14.3	13.5	20.1	83.4
Income Taxes	14.6	6.0	5.8	7.3	33.7
Net Income	20.9	8.3	7.7	12.8	49.7
Dividends on Preferred Stock	0.4	0.4	0.4	0.5	1.7
Earnings Available for   Common Stock	20.5	7.9	7.3	12.3	48.0

	2001
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Total Operating Revenue	$368.9	$536.9	$350.1	$277.2	$1,533.1
Total Operating Expenses	287.3	270.6	333.0	247.2	1,138.1
Operating Income	81.6	266.3	17.1	30.0	395.0
Other (Expenses)	(14.5)	(13.0)	(11.8)	(9.5)	(48.8)
Preferred Stock Dividend   Requirements of Subsidiaries	1.4	1.4	1.4	1.5	5.7
Income From Continuing   Operations Before Income Taxes	65.7	251.9	3.9	19.0	340.5
Income Taxes	26.8	104.5	2.1	6.5	139.9
Net Income	38.9	147.4	1.8	12.5	200.6
Dividends on Preferred Stock	1.3	1.2	0.9	0.3	3.7
Earnings Available for   Common Stock	37.6	146.2	0.9	12.2	196.9

     In the first quarter of 2001, operating income and income before extraordinary item increased by $16.3 million and $9.8 million, respectively, due to DPL's termination of its membership in a mutual insurance company, as discussed in Note 9 to the Consolidated Financial Statements.

     In the second quarter of 2001, a gain on the sale of electric generating plants increased operating income and income before extraordinary item by $221.2 million and $129.4 million, respectively, as discussed in Note 8 to the Consolidated Financial Statements.

THIS PAGE LEFT INTENTIONALLY BLANK.

Report of Independent Accountants

To the Shareholder and Board of Directors
of Atlantic City Electric Company

In our opinion, the accompanying balance sheets and the related statements of earnings and retained income and shareholder's equity, and of cash flows present fairly, in all material respects, the financial position of Atlantic City Electric Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a tes t basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2003

ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,	2002	2001	2000
(Millions of Dollars)
Operating Revenue	$1,084.7	$1,041.1	$  960.8
Operating Expenses
Fuel and purchased energy	682.5	636.6	420.7
Other operation and maintenance	243.6	249.2	243.7
Merger related costs	38.1	-	-
Impairment losses	9.5	-	-
Depreciation and amortization	69.2	84.7	101.5
Other taxes	24.8	34.1	35.9
Deferred electric service costs	(71.3)	(143.2)	(7.5)
Total Operating Expenses	996.4	861.4	794.3
Operating Income	88.3	179.7	166.5
Other Income (Expenses)
Interest and dividend income	8.4	7.0	5.9
Interest expense	(53.1)	(60.8)	(75.1)
Other income	8.5	3.9	1.4
Total Other Expenses	(36.2)	(49.9)	(67.8)
Distributions on Preferred Securities of Subsidiary Trust	7.6	7.6	7.6
Income Tax Expense	16.3	46.7	36.7
Net Income	28.2	75.5	54.4
Dividends on Preferred Stock	0.7	1.7	2.1
Earnings Available for Common Stock	$   27.5	$   73.8	$   52.3
The accompanying Notes are an integral part of these Consolidated Financial Statements.

ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
	December 31, 2002	December 31, 2001
ASSETS
(Millions of Dollars)
CURRENT ASSETS
Cash and cash equivalents	$247.1	$14.3
Accounts receivable, less allowance for uncollectible      accounts of $9.1 million and $7.8 million	159.0	159.7
Fuel, materials and supplies - at average cost	30.0	31.1
Prepaid taxes	22.8	41.0
Total Current Assets	458.9	246.1
INVESTMENTS AND OTHER ASSETS
Regulatory assets, net	1,092.0	1,066.2
Other	34.1	24.3
Total Investments and Other Assets	1,126.1	1,090.5
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	1,836.0	1,610.3
Accumulated depreciation	756.2	569.5
Net Property, Plant and Equipment	1,079.8	1,040.8
TOTAL ASSETS	$2,664.8	$2,377.4
The accompanying Notes are an integral part of these Consolidated Financial Statements.

ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
	December 31, 2002	December 31, 2001
LIABILITIES AND SHAREHOLDER'S EQUITY
(Millions of Dollars)
CURRENT LIABILITIES
Short-term debt	$  107.2	$  289.0
Accounts payable and accrued payroll	75.1	52.6
Accounts payable to associated companies	12.9	5.4
Interest	16.8	17.2
Other	77.3	41.1
Total Current Liabilities	289.3	405.3
DEFERRED CREDITS
Income taxes	508.2	470.4
Investment tax credits	26.5	28.5
Pension benefit obligation	46.6	35.5
Other postretirement benefit obligation	38.9	36.4
Other	43.3	29.9
Total Deferred Credits	663.5	600.7
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS	991.6	636.3
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES    OF SUBSIDIARY TRUST WHICH HOLDS SOLELY PARENT JUNIOR    SUBORDINATED DEBENTURES	95.0	95.0
PREFERRED STOCK
Serial preferred stock	6.2	6.2
Subject to mandatory redemption	-	12.5
Total Preferred Stock	6.2	18.7
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $3.00 par value, authorized 25,000,000 shares,      - issued 18,320,937 shares	55.0	55.0
Premium on stock and other capital contributions	411.5	411.5
Capital stock expense	(1.2)	(1.3)
Retained income	153.9	156.2
Total Shareholder's Equity	619.2	621.4
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY	$2,664.8	$2,377.4
The accompanying Notes are an integral part of these Consolidated Financial Statements.

ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2002	2001	2000
(Millions of Dollars)
OPERATING ACTIVITIES
Net income	$ 28.2	$ 75.5	$ 54.4
Adjustments to reconcile net income to net cash    from (used by) operating activities:
Depreciation and amortization	69.2	94.0	113.8
Investment tax credit adjustments	(2.0)	(7.4)	(3.2)
Write-down of plant and property	9.6	-	-
Deferred income taxes	46.6	83.6	23.1
Deferred energy supply costs	(41.8)	(143.2)	(7.5)
Changes in:
Accounts receivable	3.3	(17.4)	(7.3)
Inventories	1.0	(15.6)	9.1
Prepaid New Jersey sales and excise taxes	(3.1)	12.8	13.4
Accounts payable	39.0	5.7	(15.0)
Taxes accrued	15.4	(51.3)	98.7
Other current assets and liabilities	28.5	3.4	(2.7)
Other, net	14.0	3.9	5.7
Net Cash From Operating Activities	207.9	44.0	282.5
INVESTING ACTIVITIES
Net investment in property, plant and equipment	(106.2)	(70.0)	(53.7)
Proceeds from/changes in:
Divestiture of generation assets	-	29.5	-
Sale of other assets	12.4	-	-
Deposits to nuclear decommissioning trust funds	-	(0.8)	(0.4)
Other	(2.1)	(4.1)	4.2
Net Cash Used By Investing Activities	(95.9)	(45.4)	(49.9)
FINANCING ACTIVITIES
Common dividends paid	(34.8)	(44.2)	(67.3)
Preferred dividends paid	(0.7)	(1.7)	(2.3)
Redemption of preferred stock	(12.5)	(11.5)	-
Long-term debt issued	440.0	-	-
Long-term debt redeemed	(221.4)	(97.2)	(46.1)
Principal portion of capital lease payments	-	(29.8)	(12.3)
Net change in short-term debt	(45.0)	45.0	(30.0)
Costs of issuances and refinancings	(4.8)	(1.0)	-
Net Cash From (Used By) Financing Activities	120.8	(140.4)	(158.0)
Net Change In Cash and Cash Equivalents	232.8	(141.8)	74.6
Cash and Cash Equivalents at Beginning of Period	14.3	156.1	81.5
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$247.1	$ 14.3	$156.1
The accompanying Notes are an integral part of these Consolidated Financial Statements.

ATLANTIC CITY ELECTRIC COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
	Common Stock		Premium on Stock	Retained Income
	Shares	Par Value
(Dollar Amounts in Millions)
BALANCE, DECEMBER 31, 1999	18,320,937	55.0	493.0	130.0
Net Income				54.4
Dividends:
Preferred stock				(2.1)
Common stock				(67.3)
Contribution to Conectiv of subsidiaries    which owned combustion turbine    electric generating units			(82.8)
BALANCE, DECEMBER 31, 2000	18,320,937	55.0	410.2	115.0
Net Income				75.5
Dividends:
Preferred stock				(1.7)
Common stock				(32.6)
BALANCE, DECEMBER 31, 2001	18,320,937	55.0	410.2	156.2
Net Income				28.2
Dividends:
Preferred stock				(0.7)
Common stock				(29.7)
Preferred stock expense for redeemed    stock			0.1	(0.1)
BALANCE, DECEMBER 31, 2002	18,320,937	55.0	410.3	153.9
The accompanying Notes are an integral part of these Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ATLANTIC CITY ELECTRIC COMPANY

(1) ORGANIZATION

     Atlantic City Electric Company (ACE) is a subsidiary of Conectiv, which is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). On March 1, 1998, Conectiv was formed (the 1998 Merger) through an exchange of common stock with Atlantic Energy, Inc. and Delmarva Power & Light Company (DPL).

     On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco and their respective subsidiaries (including ACE) each became subsidiaries of PHI. ACE continues as a wholly owned, direct subsidiary of Conectiv. See Note 2 to the ACE Consolidated Financial Statements for additional information.

     ACE is a public utility which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery. ACE delivers electricity within its service area to approximately 514,300 customers through its transmission and distribution systems and also supplies electricity (Basic Generation Service) to most of its electricity delivery customers, who have the option of choosing an alternative supplier. ACE's regulated service area covers about 2,700 square miles within the southern one-third of New Jersey and has a population of approximately 0.9 million.

     As discussed in Note 8 to the Consolidated Financial Statements, ACE continued the divestiture of its electric generating plants during 2001. The divestiture began effective July 1, 2000 with ACE's contribution to Conectiv at net book value of its combustion turbines, which had an electric generating capacity of 502 megawatts (MW). On October 18, 2001, ACE sold its ownership interests in nuclear electric generating plants with 383 MW of capacity.

(2)  ACQUISITION OF CONECTIV BY PEPCO HOLDINGS, INC.

     On August 1, 2002, Conectiv was acquired by PHI in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco each became subsidiaries of PHI. ACE continues as a wholly-owned, direct subsidiary of Conectiv.

     ACE's operating results for 2002 include costs related to the Conectiv/Pepco Merger of $38.1 million ($22.6 million after income taxes). The $38.1 million of costs included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the NJBPU on July 3, 2002 that required ACE to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $6.6 million for severances and stock options settled in cash; and (iii) $1.0 million for a contribution to a certain fund based on the terms of an order issued by the NJBPU. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over ACE, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statement Presentation

     The consolidated financial statements include the accounts of ACE and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

     Certain reclassifications of prior period data have been made to conform to the current presentation.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Regulation of Utility Operations

     Certain aspects of ACE's utility businesses are subject to regulation by the New Jersey Board of Public Utilities (NJBPU) and the Federal Energy Regulatory Commission (FERC).

     ACE's electric delivery business and Basic Generation Service (BGS) are subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). Prior to the third quarter of 1999, ACE's electricity generation business was subject to the requirements of SFAS No. 71. As a result of the restructuring of ACE's electricity generation business in the third quarter of 1999, as discussed in Note 6 to the Consolidated Financial Statements, ACE discontinued applying SFAS No. 71 to its electricity generation business.

     ACE recovers through customer rates the costs it incurs in providing BGS, which entails supplying electricity to customers in ACE's service area who do not choose an alternative supplier. When utility revenues are insufficient to recover current period expenses from customers, the NJBPU may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by the NJBPU.

     On July 3, 2002, the New Jersey Board of Public Utilities (NJBPU) issued an order approving the Conectiv/Pepco Merger. Among other things, the order provides for ACE to forgo recovery through customer rates of $30.5 million of "deferred electric service costs," ACE to contribute $1.0 million to a fund supporting southern New Jersey schools, and certain customer service guarantees.

Revenue Recognition

     ACE recognizes revenues for the supply and delivery of electricity upon delivery to the customer, including amounts for services rendered, but not yet billed.

Nuclear Fuel

     As discussed in Note 8 to the Consolidated Financial Statements, on October 18, 2001, ACE sold its interests in Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and Hope Creek Nuclear Generating Station (Hope Creek) and the related nuclear fuel to the utilities which operate the plants. Prior to the sale, the ownership interests of ACE in nuclear fuel at the Peach Bottom, Salem and Hope Creek generating stations were financed through contracts accounted for as capital leases. Nuclear fuel costs, including a provision for the future disposal of spent nuclear fuel, were charged to fuel expense on a unit-of-production basis.

Accounting for the Effects of Certain Types of Regulation

     The electric delivery business of ACE is subject to the requirements of SFAS No. 71. Also, ACE recovers through customer rates the costs it incurs in providing BGS, which entails supplying electricity to customers in ACE's service area who do not choose an alternative supplier. When utility revenues are insufficient to recover current period expenses from customers, regulatory commissions may provide for future recovery from customers of such current period expenses. When future recovery is probable for current under-recoveries of utility expenses, the expenses are deferred as regulatory assets and subsequently recognized in the Consolidated Statement of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory commission.

     The components of ACE's regulatory asset balances are displayed below:

	December 31,     2002	December 31,     2001
	(Millions of Dollars)
Recoverable stranded costs	$  918.6	$  930.0
Deferred energy supply costs	153.0	106.3
Deferred recoverable income taxes	10.3	11.0
Regulatory liability for New Jersey income tax benefit	(51.2)	(49.3)
Deferred debt extinguishment costs	10.4	11.4
Deferred other postretirement benefit costs	25.0	27.5
Unrecovered purchased power costs	10.5	12.5
Asbestos removal costs	7.5	7.7
Other	7.9	9.1
Net Regulatory Assets	$1,092.0	$1,066.2

     Recoverable Stranded Costs: The pre-tax balances of $918.6 million as of December 31, 2002 and $930.0 million as of December 31, 2001 arose from the $228.5 million NUG contract termination payment in December 1999 and discontinuing the application of SFAS No. 71 to the electricity generation business in third quarter of 1999, as discussed in Notes 3 and 8 to the Consolidated Financial Statements. The regulatory asset, "recoverable stranded costs," was established in the third quarter of 1999 to recognize amounts to be collected from regulated delivery customers for stranded costs that resulted from deregulation of the electricity generation businesses of ACE.

     Deferred Energy Supply Costs: See discussion under "Regulation of Utility Operations," shown above. This line also includes deferred electric service costs; see "Basic Generation Service" in Note 6 to the Consolidated Financial Statements for further discussion, as well as the discussion of merger costs included in operating results in Note 2 to the Consolidated Financial Statements.

     Deferred Recoverable Income Taxes: Represents the portion of deferred income tax liabilities applicable to utility operations of ACE and DPL that has not been reflected in current customer rates for which future recovery is probable. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized.

     Regulatory Liability for New Jersey Income Tax Benefit: In 1999, a deferred tax asset arising from the write down of ACE's electric generating plants was established. The deferred tax asset represents the future tax benefit expected to be realized when the higher tax basis of the generating plants is deducted for New Jersey state income tax purposes. To recognize the probability that this tax benefit will be given to ACE's regulated electricity delivery customers through lower electric rates, ACE established a regulatory liability.

     Deferred Debt Extinguishment Costs: The costs of debt extinguishment for which recovery through regulated utility rates is probable are deferred and subsequently amortized to interest expense during the rate recovery period.

     Deferred Other Postretirement Benefit Costs: Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period that began on January 1, 1998.

     Unrecovered Purchased Power Costs: Includes costs incurred by ACE for renegotiation of a long-term capacity and energy contract. These costs are included in current customer rates with the balance scheduled for full recovery over the next 12 years.

     Asbestos Removal Costs: Represents costs incurred by ACE to remove asbestos insulation from a wholly owned electric generating station. These costs are included in current customer rates with the balance scheduled for full recovery over the next 27 years.

Cash and Cash Equivalents

     Cash and cash equivalents include cash on hand, money market funds, and commercial paper with original maturities of three months or less. Investments in PHI's "money pool," which PHI and Conectiv subsidiaries may invest in, or borrow from, are considered cash equivalents.

Property, Plant and Equipment

     Property, plant and equipment is comprised of the following:

At December 31, 2002	Original   Cost	Accumulated Depreciation	Net    Book Value
	(Millions of Dollars)
Generation	$  279.5	$236.6	$   42.9
Distribution	977.7	385.7	592.0
Transmission	389.4	157.6	231.8
General	81.4	(52.9)	134.3
Construction work in progress	64.7	-	64.7
Nonoperating and other property	43.3	29.2	14.1
Total	$1,836.0	$756.2	$1,079.8
At December 31, 2001
Generation	$  136.2	$ 83.5	$   52.7
Distribution	888.8	351.4	537.4
Transmission	375.5	160.1	215.4
General	89.3	(51.7)	141.0
Construction work in progress	74.8	-	74.8
Nonoperating and other property	45.7	26.2	19.5
Total	$1,610.3	$569.5	$1,040.8

     The balances of all property, plant and equipment, which is primarily electric transmission and distribution property, are stated at original cost. Utility plant is generally subject to a first mortgage lien.

Depreciation Expense

     The annual provision for depreciation on electric property, plant and equipment is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, including removal costs less salvage and other recoveries. The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.3% for 2002, 3.5% for 2001, and 3.6% for 2000. For periods prior to the sale of the ownership interests of ACE in nuclear electric generating plants on October 18, 2001, depreciation expense includes a provision for ACE's share of the estimated cost of decommissioning nuclear power plant reactors based on site-specific studies.

     Property, plant and equipment other than electric facilities is generally depreciated on a straight-line basis over the useful lives of the assets.

Capitalized Interest and Allowance for Funds Used During Construction

     The cost of financing the construction of non-utility construction projects is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost" (SFAS No. 34).

     Allowance for Funds Used During Construction (AFUDC) is included in the cost of regulated transmission and distribution utility plant and represents the cost of borrowed and equity funds used to finance construction. In the Consolidated Statements of Income, both the borrowed funds component and equity funds component of AFUDC is reported as a reduction of interest expense. AFUDC was capitalized on utility plant construction at the rates of 8.25% in 2002, 2001, and 2000.

Interest Expense

     The amortization of debt discount, premium, and expense, including deferred debt extinguishment costs associated with the regulated electric and gas transmission and distribution businesses, is included in interest expense.

Income Taxes

     ACE, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to ACE based upon the taxable income or loss, determined on a separate return basis.

     The Consolidated Financial Statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on ACE's state income tax returns and the amount of federal income tax allocated from PHI. Deferred income taxes are discussed below.

     Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of ACE's deferred tax liability applicable to its utility operations that has not been recovered from utility customers represents income taxes recoverable in the future and is included in "regulatory assets, net" on the Consolidated Balance Sheets. For additional information, see the discussion under "Accounting for the Effects of Certain Types of Regulation," shown above.

     Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

     Investment tax credits from utility plant purchased in prior years are reported on the Consolidated Balance Sheets as "Deferred investment tax credits." These investment tax credits are being amortized to income over the useful lives of the related utility plant.

New Accounting Standards

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 entitled "Accounting for Asset Retirement Obligations," which is required to be adopted for financial statements issued for fiscal years beginning after June 15, 2002 (first quarter 2003 financial statements for the Company). This Statement establishes the accounting and reporting standards for measuring and recording asset retirement obligations. ACE has completed its assessment of the provisions of SFAS No. 143. The implementation of the Statement will not have a material impact on the Company's financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in ACE's Consolidated Statements of Income.

     In July 2002, the FASB issued SFAS No. 146, which requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. Additional disclosures are also prescribed for certain guarantee contracts. The initial recognition and initial measurement provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002 (the Company's first quarter 2003 financial statements). The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made an initial assessment of the provisions of FIN 45 in order to determine its impact on the Company's financial position, results of operations, and disclosure requirements. Based o n this initial assessment, the Company does not believe the implementation of FIN 45 will have a material impact on its financial position or results of operations.

     In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). ACE has made an initial assessment of the provisions of FIN 46 in order to determine its impact on the Company's financial position or results of operations. Based on this initial assessment, the Company does not believe the implementation of FIN 46 will have a material impact on its financial position or results of operations.

(4)  SUPPLEMENTAL CASH FLOW INFORMATION

Cash Paid During the Year

	2002	2001			2000
	(Dollars in Millions)
Interest, net of capitalized amounts of   $1.4 million, $0.7 million, and   $0.6 million for 2002, 2001, and   2000, respectively	$ 50.8		$59.7	$73.5
Income taxes, net of refunds	$(43.8)		$21.8	$(80.7)

     During 2000, ACE received federal and state income tax refunds of $114.2 million and made estimated tax payments of $33.5 million, resulting in $80.7 million of net income taxes received. The income tax refunds received in 2000 were primarily related to the tax benefit associated with ACE's payment of $228.5 million on December 28, 1999 to terminate ACE's purchase of electricity under a contract with the Pedricktown Co-generation Limited Partnership (Pedricktown).

Non-cash Investing and Financing Transaction

     The 2001 Consolidated Statement of Cash Flows excludes the assumption of former nuclear decommissioning liabilities of ACE by the purchasers of ACE's ownership interests in nuclear electric generating plants and also excludes the transfer of nuclear decommissioning trust funds to the purchasers. The fair value of the nuclear decommissioning trust funds that were transferred in 2001 was $115.8 million. For additional information about the sale of ACE's ownership interests in nuclear electric generating plants, see Note 8 to the Consolidated Financial Statements.

     The 2000 Consolidated Statement of Cash Flows excludes the non-cash transaction for ACE's contribution of combustion turbines to Conectiv.

(5)  INCOME TAXES

     ACE, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to ACE based upon the taxable income or loss, determined on a separate return basis.

     The provision for income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

     The amounts computed by multiplying "Income before income taxes" by the federal statutory rate is reconciled in the table below to income tax expense on continuing operations.

Components of Consolidated Income Tax Expense

		2002	2001	2000
		(Dollars in Millions)
Operations
Federal:  Current		$(39.6)	$(23.9)	$ 6.9
Deferred		52.0	65.6	22.5
State:    Current		11.4	(5.6)	9.9
Deferred		(5.5)	18.0	0.6
Investment tax credit adjustments, net (1)		(2.0)	(7.4)	(3.2)
Total Income Tax Expense		$16.3	$ 46.7	$36.7
(1)	In 2001, $4.9 million of deferred investment tax credits were reversed and credited to tax expense due to the sale of ACE's ownership interests in nuclear electric generating plants.

Reconciliation of Effective Income Tax Rate

	For the Year Ended December 31,
	2002		2001		2000
	Amount	Rate	Amount	Rate	Amount	Rate
	(Amounts in Millions)
Statutory federal    income tax expense	$15.6	35%	$42.8	35%	$31.9	35%
State income taxes,    net of federal    benefit	3.8	9	8.1	6	6.9	8
Plant basis differences	1.0	2	2.0	2	2.2	2
Investment tax credit    amortization	(2.0)	(4)	(7.4)	(6)	(3.2)	(3)
Other, net	(2.1)	(5)	1.2	1	(1.1)	(2 )
	$16.3	37%	$46.7	38%	$36.7	40%

Components of Deferred Income Taxes

     The tax effects of temporary differences that give rise to ACE's net deferred tax liability are shown below. There were no valuation allowances for deferred tax assets as of December 31, 2002 and December 31, 2001.

	2002		2001
	(Dollars in Millions)
Deferred tax liabilities:
Utility plant basis differences	$	379.8	$	340.1
Deferred recoverable income taxes		3.6		3.9
Payment for termination of purchased power contracts with non-utility electric generators		97.0		96.8
Deferred electric service expenses		79.0		47.5
Other		26.7		46.1
Total deferred tax liabilities		586.1		534.4
Deferred tax assets:
Deferred investment tax credits		14.2		10.0
Other		63.7		54.2
Total deferred tax assets		77.9		64.2
Total deferred taxes, net	$	508.2	$	470.2

(6)  REGULATORY MATTERS

Restructuring

     On February 9, 1999, New Jersey enacted the Electric Discount and Energy Competition Act (the New Jersey Act). The New Jersey Act provided for restructuring of the electric utility industry in New Jersey and established that customers of New Jersey electric utilities could choose alternative electricity suppliers beginning August 1, 1999. Restructuring the New Jersey electric utility industry resulted in "stranded costs," which include the portion of electric generating plants, other assets, and long-term contracts that became uneconomic as a result of the restructuring. Pursuant to the New Jersey Act, on July 15, 1999, the NJBPU issued a Summary Order to ACE concerning stranded costs, unbundled rates, and other matters related to restructuring. In mid-May 2001, the NJBPU issued a Final Decision and Order, which had substantially the same provisions as the Summary Order. The NJBPU determined that ACE will have the opportunity to recover 10 0% of the net stranded costs related to certain generation units and the stranded costs associated with power purchased from non-utility generators (NUGs), subject to further NJBPU proceedings. See the section "Securitization" below for additional information.

Rate Changes

     As part of the New Jersey Act, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999, an additional 2% rate reduction by January 1, 2001, and a final 3% rate reduction by August 1, 2002. Thus, by August 1, 2002, rates were reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual revenues by approximately $50 million. The additional 2%, or $20 million, rate reduction required by January 1, 2001 was implemented through two separate 1%, or $10 million, rate reductions effective January 1, 2000 and 2001, respectively. The final rate reduction, which was effective August 1, 2002, reduced revenues by an additional $30 million, resulting in a cumulative rate reduction of $100 million since August 1, 1999.

     On February 3, 2003, ACE filed a petition with the NJBPU to increase its electric distribution rates and the Regulatory Asset Recovery Charge in New Jersey. The rate increase equates to an increase in average, total electricity rates of 6.9% overall, and will increase ACE's annual revenues by approximately $68.4 million. The petition was filed in accordance with the NJBPU's Final Order in restructuring, which mandated that ACE file a plan to set rates that will be in place when the New Jersey Act's transition period ends July 31, 2003.

Securitization

     Under the New Jersey Act, up to 100% of recovery-eligible stranded costs related to electric generating plants and the costs to effect buyouts or buydowns of NUG contracts may be recovered through customer rates. On September 9, 2002, New Jersey enacted an amendment (Amendment) to the New Jersey Act. The Amendment permits the NJBPU to authorize the securitization of deferred balances of electric public utilities resulting from the provisions of the New Jersey Act. The NJBPU may authorize the issuance of transition bonds by an electric public utility or other financing entity in order to (i) recover stranded costs deemed eligible for rate recovery in a stranded cost recovery order; (ii) recover rate reduction requirements determined by the NJBPU to be necessary under the provisions of the New Jersey Act; or (iii) recover basic generation service transition costs. The NJBPU may approve transition bonds with scheduled amortization of up to fif teen years if related to stranded cost recoveries or recoveries of basic generation service transition costs, or the remaining term of a purchase power agreement if related to the buyout or buydown of long-term purchase power contracts with NUGs.

     On September 20, 2002, the NJBPU issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. The Financing Order also authorized (i) the collection from ACE's customers of a non-bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (ii) the collection from ACE's customers of a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iii) the sale of "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. ACE, through a wholly owned subsidiary described below, issued Transition Bonds totaling $440 million on December 19, 2002, in accordance with this Financing Order. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buy down of the American Ref-Fuel NUG contract. Also included in the amount authorized was $20 million of transaction costs and capital reduction costs.

     ACE formed ACE Transition Funding, LLC (ACE Transition Funding) during 2001 for the sole purpose of purchasing and owning the bondable transition property (BTP), issuing transition bonds (Bonds), pledging ACE Transition Funding's interest in BTP and other collateral to the bond trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Proceeds from the sale of Bonds were transferred to ACE in consideration for the BTP, and ACE will repurchase debt and/or equity related to the stranded costs and NUG contracts noted above. The Bonds of ACE Transition Funding are included in Conectiv's Consolidated Balance Sheet.

     On January 31, 2003, ACE filed a petition seeking from the NJBPU an administrative valuation of a portion of the B.L. England Station stranded costs and a finding that such costs may be included as part of the principal amount of transition bonds for which ACE may seek approval under the New Jersey Act. Management anticipates that the necessary approvals will be received from the NJBPU and that a bondable stranded costs rate petition will ultimately be approved, leading to the issuance of additional transition bonds.

Basic Generation Service

     Under the provisions of New Jersey's 1999 Electric Discount and Energy Competition Act (the New Jersey Act) and the NJBPU's Final Decision and Order concerning restructuring ACE's electric utility business, ACE is obligated to provide Basic Generation Service (BGS) through July 31, 2002, which entails supplying electricity to customers in ACE's service area who do not choose an alternative supplier. The Final Decision and Order provides for the recovery through customer rates of the costs incurred by ACE in providing BGS, including an allowed return on certain electric generating plants, the above-market portion of the cost of power purchased from NUGs, and the above-market portion of costs associated with generating power for BGS customers. In recognition of this cost-based, rate-recovery mechanism, when the costs incurred by ACE in providing BGS exceed the revenues from billings to ACE's customers for BGS, the under-recovered costs are defe rred as a regulatory asset. ACE deferred costs related to providing BGS in the amounts of $71.3 million for 2002, $143.2 million for 2001, and $7.5 million for 2000. Pursuant to the terms of the 1999 restructuring of ACE's electric generation business, during 2000-2002, the under-recovered costs were first applied to a deferred energy cost liability which was eliminated and then a regulatory asset was established ($153.0 million as of December 31, 2002). After the initial four-year transition period ends July 31, 2003, customer rates are to be adjusted to recover the under-recovered cost balance over a reasonable period of time to be determined by the NJBPU. ACE's recovery of the deferred costs is subject to review by the NJBPU.

     On August 1, 2002, in accordance with the provisions of the New Jersey Act and the NJBPU's Final Decision and Order, ACE petitioned the NJBPU for a $71.6 million, or 8.4%, annualized increase in electric rates, effective August 1, 2003. This proposed rate increase is intended to recover ACE's deferred cost balance as of August 1, 2003 over a four-year period and reset ACE rates such that an under-recovery of certain costs is no longer embedded in rates. ACE's recovery of the deferred costs is subject to review by the NJBPU, which will determine the amount of cost recovery in accordance with the New Jersey Act.

     BGS electricity supply beyond July 31, 2002 was provided for by a BGS auction held in February 2002, which awarded about 1,900 MW, or 80% of ACE's BGS load to four suppliers for the period from August 1, 2002 to July 31, 2003. The remaining 20% of ACE's BGS load is supplied utilizing ACE's electric supply, consisting of its fossil fuel-fired electric generating plants (excluding Deepwater), which are used first to meet such BGS load, and its NUG contracts, to the extent such electric generating plants are not sufficient to satisfy such load.

     Any portion of ACE's electric supply that exceeds the load requirement of the BGS customers is sold in the wholesale market. In addition, if any of the four suppliers awarded 80% of ACE's BGS load default on performance, ACE will offer the defaulted load to the other winning bidders. If they are not interested, ACE will then procure the needed supply from the wholesale market. Any costs related to this new supply that are not covered by remuneration from the supplier in default will be included in the calculation of deferred electric service costs, which are subject to NJBPU review and future recovery in customer rate increases.

     By Decision and Order dated December 18, 2002, the NJBPU approved the process for the procurement of BGS supply for the period starting August 1, 2003. The decision included holding two separate but simultaneous auctions to procure BGS supply. The first auction will be for the supply needed to serve large commercial and industrial customers who will be paying an hourly energy price. There are approximately 50 customers in this group for ACE. The auction will determine the capacity price to be paid by these customers. The period covered by this auction is August 1, 2003 through May 31, 2004. The second auction will be for the supply needs of the remainder of the BGS customers, and would be for full requirement service (energy, capacity, transmission, and ancillary services) for these customers. In this auction, two thirds of the needs will be procured for the same period as the first auction, while the remaining one third of the needs wil l be procured for a period of 34 months. The results of these auctions will be used to set the rates paid by the customers in each group. The decision also established working groups to deal with metering issues and customer education. The auctions were conducted February 3 and 4, 2003. The NJBPU approved the results of the auctions on February 5, 2003. ACE has entered into BGS Supplier Agreements with the winning bidders. If any of the winning bidders were to default on their commitments, ACE will offer the defaulted load to other winning bidders, or will make arrangements to purchase the needed supply from PJM-administered markets.

(7)  IMPAIRMENT LOSS

     In connection with Conectiv's second competitive bidding process for the sale of ACE's fossil fuel-fired electric generating plants, an impairment of the carrying value of ACE's Deepwater power plant was identified. Accordingly, a $9.5 million before-tax impairment charge ($5.6 million after-tax) was recorded in December 2002. ACE's assessment of the carrying value of the Deepwater power plant was based on offers received from the competitive bidding process. In addition to the impairment charge on the Deepwater power plant, ACE recorded a $7 million before-tax charge ($4.1 million after-tax) to operating expenses for anticipated environmental clean-up costs at the Deepwater power plant. See Notes 8 and 19 to the Consolidated Financial Statements for additional information regarding the termination of the competitive bidding process and ACE's environmental matters.

(8)  SALES OF ELECTRIC GENERATING PLANTS

Sales of Electric Generating Plants Completed in 2001

     On October 18, 2001, ACE sold for $29.6 million its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station (Peach Bottom), 7.41% interest (167 MW) in Salem Nuclear Generating Station (Salem) and 5.0% interest (52 MW) in Hope Creek Nuclear Generating Station (Hope Creek) and the related nuclear fuel to the utilities that operate the plants. ACE's trust funds and obligation for decommissioning the plants were transferred to the purchasers in conjunction with the sale. The net assets sold had a carrying value of$27.3 million, which reflects a write-down in 1999 related to discontinuing SFAS No. 71. ACE used $20.5 million of the proceeds to repay the lease obligations related to the nuclear fuel. There was a $2.4 million pre-tax gain on the sale, which did not affect earnings due to the terms of the 1999 restructuring of the electricity generation business of ACE; instead, the pre-tax gain on the sale decreased the balance of deferred rec overable stranded costs.

Termination of Agreements for Sale of ACE Electric Generating Plants

     As of December 31, 2002, ACE's fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station) were no longer under agreements for sale to NRG. Under the terms of agreements between ACE and NRG for the sale of the fossil fuel-fired electric generating plants, they were subject to termination by either party after February 28, 2002. NRG delivered notice to Conectiv on April 1, 2002 terminating these agreements. On January 13, 2003, Conectiv announced the termination of a second competitive bidding process initiated on May 23, 2002 to sell these ACE-owned fossil fuel-fired electric generating plants. Conectiv noted that while the competitive bidding process identified a number of interested parties, current conditions in the electric energy market prevented the Company from reaching agreements for the sale of these generating assets. Conectiv remains interested in selling these asset s on acceptable terms, but cannot predict whether or not any or all of the plants will be sold, whether the NJBPU will grant the required approval of any sales agreements, or any related impacts upon recoverable stranded costs.

Wholesale Transaction Confirmation Letter Agreements

     On October 3, 2000, ACE entered into Wholesale Transaction Confirmation letter agreements (Letter Agreements). The Letter Agreements provided for the sale of the electricity output and capacity associated with the former ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. Under the Letter Agreements, the operators of the nuclear plants purchased the electricity output and capacity from ACE during the period from October 7, 2000 through October 18, 2001 (the date ACE sold its interests in the plants). In exchange for the electricity output and capacity purchased from a given plant, the plant operators reimbursed ACE for the nuclear fuel burned and paid ACE's share of operation and maintenance costs, inventories, and capital expenditures.

(9)  TERMINATION OF MEMBERSHIP IN MUTUAL INSURANCE COMPANY

      ACE sold its interests in nuclear electric generating plants on October 18, 2001. ACE has continued its membership in NEIL through insurance coverages offered by NEIL for property other than nuclear power plants.

(10) JOINTLY-OWNED PLANT

     ACE's Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. ACE has ownership interests in electric generating plants, transmission facilities, and other facilities in which various parties have ownership interests. ACE's proportionate share of operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in ACE's Consolidated Statements of Income. ACE is responsible for providing its share of financing for the jointly owned facilities.

     Information with respect to ACE's share of jointly owned plant as of December 31, 2002 is shown below. As discussed in Note 8 to the Consolidated Financial Statements, the jointly-owned coal-fired Keystone and Conemaugh plants were under agreement for sale as of December 31, 2002.

Jointly Owned Plant	Ownership Share	Megawatt Capability Owned	Plant in Service	Accumulated Depreciation	Construction Work in Progress
			(Dollars in Millions)
Coal-Fired Electric Generating Plants
Keystone	2.47%	42	$14.6	$ 5.1	$3.8
Conemaugh	3.83%	65	37.0	11.9	0.5
Transmission Facilities	Various		24.9	12.4	-
Other Facilities	Various		1.1	.2	-
Total			$77.6	$29.6	$4.3

(11) COMMON STOCKHOLDER'S EQUITY

     Conectiv owns all 18,320,937 outstanding shares of ACE's common stock
($3 per share par value).

     For information concerning changes in ACE's common stockholder's equity, see the Statement of Changes in Common Stockholder's Equity.

     ACE's certificate of incorporation requires payment of all preferred dividends in arrears (if any) prior to payment of common dividends to Conectiv, and has certain other limitations on the payment of common dividends.

     As a subsidiary of a registered holding company under PUHCA, ACE can pay dividends only to the extent of its retained earnings unless SEC approval is obtained.

(12) PREFERRED STOCK

     ACE has authorized 799,979 shares of Cumulative Preferred Stock, $100 Par Value, 2,000,000 shares of No Par Preferred Stock and 3,000,000 shares of Preference Stock, No Par Value. If preferred dividends are in arrears for at least a full year, preferred stockholders have the right to elect a majority of directors to the Board of Directors until all dividends in arrears have been paid.

Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption

     The amounts which were outstanding as of December 31, 2002, and 2001 for ACE's preferred stock not subject to mandatory redemption are presented below.

		Shares Outstanding		Amount
Series	Current Redemption Price	2002	2001	2002	2001
			(Dollars in Millions)
$100 per share par value
4.00%-5.00%	$100.00-$105.50	62,305	62,305	$6.2	$6.2

Preferred Stock of Subsidiaries Subject to Mandatory Redemption

     On May 1, 2002, ACE redeemed 124,500 shares of its $7.80 annual dividend rate preferred stock, under mandatory and optional redemption provisions, at the $100 per share stated value, or $12.45 million in total.

     As of December 31, 2001, ACE had 124,500 shares outstanding of $7.80 annual dividend rate preferred stock, $100 per share stated value, or $12.45 million.

(13) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
       SUBSIDIARY TRUSTS HOLDING SOLELY COMPANY DEBENTURES

		Shares Outstanding		Amount
Issuer	Series	2002	2001	2002	2001
			(Dollars in Millions)
ACE financing trust	$25 per share, 8.25%	2,800,000	2,800,000	70.0	70.0
ACE financing trust	$25 per share, 7.375%	1,000,000	1,000,000	25.0	25.0
				$95.0	$95.0

     ACE has wholly owned financing subsidiary trusts shown in the table above. The financing subsidiary trusts have common and preferred trust securities outstanding and hold Junior Subordinated Debentures (the Debentures) of ACE. ACE owns all of the common securities of the trusts, which constitute approximately 3% of the liquidation amount of all of the trust securities issued by the trusts. The trusts use interest payments received on the Debentures, which are the trusts' only assets, to make cash distributions on the trust securities. The obligations of ACE pursuant to the Debentures and guarantees of distributions with respect to the trusts' securities, to the extent the trusts have funds available therefore, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have issued.

     For consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2026 to 2036. The Debentures are subject to redemption, in whole or in part, at the option of ACE, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events.

(14) DEBT

     Maturities of long-term debt during the next five years are as follows: 2003-$84.6 million; 2004-$86.4 million; 2005-$60.0 million; 2006-$87.5 million; and, 2007-$37.4 million.

     On April 1, 2002, ACE redeemed at maturity $20 million of unsecured 6.46% Medium Term Notes.

     On May 28, 2002, ACE redeemed at maturity $5 million of secured 7.04% Medium Term Notes.

     On August 23, 2002, ACE redeemed at maturity $25.0 million of secured 7.01% Medium Term Notes.

     On December 1, 2002, ACE redeemed $75 thousand of 6.38% mandatory sinking fund Tax Exempt bonds.

     On December 19, 2002, ACE retired at maturity a term loan in the amount of $171.4 million.

     ACE will redeem on March 24, 2003, Secured Medium Term Notes totaling $58 million with interest rates ranging from 7.125% - 7.98%.

     On December 19, 2002, ACE Transition Funding issued $440 million of Bonds, consisting of four classes. The transition bonds included $109.0 million, 2.80%, due July 10, 2010; $66.0 million, 4.21%, due April 20, 2013; $118.0 million, 4.91%, due July 20, 2017; and $147.0 million, 5.55%, due October 20, 2023. The proceeds from the sale of Bonds will be used to fund the purchase of Bondable Transition Property (BTP) from ACE. The Bonds are collateralized on a pro-rata basis by the BTP and the equity and other assets of ACE Transition Funding. Amounts on deposit with the Trustee are classified as restricted funds on the Balance Sheet.

     Substantially all of ACE's utility plant is subject to the lien of the mortgage collateralizing ACE's First Mortgage Bonds and Secured Medium Term Notes. ACE's mortgage requires that electric generating plants sold (as discussed in Note 8 to the Consolidated Financial Statements) be released from the lien. Assets may be released with a combination of cash, bondable property additions, and credits representing previously issued and retired First Mortgage Bonds. Pursuant to these terms, ACE's interests in nuclear electric generating plants that were sold on October 18, 2001 were released from the lien.

     Long-term debt outstanding as of December 31, 2002 and 2001 is presented below.

Type of Debt	Interest Rates	Due	2002	2001
			(Dollars in Millions)
First Mortgage Bonds:
	6.38%	2003-2006	$    2.0	$    2.1
	6.6340%	2013	68.6	68.6
	6.80%	2021	38.9	38.9
	7.00%	2023	62.5	62.5
	5.60%	2025	4.0	4.0
	6.15%-7.20%	2028-2029	129.6	129.6
			305.6	305.7
Medium-Term Notes (secured):
	7.02%	2002	-	30.0
	6.00%-7.20%	2003	40.0	40.0
	6.18%-7.98%	2004-2008	223.0	223.0
	7.25%-7.63%	2010-2014	8.0	8.0
	7.68%	2015-2016	17.0	17.0
			288.0	318.0
Medium-Term Notes (unsecured):
	6.46%	2002	-	20.0
	6.63%	2003	30.0	30.0
	7.50%-7.52%	2007	15.0	15.0
			45.0	65.0
Asset Backed Bonds   ACE Transition Funding:
	2.89%	2010	109.0	-
	4.21%	2013	66.0	-
	4.91%	2017	118.0	-
	5.50%	2023	147.0	-
			440.0	-
Term Loan	2.95%	2002	-	171.4
Total long-term debt			1,078.6	860.1
Net unamortized discount			(2.5)	(2.4)
Current portion			(84.5)	(221.4)
Total net long-term debt			$  991.6	$  636.3

     Variable Rate Demand Bonds (VRDB) are classified as current liabilities because the VRDB are due on demand by the bondholder. However, bonds submitted to ACE for purchase are remarketed by a remarketing agent on a best efforts basis. ACE expects that bonds submitted for purchase will continue to be remarketed successfully due to ACE's credit worthiness and the bonds' interest rates being set at market. ACE also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, ACE considers the VRDB to be a source of long-term financing. Average interest rates on the VRDB were 1.1% for 2002 and 2.4% for 2001.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The year-end fair values of certain financial instruments are listed below. The fair values were based on quoted market prices of Conectiv's securities or securities with similar characteristics.

	2002			2001
	Carry Amount	Fair Value	Carrying Amount		Fair Value
	(Dollars in Millions)
Investments	8.3	8.3	3.7		3.7
Preferred stock subject to mandatory    redemption	- --	- --	12.4		12.9
Company obligated mandatorily redeemable    preferred securities of subsidiary trust    holding solely company debentures	95.0	95.2	95.0		95.8
Long-term debt	991.6	1,040.5	636.3		642.3

(16) LONG-TERM PURCHASED POWER CONTRACTS

     As of December 31, 2002, ACE's commitments under long-term purchased power contracts provided ACE 700 MW of capacity and varying amounts of firm electricity per hour during each month of a given year. Commitments for purchased capacity under contracts decreased by approximately 1,100 MW in 2002, primarily due to the replacement of the capacity supplied by these contracts with the capacity and energy to be provided by the BGS suppliers that were selected by the auction process discussed in Note 6 to the Consolidated Financial Statements. Based on existing contracts as of December 31, 2002, the commitments of ACE during the next five years for capacity and energy under long-term purchased power contracts are estimated to be as follows: $252 million in 2003, $208 million in 2004; $239 million in 2005; $237 million in 2006; and $237 million in 2007.

(17) LEASES

Nuclear Fuel

     As discussed in Note 8 to the Consolidated Financial Statements, ACE sold its ownership interests in nuclear electric generating plants and the related nuclear fuel on October 18, 2001. Prior to the sale, ACE leased its share of nuclear fuel at the nuclear electric generating plants. The obligation of ACE under the contracts was repaid upon the sale of the interest in the nuclear electric generating plants on October 18, 2001 with proceeds from the sale.

     Leased nuclear fuel costs included in operating expenses were $10.4 million for 2001 and $14.2 million for 2000.

Lease Commitments

     ACE also leases other types of property and equipment for use in its operations. Amounts charged to operating expenses for these leases were $9.2 million in 2002, $8.2 million in 2001, and $10.1 million in 2000. Future minimum rental payments for all non-cancelable lease agreements are less than $10 million per year for each of the next five years.

(18) PENSIONS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (OPEB)

Pension Benefits

     The Pepco Holdings Retirement Plan (Plan) is a noncontributory plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries. Effective December 31, 2002, following the August 1, 2002 Pepco and Conectiv merger, the Pepco General Retirement Plan and the Conectiv Retirement Plan were merged into the Plan. The provisions and benefits of the merged plan for Pepco employees are identical to those of the original Pepco plan and for DPL and ACE employees the provisions and benefits are identical to the original Conectiv plan.

     As a result of the Conectiv/Pepco Merger, PHI adjusted Conectiv's accrued pension liability on August 1, 2002 to recognize all previously unrecognized gains and losses arising from past experience different from that assumed, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.87, "Employers' Accounting for Pensions." The Conectiv Plan transferred a projected benefit obligation of $804 million and plan assets of $744 million on August 1, 2002.

     PHI's pension expense/(income) included in net periodic benefit cost was $9.0 million in 2002, $(3.0) million in 2001, and $3.0 million in 2000. The 2002 net periodic benefit cost amount of $9.0 million includes $2.9 million of Conectiv net benefit cost for the period August 1, 2002 through December 31, 2002. The 5-month net benefit cost of Conectiv includes provision for eligible employees of PHI Service Company who are heritage CRP employees. The components of net periodic benefit cost for PHI were computed as follows.

	Pension Benefits
		2002			2001			2000
		(Millions of Dollars)
Components of PHI's Net Periodic Benefit Cost
Service cost	$	16.0		$	9.7		$	12.8
Interest cost		54.1			36.3			37.2
Expected return on plan assets		(69.0	)		(50.9	)		(48.7	)
Amortization of prior service cost		1.0			1.0			1.4
Recognized actuarial loss		6.9			.9			.3
Net Periodic Benefit Cost	$	9.0		$	(3.0	)	$	3.0

     The portion of net periodic benefit cost included as retirement expense in Conectiv's consolidated net income for the twelve months ended December 31, 2002 is $(2.6) million. This expense excludes provision during the period August 1, 2002 through December 31, 2002 for eligible employees of PHI Service Company who are heritage CRP employees.

     PHI pension program assets are stated at fair value and are composed of approximately 42% of fixed income investments (including cash equivalents) with the balance in equity investments at December 31, 2002. No Pepco Holdings stock is included in the pension program assets.

     The changes in PHI benefit obligation and fair value of PHI plan assets are presented in the following table.

	Pension Benefits
		2002			2001
	(Millions of Dollars)
Change in PHI's Benefit Obligation
Projected Benefit obligation at beginning of year	$	548.3		$	532.3
Service cost		16.0			9.7
Interest cost		54.1			36.3
Acquisition		804.1			-
Actuarial loss		40.7			3.2
Benefits paid		(64.3	)		(33.2	)
Projected Benefit Obligation at End of Year	$	1,398.9		$	548.3
Accumulated Benefit Obligation at December 31	$	1,228.2			489.0
Change in Fair Value of PHI's Plan Assets
Fair value of plan assets at beginning of year	$	555.0		$	576.9
Actual return on plan assets		(37.2	)		(14.6	)
Company contributions		35.0			25.0
Acquisition		744.3			-
Benefits paid		(56.5	)		(32.3	)
Fair Value of Plan Assets at End of Year	$	1,240.6		$	555.0

     The following table sets forth the PHI Program's prepaid benefit cost.

	Pension Benefits
		2002			2001
		(Millions of Dollars
Funded status	$	(158.3	)	$	6.7
Unrecognized actuarial loss		278.1			139.6
Unrecognized prior service cost		5.1			6.1
Prepaid Benefit Cost	$	124.9		$	152.4

     The actuarial assumptions for Pepco and Conectiv at December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.0	%
Expected return on plan assets
Pepco	9.0	%	9.0	%
Conectiv	9.5	%	-
Rate of compensation increase
Pepco	4.0	%	4.0	%
Conectiv	4.5	%	-

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for the 2002 year net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plan for 2003.

Other Post-Employment Benefits

     In addition to providing pension benefits, Conectiv provides certain health care and life insurance benefits for eligible employees (OPEBS), including the eligible employees of PHI Service Company who are heritage CRP employees.

     The acquisition of Conectiv by Pepco in August 2002 resulted in purchase accounting requirements that are reflected in the net periodic benefit cost of PHI and in the 2002 net periodic benefit cost information for Conectiv listed in the table below. Under such accounting, PHI adjusted Conectiv's accrued postretirement liability on August 1, 2002 to recognize all previously unrecognized actuarial gains and losses, all unrecognized prior service costs, and the remainder of any unrecognized obligation or asset existing at the date of the initial application of SFAS No.106. The Conectiv Plan transferred a projected benefit obligation of $320 million and plan assets of $100 million on August 1, 2002. The net periodic benefit cost included in Conectiv's 2002 consolidated results of operations is stated at historical cost and does not reflect the purchase accounting adjustment recorded by PHI.

	Other Post     Employment Benefits
		2002			2001			2000
	(Millions of Dollars)
Components of Conectiv's Net Periodic Benefit Cost
Service cost	$	4.9		$	4.4		$	3.9
Interest cost		22.0			17.1			14.5
Expected return on plan assets		(8.7	)		(9.0	)		(8.6	)
Amortization of transition obligation		-			3.1			3.1
Amortization of prior service cost		-			0.1			0.1
Recognized actuarial (gain) loss		7.3			-			(3.1	)
Net Periodic Benefit Cost	$	25.5		$	15.7		$	9.9
Portion of net periodic benefit cost included as   postemployment benefit expense in Conectiv   consolidated net income	$	19.2		$	15.7		$	9.9

     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed health care cost trend rate used to measure the expected cost benefits covered by the plan is 10% for the Conectiv plan. This rate is expected to decline to 5.0% over the next four-year period. A one percentage point change in the assumed health care cost trend rate would have the following effects for fiscal year 2002.

	1 Percentage- Point Increase	1 Percentage- Point Decrease
	(Millions of Dollars)
Effect on total of service and interest cost components	$ 0.4	$ (0.4)
Effect on postretirement benefit obligation	$12.4	$(12.3)

     The changes in Conectiv benefit obligation and fair value of Conectiv plan assets are presented in the following table.

		Other Post Employment Benefits
		2002			2001
	(Millions of Dollars)
Change in Conectiv Benefit Obligation
Benefit obligation at beginning of year	$	263.8		$	201.5
Service cost		4.9			4.4
Interest cost		22.0			17.1
Plan participants' contributions		0.6			0.5
Actuarial loss		58.0			57.3
Benefits paid		(19.2	)		(17.0	)
Benefit Obligation at End of Year	$	330.1		$	263.8
Change in Fair Value of Conectiv Plan Assets
Fair value of plan assets at beginning of year	$	117.1		$	119.7
Actual return on plan assets		(11.1	)		(2.3	)
Company contributions		20.6			16.2
Plan participants' contributions		0.6			0.5
Benefits paid		(19.2	)		(17.0	)
Fair Value of Plan Assets at End of Year	$	108.0		$	117.1

     The following table sets forth the Conectiv Program's accrued benefit cost.

		Other Post Employment Benefits
		2002				2001
		(Millions of Dollars)
Funded status	$	(222.1	)	)	$	(146.7	)
Unrecognized actuarial loss		70.4				22.4
Unrecognized prior service cost		-				0.1
Unrecognized initial net obligation		57.0				34.4
Accrued Benefit Cost	$	(94.7	)	)	$	(89.8	)

     Actuarial assumptions as of December 31, 2002, and 2001 are:

	2002		2001
Discount rate	6.75	%	7.25	%
Expected return on plan assets	9.5	%	9.5	%
Rate of compensation increase	4.5	%	4.5	%

     As of January 1, 2002, Pepco and Conectiv's individual plan actuarial valuations incorporated different assumptions for 2002 net periodic expense determination. PHI expects to review, and may change the actuarial assumptions of the plans for 2003.

     Conectiv funded a portion of its 2002 and 2001 estimated liability for Conectiv postretirement medical and life insurance costs through the use of an Internal Revenue Code (IRC) 501(c)(9) Voluntary Employee Beneficiary Association (VEBA). Assets are composed of cash equivalents, fixed income investments and equity investments.

     Conectiv also sponsors defined contribution savings plans covering all eligible employees. Under these plans, the Company makes contributions on behalf of participants. ACE's contributions to the plans totaled $1.1 million in 2002, $1.0 million in 2001, and $1.0 million in 2000.

(19) COMMITMENTS AND CONTINGENCIES

Commitments

     See Note 16 to the Consolidated Financial Statements for commitments related to long-term purchased power contracts and Note 17 to the Consolidated Financial Statements for commitments related to leases.

Environmental Matters

     ACE is subject to regulation with respect to the environmental effect of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. ACE's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including whether ACE or a corporate predecessor is responsible for conditions on a particular parcel ). ACE's current liabilities include $8.2 million as of December 31, 2002 and $3.2 million as of December 31, 2001 for potential clean-up and other costs related to sites at which the Company is a potentially responsible party (PRP), alleged to be a third party contributor, or has made a decision to clean up contamination on its own property.

     Included in the previously stated $8.2 million liability is ACE's anticipated $7 million in costs to clean up the Deepwater generating station as a result of discontinuing the second competitive bidding process for ACE's fossil fuel-fired generating stations and management's decision to clean up contamination on its own property. The costs of cleaning up ACE's B.L. England generating station have not yet been quantified. ACE does not expect such future costs to have a material effect on its financial position or results of operations.

     In April 2002, the United States Environmental Protection Agency (EPA) proposed regulations addressing best technology available for minimizing environmental impact from existing power production cooling water intake structures. The ACE Deepwater electric generating station's New Jersey Pollution Discharge Elimination System (NJPDES) renewal permit, effective through September 30, 2007 will require a study to evaluate the efficiency of recent changes to the intake structure and other biological impact studies that will be submitted with a permit renewal application in 2007. The NJPDES permit for the B.L. England Station expired in December 1999, but has been administratively extended, through submittal of a renewal application, and the plant continues to operate under the conditions of the existing permit until a renewal permit is issued by the New Jersey Department of Environmental Protection (NJDEP).

     On May 4, 2002, ACE, Conectiv Atlantic Generation, LLC (CAG), and the NJDEP entered into an Administrative Consent Order (ACO) to address ACE's and CAG's inability to procure Discrete Emission Reductions (DER) credits to comply with New Jersey's NOx Reasonable Available Control Technology (RACT) requirements and NJDEP's allegations that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The ACO eliminates requirements for ACE and CAG to purchase DER credits for certain ACE and CAG electric generating units through May 1, 2005 and provides, among other things, for installation of new controls on CAG's electric generating units ($7 million estimated cost), a $1.0 million penalty, a $1.0 million contribution to promote, develop and enhance an urban airshed reforestation project, and operating hour limits at ACE's Deepwater Unit No. 4.

     On July 11, 2001, the NJDEP denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a number of stays of the denial to authorize ACE to operate Unit 1 with the current fuel until May 29, 2003. NJDEP also issued addendums to the permit/certificate to operate for Unit 1 authorizing trial burns of coal with a sulfur content less than 2.6%. ACE is requesting an extension of the current stay of the denial and submitted final wrap-up reports on the results of its test burns to NJDEP on January 28, 2003. Management is not able to predict the outcome of ACE's appeal, including the effects, if any, of trial burn results on NJDEP's position with regard to the denial or the appeal.

     In February 2000, the EPA and NJDEP requested information from ACE regarding the operation of coal-fired boilers at ACE's B.L. England and Deepwater generating stations. As of December 2002, in responding to this request and numerous subsequent requests, ACE has provided more than 24,000 pages of documents covering activities at B.L. England and Deepwater since 1978 to the EPA and NJDEP. The EPA has sought this information pursuant to its authority under Clean Air Act Section 114, and the ACE requests are similar to those that the EPA has made of other electric utilities to determine compliance with New Source Review (NSR) Prevention of Significant Deterioration (PSD) and non-attainment NSR requirements. Similar inquiries have resulted in the filing of federal lawsuits against utilities in the South and Midwest. A number of settlements of litigation brought as a result of such inquiries alleging violations of NSR standards have been announc ed. In January 2002, the Department of Justice completed its review of the EPA's enforcement actions and concluded that the EPA has a reasonable basis on which to pursue NSR enforcement. On December 31, 2002, the EPA published an NSR reform package including both proposed and final rules. The proposed rule offers options for clarifying the routine maintenance, repair and replacement exclusion to the NSR rules. It is unclear how the EPA's proposed reform rules will ultimately impact the on-going NSR enforcement actions; however, EPA officials have indicated their intention to continue with the NSR enforcement initiative targeting alleged past violations under the current rules. ACE met with the EPA and NJDEP in May 2002 to discuss NSR issues. Since then, ACE entered into a confidentiality agreement with the government agencies. Conectiv does not believe that it has violated NSR requirements. Management cannot predict the impact of the EPA/NJDEP inquiries or proposal on B.L. England or Deepwater operat ions.

     In June 1992, the EPA identified ACE as a PRP at the Bridgeport Rental and Oil Services (BROS) superfund site in Logan Township, New Jersey. In September 1996, ACE along with other PRPs signed a consent decree with the EPA and NJDEP to address remediation of the Site. ACE's liability is limited to 0.232 percent and ACE has made contributions of approximately $105,000. The Phase 2 Remedial Investigation/Feasibility Study (RI/FS) to address groundwater and wetlands contamination is scheduled to be completed in September 2003. ACE believes that its liability at this site will not have a material adverse effect on its financial position or results of operations.

     In November 1991, NJDEP identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with other PRPs, signed an ACO with NJDEP to remediate the Site. The soil cap remedy for the Site has been completed and the NJDEP conditionally approved the Remedial Action Report in January 2003. The results of groundwater monitoring over the next year will help to determine the extent of post-remedy operation and maintenance costs.

Litigation

     On October 24, 2000, the City of Vineland, New Jersey (City), filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities located within the City limits by eminent domain. On March 13, 2002, ACE and the City signed an agreement that provides for ACE to sell the electric distribution facilities within the City limits, and the related customer accounts, for $23.9 million. The proceeds are being received in installments as milestones are met, and are proceeding on schedule. The remaining proceeds should be received in the second quarter of 2004, when the final milestones will be completed. At that time the assets and customers will be transferred to the City and the sale will be recorded by ACE.

     ACE is involved in other legal and administrative (including environmental) proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on its financial position or results of operations.

(20) QUARTERLY FINANCIAL INFORMATION

     The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units.

	2002
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Total Operating Revenue	$221.0	$241.6	$365.6	$256.5	$1,084.7
Total Operating Expenses	199.1	206.3	343.4	247.7	996.4
Operating Income	21.9	35.3	22.3	8.8	88.3
Other (Expenses)	(11.1)	(9.5)	(7.3)	(8.3)	(36.2)
Preferred Stock Dividend   Requirements of Subsidiaries	1.9	1.9	1.9	1.9	7.6
Income From Continuing   Operations Before Income Taxes	8.9	23.9	13.1	(1.4)	44.5
Income Taxes	3.9	10.0	3.9	(1.5)	16.3
Net Income	5.0	13.9	9.2	0.1	28.2
Dividends on Preferred Stock	0.3	0.3	0.1	-	0.7
Earnings Available for   Common Stock	4.7	13.6	9.1	0.1	27.5

	2001
	First  Quarter	Second Quarter	Third   Quarter	Fourth   Quarter	Total
	(Dollars in Millions)
Total Operating Revenue	$225.8	$247.3	$337.8	$230.2	$1,041.1
Total Operating Expenses	193.4	193.1	275.5	199.4	861.4
Operating Income	32.4	54.2	62.3	30.8	179.7
Other (Expenses)	(14.0)	(12.2)	(12.9)	(10.8)	(49.9)
Preferred Stock Dividend   Requirements of Subsidiaries	1.9	1.9	1.9	1.9	7.6
Income From Continuing   Operations Before Income Taxes	16.5	40.1	47.5	18.1	122.2
Income Taxes	7.2	16.7	19.8	3.0	46.7
Net Income	9.3	23.4	27.7	15.1	75.5
Dividends on Preferred Stock	0.5	0.6	0.3	0.3	1.7
Earnings Available for   Common Stock	8.8	22.8	27.4	14.8	73.8

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Report of Independent Accountants

To the Member and Managing Board
of Atlantic City Electric Transition Funding LLC

In our opinion, the accompanying balance sheets and the related statement of earnings and member's equity, and of cash flows present fairly, in all material respects, the financial position of Atlantic City Electric Transition Funding LLC at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the LLC's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amo unts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 10, 2003

ATLANTIC CITY ELECTRIC TRANSITION FUNDING, LLC.
STATEMENT OF EARNINGS AND MEMBER'S EQUITY
For the Year Ended December 31, 2002

	2002
(Millions of Dollars)
Operating Revenue
Utility	$ .7
Operating Expenses
Interest expense	.7
Total Operating Expenses	.7
Operating Income	-
Income Tax Expense	-
Net Income	$  -
Member's Equity, beginning of period	$  -
Net Income	-
Capital Contributed by Member	2.2
Member's Equity, end of period	$2.2

The accompanying Notes are an integral part of these Financial Statements.

ATLANTIC CITY ELECTRIC TRANSITION FUNDING, LLC. BALANCE SHEETS
	December 31, 2002	December 31, 2001
ASSETS
(Millions of Dollars)
CURRENT ASSETS
Restricted funds held by trustee	$  2.2	-
Transition bond charge receivable for Servicer	12.7	-
Total Current Assets	14.9	-
OTHER ASSETS
Bondable transition property	420.8	-
Deferred financing costs	6.9	2.3
Total Other Assets	427.7	2.3
TOTAL ASSETS	$442.6	$2.3
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Interest accrued	$   .7	$  -
Payable to ACE	-	2.3
Short term debt	14.4	-
Total Current Liabilities	15.1	2.3
CAPITALIZATION
Member's Equity	2.2	-
Long-Term debt	425.3	-
Total Capitalization	427.5	-
TOTAL LIABILITIES AND MEMBER'S EQUITY	$442.6	$2.3
The accompanying Notes are an integral part of these Financial Statements.

ATLANTIC CITY ELECTRIC TRANSITION FUNDING, LLC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002

	2002
(Millions of Dollars)
OPERATING ACTIVITIES
Net income	-
Adjustments to reconcile net income to net cash   used by operating activities:
Transition bond charge receivable from Servicer	(12.7)
Accrued interest	.7
Other	(2.3)
Net Cash Used By Operating Activities	(14.3)
INVESTING ACTIVITIES
Deposit of restricted funds with trustee	(2.2)
Purchase of bondable transition property	(420.8)
Net Cash Used By Investing Activities	(423.0)
FINANCING ACTIVITIES
Proceeds from issuance of transition bonds	439.8
Capital contributed by member	2.2
Debt issuance costs	(4.7)
Net Cash From Financing Activities	$437.3
Net Change In Cash and Cash Equivalents	-
Cash and Cash Equivalents at Beginning of Period	-
CASH AND CASH EQUIVALENTS AT END OF PERIOD	-

NOTES TO FINANCIAL STATEMENTS

ATLANTIC CITY ELECTRIC TRANSITION FUNDING LLC.

(1)  ORGANIZATION

     Atlantic City Electric Transition Funding LLC (ACE Funding), a limited liability company established by Atlantic City Electric (ACE) under the laws of the State of Delaware, was formed on March 28, 2001 pursuant to a limited liability company agreement with ACE dated April 11, 2001 as amended, as sole member of ACE Funding. ACE is a wholly owned subsidiary of Conectiv, which is a wholly owned subsidiary of Pepco Holdings, Inc., a registered holding company under the Public Utility Holding Company Act of 1935. ACE is a public utility, which supplies and delivers electricity to its customers under the trade name Conectiv Power Delivery.

     ACE Funding was organized for the sole purpose of purchasing and owning Bondable Transition Property (BTP), issuing transition bonds (Bonds) to fund the purchasing of BTP, pledging its interest in BTP and other collateral to the Trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. BTP represents the irrevocable right of ACE or its successor or assignee, to collect a non-bypassable transition bond charge (TBC) from customers pursuant to the bondable stranded costs rate order (BPU Financing Order), issued on September 20, 2002 by the New Jersey Board of Public Utilities (BPU) in accordance with the Electric Discount and Energy Competition Act enacted by the state of New Jersey in February 1999.

     The BPU Financing Order authorizes the TBC to be sufficient to recover $440 million aggregate principal amount of transition bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Bonds. ACE Funding's organizational documents require it to operate in a manner so that it should not be consolidated in the bankruptcy estate of ACE in the event ACE becomes subject to a bankruptcy proceeding. Both ACE and ACE Funding will treat the transfer of the BTP to ACE Funding as a sale under the applicable law. The Bonds will be treated as debt of ACE Funding.

     For financial reporting, federal income tax and State of New Jersey income and corporation business tax purposes, the transfer of BTP to ACE Funding is being treated as a financing arrangement and not as a sale. Furthermore, the results of operations of ACE Funding will be consolidated with ACE for financial and income tax reporting purposes.

     ACE Funding did not have results of operations, cash flows or member's equity in the period from its formation to December 31, 2001, as ACE Funding had not issued Bonds and purchased BTP

(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenues

     Substantially all of ACE Funding's revenues are derived from the TBC authorized pursuant to the BPU financing order, which is being collected from ACE customers. ACE Funding also accrues unbilled TBC revenues for electric service provided by ACE through the end of the accounting period. In addition, ACE Funding will record investment income on amounts on deposit with the Trustee; however, only earnings on the capital subaccount will be recorded in income, as earnings on the other subaccounts must be credited to ACE customers pursuant to the BPU financing order. ACE Funding will also earn interest on temporary cash investments.

Restricted Funds

     Amounts on deposit with the Trustee are classified as restricted funds on the Balance Sheet.

Amortization of Bondable Transition Property

     The BTP was recorded at the acquired cost and is being amortized over the life of the Bonds, based on TBC revenue collections, interest accruals and other fees. The BTP is solely the property of ACE Funding.

Deferred Financing Costs

     Prior to issuance of the Bonds, certain costs associated with the issuance were paid by ACE and included as deferred financing costs on ACE Funding's Balance Sheet. Upon issuance of the Bonds, ACE Funding reimbursed ACE for these costs, and the costs are being amortized as part of the BTP

Income Taxes

     ACE Funding is a single member limited liability company, which is treated as a disregarded entity for federal and state income tax purposes. Accordingly, ACE Funding's results are included in the tax returns of ACE. However, a provision or liability for income taxes related to ACE Funding's operations will be included in ACE Funding's financial statements.

(3)  BONDS

     In December 2002, ACE Funding issued $440 million of Bonds, consisting of four classes. ACE Funding used the net proceeds from the sale of Bonds to fund the purchase of BTP from ACE. The Bonds are collateralized on a pro-rata basis by the BTP and the equity and other assets of ACE Funding.

     Scheduled maturity and interest rates for the Bonds at December 31, 2002 are as follows:

Class	Interest Rate	Principal Amount	Expected Final Payment Date	Legal Final Maturity Date
		(In Thousands)
A-1	2.80%	$109,000	July 20, 2008	July 20, 2010
A-2	4.21%	66,000	April 20, 2011	April 20, 2013
A-3	4.91%	118,000	July 20, 2015	July 20, 2107
A-4	5.55%	147,000	October 20, 2121	October 20, 2023
		440,000
Unamortized Discount		(220)
Current Maturities		(14,494)
Long-Term Debt		$425,286

     The expected final payment date for each class of Bonds is the date on which there is expected to be no further outstanding principal balance for that class, based upon an expected amortization schedule for that class. ACE Funding has made certain assumptions in establishing these amortization schedules, including, among other things, that all TBC collections are received in accordance with ACE's forecasts. There can be no assurance that the principal balance of any class of Bonds will be reduced at the rates indicated in these amortization schedules. The legal final maturity date for each class of Bonds is the date on which ACE Funding is required to pay any outstanding principal balance for that class. The Bonds will not be in default if principal is not paid in accordance with the expected amortization schedules; however, a default will occur if the entire outstanding balance of any class is not paid on or before the legal final maturity dat e of that class.

     The source for repayment of the Bonds is the TBC authorized pursuant to the BPU financing order, which is being collected from ACE customers by ACE, as Servicer. Daily, ACE deposits TBC collections into a collection account maintained by the Trustee. ACE began remitting TBC collections to the Trustee on December 31, 2002. In accordance with the Indenture, the Trustee allocates amounts in the collection account to general, reserve, overcollateralization and capital subaccounts. The general subaccount is used to make principal and interest payments on the Bonds and to pay expenses, fees and charges as specified in the Indenture. The Trustee is required to make the first payment on the Bonds on October 20, 2003. The reserve subaccount is maintained for the purpose of retaining any excess amount of TBC collections and investment earnings not released to ACE Funding. The funding level of the overcollateralization subaccount is 0.5% of the initial principal balance of the Bonds. If amounts available in the general, reserve or overcollateralization subaccounts are not sufficient on any payment date to make scheduled payments, the Trustee will draw on amounts in the capital subaccount. Upon issuance of the Bonds, an amount equal to 0.5% of the initial principal balance of the Bonds was deposited into the capital subaccount. Any amounts collateralizing Bonds will be refunded to ACE upon repayment of the Bonds.

     At December 31, 2002, $2.2 million in capital was reflected in the subaccounts maintained by the Trustee.

(4)  SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

     Under the servicing agreement entered into by ACE Funding and ACE concurrently with the issuance of the Bonds, ACE, as Servicer, manages and administers the BTP of ACE Funding and collects the TBC on behalf of ACE Funding. ACE Funding is required to pay an annual servicing fee to ACE equal to $440,000 or 1% of the initial principal balance of Bonds, which is recovered through the TBC. ACE Funding has also entered into an administration agreement with PHI Service Company, Inc., an affiliated company, pursuant to which PHI Service Company, Inc. is providing administrative services to ACE Funding.

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Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE

     None for all registrants.

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Pepco Holdings, Inc.

     The information required by this Item 10 with regard to PHI, with the exception of the information set forth under the heading "Executive Officers of PHI and Pepco," is incorporated by reference to pages 6-8 and 12 from its definitive Proxy Statement for the 2003 Annual Meeting of Shareholders.

Potomac Electric Power Company

     The directors of Pepco at March 28, 2003, are as follows:

· John M. Derrick, Jr. - Mr. Derrick is Chairman of the Board of Pepco, a position he has held since April 28, 1999. He has served as a director of Pepco since 1994. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

· Thomas S. Shaw - Mr. Shaw has been a director of Pepco since August 1, 2002. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

· William J. Sim - Mr. Sim has been a director of Pepco since August 1, 2002. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

· William T. Torgerson - Mr. Torgerson has been a director of Pepco since August 1, 2002. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

· Andrew W. Williams - Mr. Williams has been a director of Pepco since August 1, 2002. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

· Dennis R. Wraase - Mr. Wraase has been a director of Pepco since 1998. His current term as director is from August 1, 2002, until the next succeeding Annual Meeting, and until his successor has been elected and qualified.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the directors and executive officers of a public company and any beneficial owners of more than 10% of any class of a company's equity securities to file with the Securities and Exchange Commission reports of holdings in the company's equity securities. The rules of the SEC require the company to disclose any late filings of these reports and any known failure to file these reports. To the best of Pepco's knowledge, all of the filings required to be made by Pepco directors and executive officers were made on a timely basis in 2002. Other than PHI, there are no 10% beneficial owners of the Pepco common stock.

     Additional information, including all positions and offices held with Pepco, for each of the directors of Pepco is presented under the heading "Executive Officers of PHI and Pepco" below.

Executive Officers of PHI and Pepco

     The names of the executive officers of Pepco Holdings and Pepco and the positions they hold-held as of March 28, 2003, their ages (as of March 28, 2003), and their business experience during the past five years is set forth in the following table:

		Positions and Offices and Length of Service
Name	Age	Pepco Holdings	Pepco
John M. Derrick, Jr.	63	Chairman and CEO 8/02 - Present	Chairman 4/99 - Present CEO 4/97 - 8/02
Dennis R. Wraase	59	President and COO 8/02 - Present President and Treasurer 2/01 - 8/02	CEO 8/02 - Present President and COO 12/00 - 8/02 President and CFO 5/00 - 12/00 Executive Vice President and CFO 4/99 - 5/00 Senior Vice President and CFO 4/96 - 4/99
William T. Torgerson	58	Executive Vice President and General Counsel 8/02 - Present Secretary 2/01 - 8/02 (1)
Thomas S. Shaw	55	Executive Vice President 8/02 - Present (2)
Andrew W. Williams	53	Senior Vice President and CFO 8/02 - Present	Senior Vice President and CFO 1/01 - Present Group Vice President 1997 - 12/00
Barbara S. Graham	54	Senior Vice President 8/02 - Present (3)
Ed R. Mayberry	55	Senior Vice President 8/02 - Present (4)
John D. McCallum	53	Senior Vice President 8/02 - Present (5)
Beverly L. Perry	55	Senior Vice President 10/02 - Present Vice President 8/02 - 10/02 (6)
Joseph M. Rigby	46	Senior Vice President 8/02 - Present (7)
William J. Sim	58	Senior Vice President 8/02 - Present	Senior Vice President 1/01 - 8/02 Group Vice President 1997 - 12/00
William H. Spence	46	Senior Vice President 8/02 - Present (8)
James P. Lavin	55	Vice President and Controller 8/02 - Present (9)	Vice President and Controller 8/02 - Present
Kirk J. Emge	53		Vice President 1994 - 8/02 (10)
Anthony J. Kamerick	55		Vice President and Treasurer 8/02 - Present Vice President, Treasurer and Comptroller 1/02 - 8/02 Vice President and Treasurer 4/94 - 1/02 (11)

(1)	Mr. Torgerson served as Executive Vice President and General Counsel of Pepco from December 2000 to 2002. From 1994 to 2000, he served as Senior Vice President and General Counsel of Pepco.
(2)	Mr. Shaw has served as President and Chief Operating Officer of Conectiv since 2000. From 1998 to 2000 he served as Executive Vice President of Conectiv. From 1997 to 1998, Mr. Shaw served as Executive Vice President of DPL. From 1992 to 1997, Mr. Shaw served as Senior Vice President of DPL.
(3)	Ms. Graham has served as Senior Vice President of Conectiv since 1999. From 1998 to 1999, she served as Senior Vice President and Chief Financial Officer of Conectiv. From 1994 to 1998 she served as Senior Vice President, Treasurer and Chief Financial Officer of DPL.
(4)	Dr. Mayberry has served as President and Chief Executive Officer of Pepco Energy since 1995.
(5)	Mr. McCallum has served as President and Chief Executive Officer of PCI since 1999. From 1996 to 1999 he served as President of PCI.
(6)	Ms. Perry served as Vice President of Pepco from 1999 to 2002. From 1997 to 1999, she served as General Manager of Pepco.
(7)	Mr. Rigby has served as Senior Vice President of Conectiv since 2000. From 1998 to 2000, he served as Vice President of Conectiv.
(8)	Mr. Spence has served as Senior Vice President of Conectiv since 2000. From 1998 to 1999, he served Vice President and General Manager, Conectiv.
(9)	Mr. Lavin served as Controller of Conectiv from 1998 until August 1, 2002.
(10)	Mr. Emge also serves as Vice President of Pepco Holdings since August 1, 2002.
(11)	Mr. Kamerick also serves as Vice President and Treasurer of Pepco Holdings since August 1, 2002.

     No director or executive officer of PHI or Pepco has a "family relationship" with any other director or executive officer of PHI or Pepco.

     The current term of office of each PHI and Pepco executive officer is from August 1, 2002, until the next succeeding Annual Meeting, and until their successors have been elected and qualified.

     INFORMATION UNDER THIS ITEM CONCERNING CONECTIV, DPL, ACE AND ACE FUNDING HAS BEEN OMITTED IN ACCORDANCE WITH GENERAL INSTRUCTION I TO FORM 10-K.

Item 11. EXECUTIVE COMPENSATION

Pepco Holdings, Inc.

     The information required by this Item 11 with regard to PHI is incorporated herein by reference to pages 13-19 from its definitive Proxy Statement for the 2003 Annual Meeting of Shareholders.

Potomac Electric Power Company

     The following table sets forth compensation information for each of the last three fiscal years ended December 31, for the Chairman and the four other most highly compensated executive officers of Pepco determined on the basis of aggregate salary and bonus (collectively, the "Pepco Named Executive Officers"). The information presented in the table for the period August 1, 2002 to December 31, 2002, reflects compensation paid by PHI or its subsidiaries, and for periods prior to August 1, 2002 reflects compensation paid by Pepco.

SUMMARY COMPENSATION TABLE
		Annual Compensation							Long Term Incentive Plan Awards
Name and Principal Position	Year		Salary		Bonus	Other Annual Compen- sation (1)			Restricted   Stock	Options (3)	Incentive Plan Payouts (4)			All Other Compen- sation(5)
John M. Derrick, Jr.   Chairman	2002 2001 2000	$	727,000 640,000 541,667	$	493,997 204,329 255,171	$	31,509 26,701 22,630	$	545,752 0 0	119,900 119,900 119,900	$	90,513 635,097 137,165	$	33,824 61,480 57,528
Dennis R. Wraase   Chief Executive Officer	2002 2001 2000	$	455,333 423,333 366,667	$	257,833 135,156 172,731	$	7,063 6,142 5,341	$	205,915 0 0	48,000 48,000 48,000	$	58,946 283,186 95,924	$	22,673 38,688 36,390
Andrew W. Williams   Senior Vice President   and Chief Financial Officer	2002 2001 2000	$	292,000 266,667 237,333	$	132,276 85,137 91,202	$	0 0 0	$	121,193 0 0	30,000 30,000 10,300	$	31,800 80,666 50,285	$	13,206 24,490 23,598
William J. Sim   President and   Chief Operating Officer	2002 2001 2000	$	262,333 251,667 222,667	$	105,195 113,250 86,182	$	0 0 0	$	79,789 0 0	30,000 30,000 10,300	$	31,800 79,333 48,481	$	12,924 22,732 21,857
Kirk J. Emge   General Counsel	2002 2001 2000	$	216,000 206,667 196,667	$	64,962 62,000 65,244	$	0 0 0	$	35,030 0 0	5,100 5,100 5,100	$	0 0 0	$	10,568 17,299 16,848

(1)	Other Annual Compensation.    Amounts in this column for each year represent above-market earnings earned by the executive on deferred compensation under the Pepco Deferred Compensation Plan assuming retirement at age 65. The amounts are reduced if the executive terminates employment prior to age 62 for any reason other than death, total or permanent disability or a change in control of Pepco. In the event of a change in control and termination of the participant's employment, a lump sum payment will be made equal to the net present value of the expected payments at age 65 discounted using the Pension Benefit Guaranty Corporation immediate payment interest rate plus one-half of one percent. Payments to the executives are funded by Pepco-owned life insurance policies held in trust. Pepco has purchased such policies on participating individuals under a program designed so that if assumptions as to mortality experience, policy return and other factor s are realized, the compensation deferred and the death benefits payable to Pepco under such insurance policies will cover all premium payments and benefit payments projected under this program, plus a factor for the use of Pepco funds.
(2)	Restricted Stock.    Amounts in this column for 2002 represent the dollar value on the grant date of restricted shares of PHI common stock awarded to each of Messrs. Derrick, Wraase, Williams, Sim and Emge under the Merger Success Integration Program implemented under PHI's Long-Term Incentive Plan. The dollar value is calculated by multiplying the number of restricted shares by the market price of the PHI common stock on the grant date. These restricted shares vest over a three-year period as follows: 20% on August 1, 2003, 30% on August 1, 2004, and the remaining 50% on August 1, 2005. In calculating the dollar value, the market price of the PHI common stock has not been adjusted to reflect that the shares are restricted. Dividends are paid on the restricted shares. Dollar amounts shown are for executives who received restricted shares of PHI common stock in the years indicated.
	The number and aggregate market value of all restricted shares of PHI common stock held by each of the Pepco Named Executive Officers at December 31, 2002 were: 27,654 with a market value of $536,211 for Mr. Derrick, 10,434 shares with a market value of $202,315 for Mr. Wraase, 6,141 shares with a market value of $119,074 for Mr. Williams, 4,043 shares with a market value of $78,394 for Mr. Sim and 1,775 shares with a market value of $34,417 for Mr. Emge.
(3)	Options.     Amounts in this column for each of the executives represent the stock options granted under the Pepco Long-Term Incentive Plan. At the time of the merger, these options were converted on a one-for-one basis into options to purchase PHI common stock.
(4)	Incentive Plan Payouts.     Amounts in this column for the executives represent the value of vested shares of common stock under the Pepco Performance Restricted Stock Program, a component of PHI's Long-Term Incentive Plan. The amounts shown for 2002 consist of 33 1/3% of the common stock award from the one-year performance cycle ended December 31, 1999 (the "One-Year 1999 Cycle"), 33 1/3% of the common stock award from the eight-month performance cycle ended December 31, 1999 (the "Eight-Month 1999 Cycle"), and 100% of the common stock award from the three-year cycle ended December 31, 2002 that vested on Jan uary 1, 2003. The amounts shown for 2001 consist of 33 1/3% of the common stock award from the One-Year 1999 Cycle, 33 1/3% of the common stock award from the Eight-Month 1999 Cycle and 100% of the common stock from the three-year cycle ended December 31, 2001 that vested on January 1, 2002. The amounts shown for 2000 consist of 33 1/3% of the common stock award from the One-Year 1999 Cycle, 33 1/3% of the common stock award from the Eight-Month 1999 Cycle and 50% of the common stock award from the performance cycle ended December 31, 1998 that vested on January 1, 2001. The value of the vested common stock was calculated by multiplying the number of vested shares by the market price of the common stock on the day proceeding the vesting date.
(5)	All Other Compensation.     Amounts in this column for 2002 consist of (i) Pepco's contributions to the Pepco Savings Plan for Exempt Employees of $8,500, $8,500, $4,436, $8,500 and $8,500 for Messrs. Derrick, Wraase, Williams, Sim and Emge, respectively, (ii) PHI, or prior to the merger, Pepco, contributions to the Executive Deferred Compensation Plan due to Internal Revenue Service limitations on maximum contributions to the Pepco Savings Plan for Exempt Employees of $19,558, $11,116, $7,377, $2,611 and $984 for Messrs. Derrick, Wraase, William, Sim and Emge, respectively, and (iii) the term life insurance portion of life insurance written on a split-dollar basis of $5,766, $3,057, $1,393, $1,813 and $1,084 paid by Pepco for Messrs. Derrick, Wraase, Williams, Sim and Emge, respectively. The split-dollar life insurance contract provides death benefits to the executive's beneficiaries of approximately three times the executive's annual salary. The split-dollar program is designed so that, if the assumptions made as to mortality experience, policy return and other factors are realized, Pepco will recover all plan costs, including a factor for the use of Pepco's funds. This program was eliminated as of December 31, 2002. All future insurance coverage will be offered as term life insurance.

OPTION GRANTS IN LAST FISCAL YEAR
	Individual Grants
Name	Number of Securities Underlying Options Granted   (#)		% of Total Options Granted to Employees in Fiscal Year (6)			Exercise or Base Price ($/Sh)	Expiration Date		Grant Date Fair Value (7)
John M. Derrick, Jr.	119,900	(8)	31.0	%	$	22.57	December 31, 2011	$	444,829
Dennis R. Wraase	48,000	(8)	12.4	%	$	22.57	December 31, 2011	$	178,080
Andrew W. Williams	30,000	(8)	7.8	%	$	22.57	December 31, 2011	$	111,300
William J. Sim	30,000	(8)	7.8	%	$	22.57	December 31, 2011	$	111,300
Kirk J. Emge	5,100	(8)	1.3	%	$	22.57	December 31, 2011	$	18,921

(6)	The percentages shown reflect the percentage of the total options granted by Pepco to its employees in 2002. These options were converted in connection with the merger into options to purchase shares of PHI common stock.
(7)	The values in this column were determined based on the Black-Scholes option pricing model and are calculated at the time of grant. The following assumptions were used in the calculation: (a) expected price volatility - 27.43%, (b) options will be exercised in the eighth year, (c) an interest rate based upon the corresponding yield of a government bond maturing ten years from the date of grant, (d) expected dividend yield at date of grant and, (e) no adjustments for nontransferability. The use of the Black-Scholes model does not necessarily mean that the model can accurately determine the value of options. The ultimate value of the option, if any, will depend on the future market price of PHI's common stock and the optionee's individual investment decisions, neither of which can be predicted with any degree of certainty.
(8)	Represents stock options granted in 2002 under the Pepco Long-Term Incentive Plan that, at the time of the merger, were converted on a one-for-one basis for PHI stock options. The exercise price of the options is equal to the market price of the Pepco common stock on the grant date (January 2, 2002). The options become exercisable at the rate of 25% per year beginning on January 1, 2003.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
			Number of Shares Underlying Unexercised Options at End of Fiscal Year		Value of Unexercised In-the-Money Options at End of Fiscal Year (9)
Name	Shares Acquired on Exercise    (#)	Value Realized   ($)	Exercisable	Unexercisable	Exercisable	Unexercisable
John M. Derrick, Jr.	0	0	198,310	269,775	0	0
Dennis R. Wraase	0	0	57,843	108,000	0	0
Andrew W. Williams	0	0	26,584	57,650	0	0
William J. Sim	0	0	26,584	57,650	0	0
Kirk J. Emge	0	0	3,825	11,475	0	0

(9)     The value of unexercised in-the-money stock options at December 31, 2002 is calculated by multiplying the number of shares by the amount by which the fair market value of the PHI common stock on the last trading day of 2002, as reported by the New York Stock Exchange, exceeds the option exercise price. The closing price of the PHI common stock on the last trading day of 2002 was less than the option exercise prices, making the value of the unexercised in-the-money options zero.

LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
Name	Performance or Other Period Until Maturation or      Payout	Threshold Number of Shares	Target Number of Shares	Maximum Number of Shares
John M. Derrick, Jr.	2003-2005 2003 2004	0 0 0	47,500 13,828 13,827	95,000 20,741 20,740
Dennis R. Wraase	2003-2005 2003 2004	0 0 0	24,400 5,218 5,217	48,800 7,826 7,825
Andrew W. Williams	2003-2005 2003 2004	0 0 0	11,100 3 071 3,071	22,200 4,606 4,606
William J. Sim	2003-2005 2003 2004	0 0 0	9,700 2,022 2,021	19,400 3,033 3,032
Kirk J. Emge	2003-2005 2003 2004	0 0 0	4,600 888 887	9,200 1,332 1,331

     The preceding table sets forth the performance award opportunities granted to the Pepco Named Executive Officers in 2002 in accordance with the Performance Restricted Stock Program and the Merger Integration Success Program established under PHI's Long-Term Incentive Plan. The awards are shown for three performance periods. For the first, performance criteria are selected and measured over a three-year period. Depending on the extent to which the performance criteria are satisfied, the executive will earn some or all of the maximum award of shares of PHI common stock. For the 2003 through 2005 performance cycle established in 2002, the sole performance measure is PHI's total shareholder return compared to other companies in a peer group comprised of 20 gas and electric distribution companies. However, if, during the course of a performance period, a significant event occurs, as determined in the sole discretion of the PHI Board of Directors, wh ich the Board expects to have a substantial effect on total shareholder performance during the period, the Board may revise such measures. Under the Performance Restricted Stock Program, the participant is eligible to earn a number of shares of Common Stock ranging from 0% to 200% of the target performance award to the extent that the performance objectives are achieved.

     For the second and third performance periods, the executive may earn some or all of the maximum award of shares of common stock based on the extent to which operating efficiencies and expense reduction goals are attained through December 31, 2003 and December 31, 2004, respectively.

     In all cases, the shares of PHI common stock earned by a participant will vest immediately on the date that the performance award is earned.

PEPCO PENSION PLAN TABLE
	Annual Retirement Benefits
	Years in Plan
Average Annual Salary   in Final Three Years     of Employment		15		20		25		30		35		40
$250,000	$	66,000	$	88,000	$	109,000	$	131,000	$	153,000	$	175,000
$350,000	$	92,000	$	123,000	$	153,000	$	184,000	$	214,000	$	245,000
$450,000	$	118,000	$	158,000	$	197,000	$	236,000	$	276,000	$	315,000
$550,000	$	144,000	$	193,000	$	241,000	$	289,000	$	337,000	$	385,000
$650,000	$	171,000	$	228,000	$	284,000	$	341,000	$	398,000	$	455,000
$750,000	$	197,000	$	263,000	$	328,000	$	394,000	$	459,000	$	525,000
$850,000	$	223,000	$	298,000	$	372,000	$	446,000	$	521,000	$	595,000
$950,000	$	249,000	$	333,000	$	416,000	$	499,000	$	582,000	$	665,000
$1,050,000	$	276,000	$	368,000	$	459,000	$	551,000	$	643,000	$	735,000
$1,150,000	$	302,000	$	403,000	$	503,000	$	604,000	$	740,000	$	805,000

     The Pepco Holdings Retirement Plan consists of the Pepco General Retirement Plan and the Conectiv Retirement Plan.

     The Pepco General Retirement Plan provides participating employees with at least five years of service with retirement benefits based on the participant's average salary (the term "salary" being equal to the amounts contained in the Salary column of the Summary Compensation Table) for the final three years of employment and the number of years of credited service under the Plan at the time of retirement. Normal retirement under this Plan is age 65. Plan benefits are subject to an offset for any Social Security benefits. Benefits under the Plan may be reduced under provisions of the Internal Revenue Code and by salary deferrals under Pepco's deferred compensation plans (other than the participant's pre-tax contributions made under the Savings Plan). If an executive's retirement benefits under the Plan are reduced by any such limitations, Pepco will pay a supplemental retirement benefit to the eligible executive that is designed to maintain total retirement benefits at the formula level of the Plan. In addition, for executives who retire at age 59 or older, their retirement benefit will be calculated by adding the average of the highest three annual incentive awards in the last five consecutive years to their average salary over the final three years of their employment. The annual incentive amounts are equal to the amounts shown in the Bonus column of the Summary Compensation Table. The current age, years of credited service and compensation used to determine retirement benefits (including supplemental benefits) for the officers named in the Summary Compensation Table who are participants in the Plan are as follows: Mr. Derrick, age 62, 40 years of credited service and $954,055; Mr. Wraase, age 58, 33 years of credited service and $603,684; Mr. Williams, age 53, 28 years of credited service and $368,205, Mr. Sim, age 58, 33 years of credited service and $347,098; and Mr. Emge, age 53, 16 years of credited service and $270,513. Annual benefits at age 65 (including the effect of the Social Security offset) are illustrated in the table above.

Director Compensation

     The directors of Pepco, all of whom are executive officers of Pepco, are not separately compensated for their service as directors.

Employment and Severance Agreements

     Messrs. Derrick, Wraase, Williams and Sim each have employment agreements with PHI. Mr. Derrick's agreement provides for his employment until his normal retirement date, April 1, 2005. Mr. Wraase's agreement provides for employment through August 1, 2007, and automatically extends until April 1, 2009, unless either PHI or the executive gives notice that it shall not be extended. Mr. Williams' and Mr. Sims' agreements provide for their employment through August 1, 2005, and automatically extend for successive periods of three years thereafter, unless either PHI or the executive has given notice that it shall not be so extended. Each of the employment agreements provides that the executive (i) will receive an annual salary in an amount not less than his base salary in effect as of August 1, 2002, and incentive compensation as determined by the PHI Board of Directors and (ii) will be entitled to participate in retirement plans, fringe benefit pl ans, supplemental benefit plans and other plans and programs, on the same basis as other senior executives of PHI.

     Under each of the employment agreements, the executive is entitled to certain benefits if his employment is terminated prior to the expiration of the initial term of the agreement (or, if applicable, as extended) either (i) by PHI other than for cause, death or disability or (ii) by the executive if his base salary is reduced, he is not in good faith considered for incentive awards, PHI fails to provide him with retirement benefits and other benefits provided to similarly situated executives, he is required to relocate by more than 50 miles from Washington, D.C., or he is demoted from a senior management position. These benefits include: (i) a lump sum payment in cash equal to three times (a) the sum of the executive's highest annual base salary rate in effect during the three-year period preceding termination and (b) the higher of (1) the annual target bonus for the year in which the termination of employment occurs or (2) the highest annual bonus received by the executive in any of the three preceding calendar years and (ii) the executive's annual bonus for the year preceding termination of employment, if not yet paid, and a pro rata portion of the executive's annual bonus for the year in which the executive's employment terminates. In addition, any outstanding shares of restricted stock will become immediately vested, and the executive will be entitled to receive unpaid salary through the date of termination and certain supplemental retirement benefits under existing plans of PHI. Each of the agreements also provides that the executive is entitled to receive a gross-up payment equal to the amount of any federal excise taxes imposed upon compensation payable upon termination of employment and the additional taxes that result from such payment.

     Under his employment agreement, Mr. Derrick also is entitled to receive, after he ceases to be employed by PHI (other than due to a termination of his employment by PHI for cause), the following benefits: (1)(A) a monthly supplemental retirement benefit equal to 1/12 of 65% of the sum of (y) his annual base salary at the time of termination and (z) the highest annual bonus received by him during the three calendar years preceding the calendar year in which the termination occurs (B) less the monthly benefits he is entitled to under all defined benefit retirement and supplemental retirement plans of PHI and its subsidiaries (upon Mr. Derrick's death, his surviving spouse would receive 75% of the amount determined under (A) above less monthly retirement benefits the surviving spouse receives under all such retirement plans), (2) financial services for tax preparation and planning until age 70, at the same level as is received by PHI's then chief executive officer, (3) until age 70, office space in Washington, D.C. at an annual rent not to exceed $100,000, secretarial services, and a parking space at PHI's headquarters building and (4) for two years after termination of employment, PHI will reimburse Mr. Derrick for the expenses associated with participation in the civic and trade organization in which he is a participant at the time his employment terminates.

     Mr. Emge has entered into a severance agreement with Pepco. The severance agreement provides for the payment of severance benefits to the executive if, within two years following a change in control, any of the following events occur: (i) termination of the employment of the executive by Pepco (or a successor company), other than for cause, death, disability or voluntary normal retirement; (ii) termination of employment by the executive for "good reason," defined as the assignment of duties materially inconsistent with the executive's duties prior to the change in control or a material reduction or alteration of his duties, a reduction in the executive's salary or relocation of the executive by more than 50 miles; (iii) the failure or refusal by a successor company to assume the Company's obligations under the agreement; or (iv) a material breach of the agreement by Pepco (or a successor company). The executive also is entitled to severance benefits upon (i) the termination of the executive's employment without cause in contemplation of, but prior to, a change in control or (ii) the occurrence of an event, in contemplation of, but prior to a change in control, constitution "good reason" followed by the executive's voluntary termination of employment within two years after a change in control. The severance benefits consist of: (i) an amount equal to two times the executive's annual base salary (in effect at the time of termination) and annual bonus (average of annual target bonuses during the three years prior to termination) paid in 24 equal monthly installments and (ii) certain welfare benefits for a three-year period after the date of termination. The agreement also provides that the executive is entitled to receive a gross-up payment equal to the amount of any federal excise taxes imposed upon compensation payable upon termination and the additional taxes that result from such payment.

     INFORMATION UNDER THIS ITEM CONCERNING CONECTIV, DPL, ACE AND ACE FUNDING HAS BEEN OMITTED IN ACCORDANCE WITH GENERAL INSTRUCTIONS I TO FORM 10-K.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            AND RELATED STOCKHOLDER MATTERS

Pepco Holdings, Inc.

     The information required by Item 12 for Pepco Holdings concerning the security ownership of certain beneficial owners and management is incorporated herein by reference to pages 11-12 from its definitive Proxy Statement for the 2003 Annual Meeting of Shareholders.

     The following table provides information as of December 31, 2002, with respect to the shares of PHI's common stock that may be issued under PHI's existing equity compensation plans.

Equity Compensation Plans Information

Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options	(b) Weighted-Average Exercise Price of Outstanding Options	(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity Compensation Plans Approved by Shareholders (1)	(2)	(2)	9,799,275
Equity Compensation Plans Not Approved by Shareholders (3)	0	0	99,596
Total	0	0	9,898,871

(1) Consists solely of the Pepco Holdings, Inc. Long-Term Incentive Plan.

(2) In connection with the merger of Pepco and Conectiv (i) outstanding options granted under the Potomac Electric Power Company Long-Term Incentive Plan were converted into options to purchase 1,365,941 shares of PHI common stock and (ii) options granted under the Conectiv Incentive Compensation Plan were converted into options to purchase 756,660 shares of PHI commons stock. Collectively, these options to purchase an aggregate of 2,122,601 shares of PHI common stock have a weighted average exercise price of $21.8031.

(3) Consists solely of the PHI Stock Compensation Plan for Directors. Under this plan, in which only directors who are not employees of PHI or any of its subsidiaries participate, one-half of the director's $30,000 annual retainer is paid, at the election of the director, either (i) in shares of PHI common stock or (ii) in PHI common stock equivalents under PHI's Deferred Compensation Plan. PHI common stock equivalents correspond in value to the market price of the PHI common stock, but have no voting rights. When a dividend is paid on the PHI common stock, the PHI common stock equivalent balance is credited with additional PHI common stock equivalents based on the number of shares that could be purchased with the cash amount of the dividend at the then current market price. The balance of the annual retainer and meeting fees is paid to the director in cash or, at the election of the director, can be deferred through voluntary participation in the PHI Deferred Compensati on Plan. A director can elect to have these optional deferrals credited to the director's account either in the form of PHI common stock equivalents or an account that earns additional credits equal to the prevailing prime interest rate, the return on a specified group of funds or a combination of both. Balances under the PHI Deferred Compensation Plan, including PHI common stock equivalent balances, are paid out in cash, in either a lump sum or installments, commencing at a time selected by the director.

Potomac Electric Power Company

     All of Pepco's voting securities are held by PHI. Accordingly, no director or executive office of Pepco owns any voting securities of Pepco.

     No equity securities of Pepco are issuable under any compensation plan. Accordingly, no Equity Compensation Plans Information table is presented for Pepco.

    The following table sets forth, as of February 1, 2003, for each Pepco director, the Pepco Named Executive Officers and all Pepco directors and Pepco executive officers as a group (i) the number of shares of Common Stock, $.01 par value, of PHI common stock beneficially owned, (ii) the number of shares of PHI common stock that could be purchased through the exercise of stock options then-currently exercisable or that are scheduled to become exercisable within 60 days thereafter, and (iii) the total beneficial ownership. The common stock is PHI's only class of equity securities. None of the listed persons beneficially owns shares of any class of equity securities of Pepco. Each of the individuals listed, and all directors and executive officers as a group, beneficially owned less than 1% of the outstanding shares of Common Stock.

Name of Beneficial Owner	Shares of Common Stock Owned (1)	Common Stock Acquirable Within 60 Days	Total Beneficial Ownership (2)
John M. Derrick, Jr. (3)	91,432	288,235	379,667
Thomas S. Shaw	92,136	0	92,136
William T. Torgerson	29,858	69,093	98,951
Andrew W. Williams	32,571	44,159	76,730
Dennis R. Wraase	45,532	93,843	139,375
William J. Sim	20,917	44,159	65,076
Kirk J. Emge (4)	11,856	7,650	19,506
All Directors and   Executive Officers   as a Group (9 Individuals)	351,795	554,789	906,584
(1)  Includes shares held under Pepco Holdings' Dividend Reinvestment Plan and Employee Savings Plans. Also includes shares awarded under the Pepco Holdings' Long-Term Incentive Plan that will vest over time if the executive officer has the right to vote the shares. Unless otherwise noted, each beneficial owner has sole voting power.
(2)  Consists of the sum of the two preceding columns.
(3)  Includes 36,815 shares owned by Mr. Derrick's spouse. Mr. Derrick disclaims beneficial ownership of these shares. Also includes 5,664 shares held in a trust of which Mr. Derrick is Trustee for the benefit of an adult child and 888 shares held in a trust of which Mr. Derrick is Trustee for the benefit of a minor grandchild.
(4)  Includes 1,016 shares owned by Mr. Emge's spouse. Mr. Emge disclaims beneficial ownership of these shares.
INFORMATION UNDER THIS ITEM CONCERNING CONECTIV, DPL, ACE AND ACE FUNDING HAS BEEN OMITTED IN ACCORDANCE WITH GENERAL INSTRUCTION I TO FORM 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pepco Holdings, Inc.
None.
Potomac Electric Power Company
None.
INFORMATION UNDER THIS ITEM CONCERNING CONECTIV, DPL, ACE, AND ACE FUNDING HAS BEEN OMITTED IN ACCORDANCE WITH GENERAL INSTRUCTION I TO FORM 10-K.
Item 14. CONTROLS AND PROCEDURES
Pepco Holdings, Inc.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Potomac Electric Power Company
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Conectiv
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Delmarva Power and Light Company
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Atlantic City Electric Company
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Atlantic City Electric Transition Funding LLC
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the company in the reports that the company files with or submits to the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls, and procedures designed to ensure that information required to be disclosed by the company in the reports that we file under the Exchange Act is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, the company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, the chief executive officer and the chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC's rules and forms.
There were no significant changes in the company's internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.
Part IV
Item 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)  Documents List
1.   FINANCIAL STATEMENTS
The financial statements filed as part of this report for each registrant are set forth under Item 8. "Financial Statements and Supplemental Data," herein.
2.   FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules, other than those included below, are omitted because either they are not applicable, or the required information is presented in the financial statements, which are included in Item 8. "Financial Statements and Supplemental Data," herein.
Schedule II (Valuation and Qualifying Accounts) for each registrant (none for ACE Funding) is submitted below:

PEPCO HOLDINGS
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of Dollars)
Year Ended December 31, 2002   Allowance for uncollectible     accounts -customer and     other accounts receivable	$9.5	$13.1	$ .8	$13.9	$37.3
Year Ended December 31, 2001   Allowance for uncollectible     accounts -customer and     other accounts receivable	$9.0	$ 6.9	$1.3	$(7.7)	$ 9.5
Year Ended December 31, 2000   Allowance for uncollectible     accounts -customer and     other accounts receivable	$8.0	$ 8.0	$1.5	$(8.5)	$ 9.0

(a)	Collection of accounts previously written off.
(b)	Due to the consummation of the merger this amount includes the transfer of Conectiv balances onto Pepco Holdings accounts , net of uncollectible accounts written off.

PEPCO
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of Dollars)
Year Ended December 31, 2002   Allowance for uncollectible     accounts -customer and     other accounts receivable	$9.5	$5.7	$ .8	$(12.4)	$3.6
Year Ended December 31, 2001   Allowance for uncollectible     accounts -customer and     other accounts receivable	$9.0	$6.9	$1.3	$(7.7)	$9.5
Year Ended December 31, 2000   Allowance for uncollectible     accounts -customer and     other accounts receivable	$8.0	$8.0	$1.5	$(8.5)	$9.0
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.

CONECTIV
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of Dollars)
Year Ended December 31, 2002   Allowance for uncollectible     accounts -customer and     other accounts receivable	$32.2	$30.5	-	$(33.3)	$29.4
Year Ended December 31, 2001   Allowance for uncollectible     accounts -customer and     other accounts receivable	$31.3	$30.9	-	$(30.0)	$32.2
Year Ended December 31, 2000   Allowance for uncollectible     accounts -customer and     other accounts receivable	$11.5	$30.5	-	$(10.7)	$31.3
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.

DPL
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of Dollars)
Year Ended December 31, 2002   Allowance for uncollectible     accounts -customer and     other accounts receivable	$17.3	$13.6	-	$(16.7)	$14.2
Year Ended December 31, 2001   Allowance for uncollectible     accounts -customer and     other accounts receivable	$16.3	$15.5	-	$(14.5)	$17.3
Year Ended December 31, 2000   Allowance for uncollectible     accounts -customer and     other accounts receivable	$ 6.5	$13.9	-	$( 4.1)	$16.3
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.

ACE
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of Dollars)
Year Ended December 31, 2002   Allowance for uncollectible     accounts -customer and     other accounts receivable	$7.8	$13.4	-	$(12.1)	$9.1
Year Ended December 31, 2001   Allowance for uncollectible     accounts -customer and     other accounts receivable	$4.4	$11.3	-	$( 7.9)	$7.8
Year Ended December 31, 2000   Allowance for uncollectible     accounts -customer and     other accounts receivable	$3.5	$ 4.2	-	$( 3.3)	$4.4
(a) Collection of accounts previously written off.
(b) Uncollectible accounts written off.

3.   Exhibits required by Securities and Exchange Commission Regulation S-K
     (summarized below).

EXHIBITS

     The documents listed below are being filed or have previously been filed on behalf of Pepco Holdings, Inc. (PHI), Conectiv, Potomac Electric Power Company (Pepco), Delmarva Power & Light Company (DPL), Atlantic City Electric company (ACE) and Atlantic City Electric Transition Funding LLC (ACEF) and are incorporated herein by reference from the documents indicated and made a part hereof.

Exhibit   No.	Registrant(s)	Description of Exhibit	Reference
2	PHI Pepco Conectiv	Agreement and Plan of Merger, dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Pepco and Conectiv	Exh. 2 to Pepco's Form 8-K, 2/13/01.
2.1	Conectiv DPL ACE	Amended and Restated Agreement and Plan of Merger, dated as of December 26, 1996, between DPL, Atlantic Energy, Inc., Conectiv and DS Sub, Inc.	Exh. 2(a) to Conectiv's Registration Statement No. 333-18843, 12/26/96.
3.1	PHI	Certificate of Incorporation of PHI	Exh. 3.1 to Form 8-K, 8/2/02.
3.1.1	Pepco	Restated Articles of Incorporation and Articles of Restatement of Pepco	Filed herewith.
3.1.2	Conectiv	Restated Certificate of Incorporation	Exh. B.17.2 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.1.3	DPL	Articles of Restatement of Certificate and Articles of Incorporation (filed in Virginia 8/8/02)	Exh. B.35.1 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.1.4	DPL	Corrected Restated Certificate and Articles of Incorporation (filed in Delaware 8/16/02)	Exh. B.35.4 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.1.5	DPL	Articles of Correction (filed in Virginia 8/16/02)	Exh. B.35.3 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.1.6	ACE	Restated Certificate of Incorporation (filed in New Jersey 8/09/02)	Exh. B.8.1 to PHI's Amendment No. 1 to Form U5B, 2/13/03.
3.1.7	ACEF	Certificate of Formation (filed in DE 3/29/01)	Exh. 3.2 to ACE's Registration Statement No. 333-59558, 6/05/02.
3.2.1	PHI	By-Laws	Exh. 3.2 to PHI's Form 8-K, 8/2/02.
3.2.2	Pepco	By-Laws	Exh. 3.2 to Pepco's Form 10-Q, 11/13/02.
3.2.3	Conectiv	Restated and Amended By-Laws (adopted 7/29/02)	Exh. B.17.1 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.2.4	DPL	Amended and Restated By-Laws (adopted 8/08/02)	Exh. B.35.2 to PHI's Amendment No. 1 to Form U5B, 2/13/02.
3.2.5	ACE	Amended and Restated By-Laws Company (adopted 8/08/02)	Exh. B.8.3 to PHI's Amendment No. 1 to Form U5B, 2/13/03.
3.2.6	ACEF	Amended and Restated Limited Liability Company Agreement (executed 12/19/02)	Exh. 3.1 to ACEF's Form 8-K, 12/23/02.
4.1	PHI Pepco	Mortgage and Deed of Trust dated July 1, 1936, of the Company to The Bank of New York as Successor Trustee, securing First Mortgage Bonds of the Company, and Supplemental Indenture dated July 1, 1936	Exh. B-4 to First Amendment, 6/19/36, to Pepco's Registration Statement No. 2-2232.
		Supplemental Indentures, to the aforesaid Mortgage and Deed of Trust, dated - December 10, 1939	Exh. B to Pepco's Form 8-K, 1/3/40.
		July 15, 1942 and August 10, 1942	Exh. B-1 to Amendment No. 2, 8/24/42, and B-3 to Post-Effective Amendment, 8/31/42, to Pepco's Registration Statement No. 2-5032.
		October 15, 1942	Exh. A to Pepco's Form 8-K, 12/7/42.
		October 15, 1947	Exh. A to Pepco's Form 8-K, 12/8/47.
		December 31, 1948	Exh. A-2 to Pepco's Form 10-K, 4/13/49.
		December 31, 1949	Exh. (a)-1 to Pepco's Form 8-K, 2/8/50.
		February 15, 1951	Exh. (a) to Pepco's Form 8-K, 3/9/51.
		February 16, 1953	Exh. (a)-1 to Pepco's Form 8-K, 3/5/53.
		March 15, 1954 and March 15, 1955	Exh. 4-B to Pepco's Registration Statement No. 2-11627, 5/2/55.
		March 15, 1956	Exh. C to Pepco's Form 10-K, 4/4/56.
		April 1, 1957	Exh. 4-B to Pepco's Registration Statement No. 2-13884, 2/5/58.
		May 1, 1958	Exh. 2-B to Pepco's Registration Statement No. 2-14518, 11/10/58.
		May 1, 1959	Exh. 4-B to Amendment No. 1, 5/13/59, to Pepco's Registration Statement No. 2-15027.
		May 2, 1960	Exh. 2-B to Pepco's Registration Statement No. 2-17286, 11/9/60.
		April 3, 1961	Exh. A-1 to Pepco's Form 10-K, 4/24/61.
		May 1, 1962	Exh. 2-B to Pepco's Registration Statement No. 2-21037, 1/25/63.
		May 1, 1963	Exh. 4-B to Pepco's Registration Statement No. 2-21961, 12/19/63.
		April 23, 1964	Exh. 2-B to Pepco's Registration Statement No. 2-22344, 4/24/64.
		May 3, 1965	Exh. 2-B to Pepco's Registration Statement No. 2-24655, 3/16/66.
		June 1, 1966	Exh. 1 to Pepco's Form 10-K, 4/11/67.
		April 28, 1967	Exh. 2-B to Post-Effective Amendment No. 1 to Pepco's Registration Statement No. 2-26356, 5/3/67.
		July 3, 1967	Exh. 2-B to Pepco's Registration Statement No. 2-28080, 1/25/68.
		May 1, 1968	Exh. 2-B to Pepco's Registration Statement No. 2-31896, 2/28/69.
		June 16, 1969	Exh. 2-B to Pepco's Registration Statement No. 2-36094, 1/27/70.
		May 15, 1970	Exh. 2-B to Pepco's Registration Statement No. 2-38038, 7/27/70.
		September 1, 1971	Exh. 2-C to Pepco's Registration Statement No. 2-45591, 9/1/72.
		May 7, 1992	Exh. 4 to Pepco's Form 10-K, 3/26/93.
		September 1, 1992	Exh. 4 to Pepco's Form 10-K, 3/26/93.
		November 1, 1992	Exh. 4 to Pepco's Form 10-K, 3/26/93.
		March 1, 1993	Exh. 4 to Pepco's Form 10-K, 3/26/93.
		March 2, 1993	Exh. 4 to Pepco's Form 10-K, 3/26/93.
		July 1, 1993	Exh. 4.4 to Pepco's Registration Statement No. 33-49973, 8/11/93.
		August 20, 1993	Exh. 4.4 to Pepco's Registration Statement No. 33-50377, 9/23/93.
		September 29, 1993	Exh. 4 to Pepco's Form 10-K, 3/25/94.
		September 30, 1993	Exh. 4 to Pepco's Form 10-K, 3/25/94.
		October 1, 1993	Exh. 4 to Pepco's Form 10-K, 3/25/94.
		February 10, 1994	Exh. 4 to Pepco's Form 10-K, 3/25/94.
		February 11, 1994	Exh. 4 to Pepco's Form 10-K, 3/25/94.
		March 10, 1995	Exh. 4.3 to Registration Statement No. 61379, 7/28/95.
		September 6, 1995	Exh. 4 to Pepco's Form 10-K, 4/1/96.
		September 7, 1995	Exh. 4 to Pepco's Form 10-K, 4/1/96.
		October 2, 1997	Exh. 4 to Pepco's Form 10-K, 3/26/98.
4.2	PHI Pepco	Indenture, dated as of July 28, 1989, between the Company and The Bank of New York, Trustee, with respect to the Company's Medium-Term Note Program	Exh. 4 to Pepco's Form 8-K, 6/21/90.
4.3.1	PHI Pepco	Certificate of Trust of Potomac Electric Power Company Trust I	Exh. 4.1 to Pepco's Registration Statement No. 333-51241, 4/2/98.
4.3.2	PHI Pepco	Form of Amended and Restated Declaration of Trust of Potomac Electric Power Company Trust I	Exh. 4.3 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.3.3	PHI Pepco	Form of Preferred Security	Included in Exhibit A-1 to Exh. 4.3 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.3.4	PHI Pepco	Form of Indenture	Exh. 4.4 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.3.5	PHI Pepco	Form of First Supplemental Indenture to be used in providing for the issuance of 7-3/8% Junior Subordinated Deferrable Interest Debentures due 2038	Exh. 4.5 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.3.6	PHI Pepco	Form of 7-3/8% Junior Subordinated Deferrable Interest Debentures due 2038	Included in Exh. 4.5 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.3.7	PHI Pepco	Form of Preferred Securities Guarantee Agreement	Exh. 4.8 to Amendment No. 1 to Pepco's Registration Statement No. 333-51241, 5/7/98.
4.4	PHI Conectiv DPL	Mortgage and Deed of Trust of Delaware Power & Light Company to the New York Trust Company, Trustee, (the Chase Manhattan Bank, successor Trustee) dated as of October 1, 1943 and copies of the First through Sixty-Eighth Supplemental Indentures thereto	Exh. 4-A to DPL's Registration Statement No. 33-1763, 11/27/85.
		Sixty-Ninth Supplemental Indenture	Exh. 4-B to DPL's Registration Statement No. 33-39756, 4/03/91.
		Seventieth through Seventy-Fourth Supplemental Indentures	Exhs. 4-B to DPL's Registration Statement No. 33-24955, 10/13/88.
		Seventy-Fifth through Seventy-Seventh Supplemental Indentures	Exhs. 4-D, 4-E & 4-F to DPL's Registration Statement No. 33-39756, 4/03/91.
		Seventy-Eighth and Seventy-Ninth Supplemental Indentures	Exhs. 4-E & 4-F to DPL's Registration Statement No. 33-46892, 4/1/92.
		Eightieth Supplemental Indenture	Exh. 4 to DPL's Registration Statement No. 33-49750, 7/17/92.
		Eighty-First Supplemental Indenture	Exh. 4-G to DPL's Registration Statement No. 33-57652, 1/29/93.
		Eighty-Second Supplemental Indenture	Exh. 4-H to DPL's Registration Statement No. 33-63582, 5/28/93.
		Eighty-Third Supplemental Indenture	Exh. 99 to DPL's Registration Statement No. 33-50453, 10/1/93.
		Eighty-Fourth through Eighty-Eighth Supplemental Indentures	Exhs. 4-J, 4-K, 4-L, 4-M & 4-N to DPL's Registration Statement No. 33-53855, 1/30/95.
		Eighty-Ninth and Ninetieth Supplemental Indentures	Exhs. 4-K & 4-L to DPL's Registration Statement No. 333-00505, 1/29/96.
4.5	PHI Conectiv DPL	Indenture between DPL and The Chase Manhattan Bank (ultimate successor to Manufacturers Hanover Trust Company, as Trustee, dated as of November 1, 1988	Exh. No. 4-G to DPL's Registration Statement No. 33-46892, 4/1/92.
4.6	PHI Conectiv DPL	Indenture (for Unsecured Subordinated Debt Securities relating to Trust Securities) between DPL and Wilmington Trust Company, as Trustee, dated as of October 1, 1996.	Exh. No. 4-S to DPL's Registration Statement No. 333-20715, 1/30/97.
4.7	PHI Conectiv DPL	Officer's Certificate dated October 3, 1996, establishing the 8.125% Junior Subordinated Debentures, Series I, Due 2036	Exh. No.4-T to DPL's Registration Statement No. 333-20715, 1/30/97.
4.8	PHI Conectiv DPL	Guarantee Agreement between DPL, as Guarantor, and Wilmington Trust Company, as Trustee, dated as of October 1, 1996	Exh. 4-U to DPL's Registration Statement No. 333-20715, 1/30/97.
4.9	PHI Conectiv DPL	Amended and Restated Trust Agreement between DPL, as Depositor, and Wilmington Trust Company, Barbara S. Graham, Edric R. Mason and Donald P. Connelly, as Trustees, dated as of October 1, 1996	Exh. 4-V to DPL's Registration Statement No. 333-20715, 1/30/97.
4.10	PHI Conectiv DPL	Agreement as to Expenses and Liabilities dated as of October 1, 1996, between DPL and Delmarva Power Financing I	Exh. 4-W to DPL's Registration Statement No. 333-20715, 1/30/97.
4.11	PHI Conectiv ACE	Mortgage and Deed of Trust, dated January 15, 1937, between Atlantic City Electric Company and The Bank of New York (formerly Irving Trust Company)	Exh. 2(a) to ACE's Registration Statement No. 2-66280, 12/21/79.
		Supplemental Indentures, to the aforesaid Mortgage and Deed of Trust, dated as of -
		January 1, 1980	Exh. 4(e) to ACE's Form 10-K, 3/25/81.
		May 1, 1981	Exh. 4(a) to ACE's Form 10-Q, 8/10/81.
		November 1, 1983	Exh. 4(d) to ACE's Form 10-K, 3/30/84.
		April 15, 1984	Exh. 4(a) to ACE's Form 10-Q, 5/14/84.
		July 15, 1984	Exh. 4(a) to ACE's Form 10-Q, 8/13/84.
		October 1, 1985	Exh. 4 to ACE's Form 10-Q, 11/12/85.
		May 1, 1986	Exh. 4 to ACE's Form 10-Q, 5/12/86.
		July 15, 1987	Exh. 4(d) to ACE's Form 10-K, 3/28/88.
		October 1, 1989	Exh. 4(a) to ACE's Form 10-Q for quarter ended 9/30/89.
		March 1, 1991	Exh. 4(d)(1) to ACE's Form 10-K, 3/28/91.
		May 1, 1992	Exh. 4(b) to ACE's Registration Statement 33-49279, 1/6/93.
		August 1, 1993 September 1, 1993	Exh. 4(a) & 4(b) to ACE's Form 10-Q, 11/12/93.
		November 1, 1993	Exh. 4(c)(1) to ACE's Form 10-K, 3/29/94.
		June 1, 1994	Exh. 4(a) to ACE's Form 10-Q, 8/14/94.
		October 1, 1994	Exh. 4(a) to ACE's Form 10-Q, 11/14/94.
		November 1, 1994	Exh. 4(c)(1) to ACE's Form 10-K, 3/21/95.
		March 1, 1997	Exh. 4(b) to ACE's Form 8-K, 3/24/97.
4.12	PHI Conectiv ACE	Indenture dated as of March 1, 1997 between Atlantic City Electric Company and The Bank of New York	Exh. 4(e) to ACE's Form 8-K, 3/24/97.
4.13.1	PHI Conectiv ACE	Amended and Restated Trust Agreement, dated as of October 1, 1996, by and among Atlantic City Electric Company, as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware) as Delaware Trustee and the Administrative Trustees Names Therein	Exh. 4f(7) to ACE's Form 10-K, 3/14/97.
4.13.2	PHI Conectiv ACE	Junior Subordinated Indenture, dated as of October 1, 1996, by and between Atlantic City Electric Company and The Bank of New York, as Trustee	Exh. 4f(8) to ACE's Form 10-K, 3/14/97.
4.13.3	PHI Conectiv ACE	Guarantee Agreement, dated as of October 1, 1996, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee	Exh. 4f(9) to ACE's Form 10-K, 3/14/97.
4.14.1	PHI Conectiv ACE	Amended and Restated Trust Agreement, dated as of October 1, 1998, by and among Atlantic City Electric Company, as Depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware) as Delaware Trustee and the Administrative Trustees Names Therein	Exh. 4-G to ACE's Form 10-K, 3/26/99.
4.14.2	PHI Conectiv ACE	Junior Subordinated Indenture, dated as of October 1, 1998, by and between Atlantic City Electric Company and The Bank of New York, as Trustee	Exh. 4-H to ACE's Form 10-K, 3/26/99.
4.14.3	PHI Conectiv ACE	Guarantee Agreement, dated as of October 1, 1998, by and between Atlantic City Electric Company as Guarantor, and The Bank of New York as Guarantee Trustee	Exh. 4-I to ACE's Form 10-K, 3/26/99.
4.15	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated June 3, 1992	Filed herewith.
4.16	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated April 29, 1998	Filed herewith.
4.17	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated July 7, 2000	Filed herewith.
4.18	PHI	Indenture between PHI and The Bank of New York, as Trustee dated September 6, 2002	Exh. 4.03 to PHI's Registration Statement No. 333-100478, 10/10/02.
4.19	PHI	Form of 7.45% Note due August 15, 2032.	Filed herewith.
4.20	PHI	Form of 6.45% Note due August 15, 2012.	Filed herewith.
4.21	PHI	Form of 5.50% Note due August 15, 2007.	Filed herewith.
4.22	PHI	Form of 3.75% Note due February 15, 2006.	Exh. 4.1 to PHI's Form 8-K, 1/17/03.
4.23	PHI	Registration Rights Agreement, dated as of September 6, 2002, among PHI, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc One Capital Markets, Inc., Credit Suisse First Boston Corporation, Scotia Capital (USA) Inc., Wachovia Securities, Inc., Banc of America Securities LLC, Legg Mason Wood Walker, Incorporated, BNY Capital Markets, Inc., Mellon Financial Markets, LLC, SunTrust Capital Markets, Inc., and The Williams Capital Group, L.P.	Exh. 4.1 to PHI's Form 10-Q, 11/13/02.
4.24	PHI	Registration Rights Agreement, dated as of September 19, 2002, among PHI, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc One Capital Markets, Inc., Credit Suisse First Boston Corporation, Scotia Capital (USA) Inc., Wachovia Securities, Inc., Banc of America Securities LLC, Legg Mason Wood Walker, Incorporated, BNY Capital Markets, Inc., Mellon Financial Markets, LLC, SunTrust Capital Markets, Inc., and The Williams Capital Group, L.P.	Exh. 4.2 to PHI's Form 10-Q, 11/13/02.
4.25	PHI Conectiv ACE ACEF	Indenture dated as of December 19, 2002 between ACEF and The Bank of New York (BONY)	Exh. 4.1 to ACEF's Form 8-K, 12/23/02.
4.26	PHI Conectiv ACE ACEF	2002-1 Series Supplement dated as of December 19, 2002 between ACEF and BONY	Exh. 4.2 to ACEF's Form 8-K, 12/23/02.
10.1	PHI	Employment Agreement of John M. Derrick, Jr.*	Exh. 10.1 to PHI's Form 10-Q, 8/9/02.

10.2	PHI	Employment Agreement of Dennis R. Wraase*	Exh. 10.2 to PHI's Form 10-Q, 8/9/02.
10.3	PHI	Employment Agreement of William T. Torgerson*	Exh. 10.3 to PHI's Form 10-Q, 8/9/02.
10.4	PHI	Employment Agreement of Andrew W. Williams*	Exh. 10.4 to PHI's Form 10-Q, 8/9/02.
10.5	PHI	Employment Agreement of Thomas S. Shaw*	Exh. 10.5 to PHI's Form 10-Q, 8/9/02.
10.6	PHI	Employment Agreement of Eddie R. Mayberry*	Exh. 10.6 to PHI's Form 10-Q, 8/9/02.
10.7	PHI	Employment Agreement of John D. McCallum*	Exh. 10.7 to PHI's Form 10-Q, 8/9/02.
10.8	PHI	Employment Agreement of Joseph M. Rigby*	Exh. 10.8 to PHI's Form 10-Q, 8/9/02.
10.9	PHI	Employment Agreement of William H. Spence*	Exh. 10.9 to PHI's Form 10-Q, 8/9/02.
10.10	PHI	Employment Agreement of William H. Sim*	Exh. 10.10 to PHI's Form 10-Q, 8/9/02.
10.11	PHI	Employment Agreement of James P. Lavin*	Filed herewith.
10.12	PHI Pepco	Form of Severance Agreement between Potomac Electric Power Company and (1) Anthony J. Kamerick and (2) Kirk J. Emge*	Filed herewith.
10.13	PHI Conectiv	Conectiv Change-in-Control Severance Plan For Certain Executive Officers*	Exh. 10-C to Conectiv's Form 10-K, 3/15/01.
10.14	PHI Conectiv	Conectiv Change-in-Control Severance Plan For Certain Select Employees*	Exh. 10-D to Conectiv's Form 10-K, 3/15/01.
10.15	PHI Conectiv	Form of Change-in-Control Severance Agreement between Conectiv and Barbara Graham*	Exh. 10-E to Conectiv's Form 10-K, 3/15/01.
10.16	PHI	Pepco Holdings, Inc. Long-Term Incentive Plan*	Annex I to PHI's Registration Statement No. 333-57042, 3/14/01.
10.17	PHI	Pepco Holdings, Inc. Stock Compensation Plan for Directors*	Filed herewith.
10.18	PHI	Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan*	Filed herewith.
10.19	PHI	Pepco Holdings, Inc. Supplemental Executive Retirement Plan*	Filed herewith.
10.20	PHI	Pepco Holdings, Inc. Supplemental Benefit Plan*	Filed herewith.
10.21	PHI	Pepco Holdings, Inc. Revised and Restated Executive and Director Deferred Compensation Plan*	Filed herewith.
10.22	PHI Pepco	Potomac Electric Power Company Director and Executive Deferred Compensation Plan*	Filed herewith.
10.23	PHI Pepco	Potomac Electric Power Company Long-Term Incentive Plan*	Exh. 4 to Pepco's Form S-8, 6/12/98.
10.24	PHI Conectiv	Conectiv Incentive Compensation Plan*	Exh. 99(e) to Conectiv's Registration Statement No. 333-18843, 12/26/96.
10.25	PHI Conectiv	Conectiv Deferred Compensation Plan*	Exh. 10-B to Conectiv's Form 10-K, 3/26/99.
10.26	PHI Conectiv	Conectiv Supplemental Executive Retirement Plan*	Filed herewith.
10.27	Pepco	Asset Purchase and Sale Agreement for Generating Plants and Related Assets by and between Potomac Electric Power Company and Southern Energy, Inc. dated June 7, 2000, including Exhibits A through M	Exh. 10 to Pepco's Form 8-K, 6/13/00.
10.28	Pepco	Amendment No. 1, dated September 18, 2000 to Asset Purchase and Sale Agreement for Generating Plants and Related Assets by and between Potomac Electric Power Company and Southern Energy, Inc., dated June 7, 2000, including Exhibits A-1, A-2 and A-3	Exh. 10.1 to Pepco's Form 8-K, 12/19/00.
10.29	Pepco	Amendment No. 2, dated December 19, 2000, to Asset Purchase and Sale Agreement for Generating Plants and Related Assets by and between Potomac Electric Power Company and Southern Energy, Inc., dated June 7, 2000	Exh. 10.2 to Pepco's Form 8-K, 12/19/00.
10.30	PHI Pepco	Transition Power Agreement -- District of Columbia	Exh. 10.3 to Pepco's Form 8-K, 12/19/00.
10.31	PHI Pepco	Transition Power Agreement -- Maryland.	Exh. 10.4 to Pepco's Form 8-K, 12/19/00.
10.32	PHI Conectiv DPL	Purchase and Sale Agreement By and Between Delmarva Power & Light Company and NRG Energy Inc.	Exh. 10-A to DPL's Form 10-K, 4/02/01.
10.33	PHI Conectiv DPL	Purchase and Sale Agreement By and Between Delmarva Power & Light Company and NRG Energy Inc.	Exh. 10-B to DPL's Form 10-K, 4/02/01.
10.34	PHI Conectiv ACE	Purchase and Sale Agreement By and Between Atlantic City Electric Company and NRG Energy Inc.	Exh. 10-B to ACE's Form 10K, 4/02/01.
10.35	PHI Conectiv ACE	Purchase and Sale Agreement By and Between Atlantic City Electric Company and NRG Energy Inc.	Exh. 10-C to ACE's Form 10K, 4/02/01.
10.36	PHI Conectiv ACE	Second Amendment to Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc.	Exh. 10-C to ACE's Form 10-Q, 11/08/01.
10.37	PHI Conectiv ACE	Second Amendment to Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc.	Exh. 10-D to ACE's Form 10-Q, 11/08/01.
10.38	ACE	Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc.	Exh. 10-B to ACE's Form 10-K, 4/02/01.
10.39	ACE	Purchase And Sale Agreement By And Between Atlantic City Electric Company and NRG Energy Inc.	Exh. 10-C to ACE's Form 10-K, 4/02/01.
10.40	ACE	Second Amendment to the Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc. dated as of October 31, 2001	Exh. 10-B to ACE's Form 10-Q, 11/09/01.
10.41	ACE ACEF	Bondable Transition Property Sale Agreement between ACEF and ACE dated as of December 19, 2002	Exh. 10.1 to ACEF's Form 8-K, 12/23/02.
10.42	ACE ACEF	Bondable Transition Property Servicing Agreement between ACEF and ACE dated as of December 19, 2002	Exh. 10.2 to ACEF's Form 8-K, 12/23/02.
10.43	ACEF	Administration Agreement between ACEF and PHI Service Company, dated as of December 19, 2002	Exh. 10.3 to ACEF's Form 8-K, 12/23/02.
10.44	PHI Pepco ACE DPL	Credit Agreement, dated as of August 1, 2002, among Pepco Holdings, Inc., Potomac Electric Power Company, Delmarva Power & Light Company, Atlantic City Electric Company, Bank One, NA, as agent, and the Lenders named therein	Exh. 10.2 to PHI's Form 8-K, 8/2/02.
12.1	PHI	Statements Re: Computation of Ratios	Filed herewith.
12.2	Pepco	Statements Re: Computation of Ratios	Filed herewith.
12.3	Conectiv	Statements Re: Computation of Ratios	Filed herewith.
12.4	DPL	Statements Re: Computation of Ratios	Filed herewith.
12.5	ACE	Statements Re: Computation of Ratios	Filed herewith.
21	PHI Pepco Conectiv DPL ACE	Subsidiaries of the Registrant	Numbered paragraph 4, Amendment No. 1 to PHI's Form U5B, 2/13/02.
23.1	PHI	Consent of Independent Accountants	Filed herewith.
23.2	Pepco	Consent of Independent Accountants	Filed herewith.
23.3	Conectiv	Consent of Independent Accountants	Filed herewith.
23.4	DPL	Consent of Independent Accountants	Filed herewith.
23.5	ACE	Consent of Independent Accountants	Filed herewith.
23.6	ACEF	Consent of Independent Accountants	Filed herewith.
24	PHI	Power of Attorney	Filed herewith.
99.1	PHI	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
99.2	Pepco	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
99.3	Conectiv	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
99.4	DPL	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
99.5	ACE	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
99.6	ACEF	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350	Filed herewith.
Regulation S-K 229.10(d) requires Registrants to identify the physical location, by SEC file number reference of all documents that are incorporated by reference and have been on file with the SEC for more than five years. The SEC file number references for Pepco Holdings, Inc. and its subsidiaries, which are registrants are provided below:
Pepco Holdings, Inc. in file number 001-31403
Potomac Electric Power Company in file number 001-1072
Conectiv in file number 001-13895
Delmarva Power & Light Company in file number 001-1405
Atlantic City Electric Company in file number 001-3559
Atlantic City Electric Transition Funding LLC in file number 333-59558
* Management contract or compensatory plan or arrangement.

(b)  Reports on Form 8-K

     A Current Report on Form 8-K was filed by the following registrants for the quarter ended December 31, 2002:

PEPCO HOLDINGS

     A Current Report on Form 8-K/A was filed on October 9, 2002. The items reported on such Form 8-K/A were Item 2 (Acquisition and Disposition of Assets) and Item and Item 7 (Financial Statements and Exhibits).

     A Current Report on Form 8-K was filed on October 24, 2002. The items reported on such Form 8-K were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits).

     A Current Report on Form 8-K was filed on December 9, 2002. The item reported on such Form 8-K was Item 5 (Other Events).

     A Current Report on Form 8-K was filed on December 10, 2002. The items reported on such Form 8-K were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits).

PEPCO

None.

CONECTIV

     A Current Report on Form 8-K was filed on December 9, 2002. The item reported on such Form 8-K was Item 5 (Other Events).

DPL

None.

ACE

None.

ACE FUNDING

     A Current Report on Form 8-K was filed on December 6, 2002. The items reported on such Form 8-K were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits).

     A Current Report on Form 8-K was filed on December 23, 2002. The items reported on such Form 8-K were Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits).

(c)  Exhibits

Exhibit 11   Statements Re. Computation of Earnings Per Common Share

     The information required by this Exhibit is included in Note 10 of the "Notes to Consolidated Financial Statements," which is included in Exhibit 13.

Exhibit 12.1  Statements Re. Computation of Ratios

PEPCO HOLDINGS

	For the Year Ended December 31,
	2002	2001	2000	1999	1998
	(Dollar Amounts in Millions)
Net income	$210.5	$192.3	$369.1	$256.7	$234.8
Taxes based on income	124.1	83.5	341.2	114.5	122.3
Income before taxes	334.6	275.8	710.3	371.2	357.1
Fixed charges:
Interest charges	239.2	166.4	230.7	208.7	208.6
Interest factor in rentals	13.0	23.8	23.6	23.8	24.0
Total fixed charges	252.2	190.2	254.3	232.5	232.6
Competitive operations   capitalized interest	(9.9)	(2.7)	(3.9)	(1.8)	(0.6)
Income before income taxes   and fixed charges	$576.9	$463.3	$960.7	$601.9	$589.1
Coverage of fixed charges	2.29	2.44	3.78	2.59	2.53
Preferred dividend requirements,   including redemption premium	$5.9	$5.0	$5.5	$8.9	$18.0
Ratio of pre-tax income to net income	1.59	1.43	1.92	1.45	1.52
Preferred dividend factor	$9.4	$7.2	$10.6	$12.9	$27.4
Total fixed charges and   preferred dividends	$261.6	$197.4	$264.9	$245.4	$260.0
Coverage of combined fixed charges   and preferred dividends	2.21	2.35	3.63	2.45	2.27

Exhibit 12.2  Statements Re. Computation of Ratios

PEPCO

Utility Only Basis

	For the Year Ended December 31,
	2002	2001	2000	1999	1998
	(Dollar Amounts in Millions)
Net income	$124.0	$194.2	$348.9	$228.0	$211.2
Taxes based on income	81.4	130.9	352.9	142.6	131.0
Income before taxes	205.4	325.1	701.8	370.6	342.2
Fixed charges:
Interest charges	90.7	112.5	170.1	156.1	151.8
Interest factor in rentals	9.1	23.4	23.2	23.4	23.8
Total fixed charges	99.8	135.9	193.3	179.5	175.6
Income before income taxes and fixed charges	$305.2	$461.0	$895.1	$550.1	$517.8
Coverage of fixed charges	3.06	3.39	4.63	3.06	2.95
Preferred dividend requirements	$5.0	$5.0	$5.5	$8.9	$18.0
Ratio of pre-tax income to net income	1.66	1.67	2.01	1.63	1.62
Preferred dividend factor	$  8.3	$  8.4	$ 11.1	$ 14.5	$ 29.2
Total fixed charges and preferred dividends	$108.1	$144.3	$204.4	$194.0	$204.8
Coverage of combined fixed charges and preferred dividends	2.82	3.20	4.38	2.84	2.53

Exhibit 12.2  Statements Re. Computation of Ratios

PEPCO

Consolidated Basis

	For the Year Ended December 31,
	2002	2001	2000	1999	1998
	(Dollar Amounts in Millions)
Net income	$141.2	$192.3	$369.1	$256.7	$234.8
Taxes based on income	79.9	83.5	341.2	114.5	122.3
Income before taxes	221.1	275.8	710.3	371.2	357.1
Fixed charges:
Interest charges	118.7	166.4	230.7	208.7	208.6
Interest factor in rentals	9.3	23.8	23.6	23.8	24.0
Total fixed charges	128.0	190.2	254.3	232.5	232.6
Competitive subsidiary capitalized interest	(0.2)	(2.7)	(3.9)	(1.8)	(0.6)
Income before income taxes and fixed charges	$348.9	$463.3	$960.7	$601.9	$589.1
Coverage of fixed charges	2.73	2.44	3.78	2.59	2.53
Preferred dividend requirements	$  5.0	$  5.0	$  5.5	$  8.9	$ 18.0
Ratio of pre-tax income to net income	1.57	1.43	1.92	1.45	1.52
Preferred dividend factor	$  7.8	$  7.2	$10.6	$12.9	$27.4
Total fixed charges and preferred dividends	$135.8	$197.4	$264.9	$245.4	$260.0
Coverage of combined fixed charges and preferred dividends	2.57	2.35	3.63	2.45	2.27

Exhibit 12.3  Statements Re. Computation of Ratios
CONECTIV
	Year Ended December 31,
	2002	2001	2000	1999	1998
	(Dollars Amounts in Millions)
Income from continuing operations	$ 90.8	$374.7	$203.8	$143.5	$170.9
Income taxes	70.6	251.6	151.3	123.1	117.9
Fixed charges:	121.6	147.1	166.3	149.7	133.8
Interest on long-term debt     including amortization of     discount, premium and     expense
Other interest	32.2	54.2	60.8	37.7	26.2
Preferred dividend requirements     of subsidiaries	15.8	18.7	20.4	20.0	17.9
Total fixed charges	169.6	220.0	247.5	207.4	177.9
Nonutility capitalized interest	(15.8)	(15.1)	(9.3)	(3.3)	(1.4)
Undistributed earnings of equity   method investees	-	-	(4.5)	-	-
Earnings before extraordinary   item, income taxes, and   fixed charges	$315.2	$831.2	$588.8	$470.7	$465.3
Total fixed charges shown above	$169.6	$220.0	$247.5	$207.4	$177.9
Increase preferred stock dividend   requirements of subsidiaries to   a pre-tax amount	1.9	3.6	5.3	6.1	4.9
Fixed charges for ratio   computation	$171.5	$223.6	$252.8	$213.5	$182.8
Ratio of earnings to fixed charges	1.84	3.72	2.33	2.20	2.55

Exhibit 12.4  Statements Re. Computation of Ratios
DELMARVA POWER & LIGHT COMPANY
	Year Ended December 31,
	2002	2001	2000	1999	1998
	(Dollar Amounts in Millions)
Net income	$ 49.7	$200.6	$141.8	$142.2	$112.4
Income taxes	33.7	139.9	81.5	95.3	72.3
Fixed charges:
Interest on long-term debt     including amortization of     discount, premium and     expense	42.6	68.5	77.1	77.8	81.1
Other interest	3.6	3.4	7.5	6.1	9.3
Preferred dividend requirements     of a subsidiary trust	5.7	5.7	5.7	5.7	5.7
Total fixed charges	51.9	77.6	90.4	89.6	96.1
Nonutility capitalized interest	-	-	-	-	-
Earnings before extraordinary   item, income taxes, and   fixed charges	$135.3	$418.1	$313.7	$327.1	$280.8
Fixed charges	$ 51.9	$ 77.6	$ 90.4	$ 89.6	$ 96.1
Preferred dividend requirements	2.9	6.3	7.7	7.4	7.2
Total Fixed Charges and   Preferred Dividends	$ 54.8	$ 83.9	$  98.1	$  97.0	$103.3
Ratio of earnings to fixed charges   and preferred dividends	2.47	4.98	3.20	3.37	2.72

Exhibit 12.5  Statements Re. Computation of Ratios
ATLANTIC CITY ELECTRIC COMPANY
	Year Ended December 31,
			2002	2001	2000	1999	1998
			(Dollar Amounts in Millions)
Net income		$ 28.2		$ 75.5	$ 54.4	$ 63.9	$ 30.3
Income taxes		16.3		46.7	36.7	49.3	18.2
Fixed charges:
Interest on long-term debt     including amortization of     discount, premium and     expense		53.1		62.2	76.2	60.6	63.9
Other interest		2.4		3.3	4.5	3.8	3.4
Preferred dividend requirements     of subsidiary trusts		7.6		7.6	7.6	7.6	6.1
Total fixed charges		63.1		73.1	88.3	72.0	73.4
Earnings before extraordinary   item, income taxes and   fixed charges		$107.6		$195.3	$179.4	$185.2	$121.9
Fixed charges		$ 63.1		$ 73.1	$ 88.3	$ 72.0	$ 73.4
Preferred dividend requirements		1.1		2.7	3.6	3.8	5.3
Total Fixed Charges and   Preferred Dividends		$ 64.2		$ 75.8	$ 91.9	$ 75.8	$ 78.7
Ratio of earnings to fixed charges   and preferred dividends		1.68		2.58	1.95	2.44	1.55

Exhibit 21    Subsidiaries of the Registrant

     THE INFORMATION REQUIRED BY THIS EXHIBIT FOR PEPCO HOLDINGS, PEPCO,CONECTIV, ACE, AND DP&L IS INCLUDED IN AMENDMENT NO. 1 TO FORM U5B, NUMBERED PARAGRAPH 4, FILED UNDER COMMISSION FILE NO. 001-31403, 2/13/03, WHICH IS INCORPORATED BY REFERENCE HEREIN.

ACE FUNDING - NONE.

Exhibit 23.1    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, except as to the twelfth and thirteenth paragraphs of Note 14 for which the date is March 4, 2003, relating to the consolidated financial statements of Pepco Holdings, Inc., which appears this Form 10-K. We also consent to the incorporation by reference of our report dated February 10, 2003, relating to the consolidated financial statement schedule of Pepco Holdings, Inc., which appears in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
March 28, 2003

Exhibit 23.2    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, except as to the first and second paragraphs of Note 12 for which the date is March 4, 2003, relating to the consolidated financial statements of Potomac Electric Power Company, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 10, 2003, relating to the consolidated financial statement schedule of Potomac Electric Power Company, which appears in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
March 28, 2003

Exhibit 23.3    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, relating to the consolidated financial statements of Conectiv, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 10, 2003, relating to the consolidated financial statement schedule of Conectiv, which appears in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 28, 2003

Exhibit 23.4    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, relating to the consolidated financial statements of Delmarva Power and Light Company, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 10, 2003, relating to the consolidated financial statement schedule of Delmarva Power and Light Company, which appears in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 28, 2003

Exhibit 23.5    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, relating to the financial statements of Atlantic City Electric Company, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 10, 2003, relating to the consolidated financial statement schedule of Atlantic City Electric Company, which appears in this Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 28, 2003

Exhibit 23.6    Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Number 333-59558) of Atlantic City Electric Transition Funding, LLC and we also hereby consent to the incorporation by reference in the Registration Statement on Form S-4 (Number 333-103408), the Registration Statements on Forms S-3 (Numbers 333-89938 and 333-100478) and the Registration Statements on Forms S-8 (Numbers 333-96673, 333-96675 and 333-96687) of Pepco Holdings, Inc. of our report dated February 10, 2003, relating to the financial statements of Atlantic City Electric Transitional Funding, LLC, which appears in this Form 10-K

PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 28, 2003

Report of Independent Accountants on Consolidated Financial Statement Schedule

To the Board of Directors of Pepco Holdings, Inc.

Our audits of the consolidated financial statements referred to in our report dated February 10, 2003, except as to the twelfth and thirteenth paragraphs of Note 14 for which the date is March 4, 2003, appearing in the 2002 Annual Report on Form 10-K of Pepco Holdings, Inc. also included an audit of the consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
February 10, 2003

Report of Independent Accountants on Consolidated Financial Statement Schedule

To the Board of Directors of
Potomac Electric Power Company

Our audits of the consolidated financial statements referred to in our report dated February 10, 2003, except as to the first and second paragraphs of Note 12 for which the date is March 4, 2003, appearing in the 2002 Annual Report on Form 10-K of Potomac Electric Power Company also included an audit of the consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
February 10, 2003

Report of Independent Accountants on Consolidated Financial Statement Schedule

To the Board of Directors of
Conectiv

Our audits of the consolidated financial statements referred to in our report dated February 10, 2003, appearing in the 2002 Annual Report on Form 10-K of Conectiv also included an audit of the consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 10, 2003

Report of Independent Accountants on Consolidated Financial Statement Schedule

To the Board of Directors of
Delmarva Power & Light Company

Our audits of the consolidated financial statements referred to in our report dated February 10, 2003, appearing in the 2002 Annual Report on Form 10-K of Delmarva Power and Light Company also included an audit of the consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 10, 2003

Report of Independent Accountants on Consolidated Financial Statement Schedule

To the Board of Directors of
Atlantic City Electric Company

Our audits of the consolidated financial statements referred to in our report dated February 10, 2003, appearing in the 2002 Annual Report on Form 10-K of Atlantic City Electric Company also included an audit of the consolidated financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 10, 2003

SIGNATURES

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

March 28, 2003	PEPCO HOLDINGS, INC. ("Pepco Holdings") CONECTIV   (Registrants) By     /s/ JOHN M. DERRICK, JR.           John M. Derrick, Jr.,         Chairman of the Board and         Chief Executive Officer
March 28, 2003	POTOMAC ELECTRIC POWER COMPANY ("Pepco")   (Registrant) By     /s/ D. R. WRAASE                  Dennis R. Wraase,         Chief Executive Officer
March 28, 2003	DELMARVA POWER & LIGHT COMPANY ("DPL") ATLANTIC CITY ELECTRIC TRANSITION   FUNDING, LLC ("ACE Funding")     (Registrants) By     /s/ T. S. SHAW                     Thomas S. Shaw,         Chief Executive Officer, DPL         Chairman, ACE Funding
March 28, 2003	ATLANTIC CITY ELECTRIC COMPANY ("ACE")   (Registrant) By     /s/ JOSEPH M. RIGBY                 Joseph M. Rigby,         President and Chief          Executive Officer

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

/s/ JOHN M. DERRICK, JR.   John M. Derrick, Jr.	Chairman, Chief Executive Officer and Director of Pepco Holdings, Inc. and Conectiv, and Chairman and Director of Pepco, DPL and ACE (Principal Executive Officer, Pepco Holdings, Inc. and Conectiv)	March 28, 2003
/s/ D. R. WRAASE           Dennis R. Wraase	Chief Executive Officer of Pepco and Director of Pepco Holdings, Inc., Pepco, Conectiv, DPL and ACE (Principal Executive Officer, Pepco)	March 28, 2003
/s/ T. S. SHAW             Thomas S. Shaw	Chief Executive Officer of DPL, Chairman of ACE Funding and Director of Pepco, Conectiv, DPL, ACE, and ACE Funding (Principal Executive Officer, DPL and ACE Funding)	March 28, 2003
/s/ JOSEPH M. RIGBY        Joseph M. Rigby	President and Chief Executive Officer of ACE and Director of DPL and ACE (Principal Executive Officer of ACE)	March 28, 2003
/s/ A. W. WILLIAMS         Andrew W. Williams	Senior Vice President and Chief Financial Officer of Pepco Holdings, Inc., Pepco, Conectiv, and DPL, Chief Financial Officer of ACE and Director of Pepco, Conectiv, DPL and ACE (Principal Financial Officer of Pepco Holdings, Inc., Pepco, Conectiv, DPL and ACE)	March 28, 2003
/s/ JAMES P. LAVIN         James P. Lavin	Vice President and Controller of Pepco Holdings, Inc., Pepco, Conectiv, and DPL, Controller of ACE, and Chief Financial Officer and Director of ACE Funding (Principal Accounting Officer of Pepco Holdings, Inc., Pepco, Conectiv, ACE, DPL and ACE Funding) (Principal Financial Officer of ACE Funding)	March 28, 2003

Signature	Title	Date
Edmund B. Cronin, Jr.*   Edmund B. Cronin, Jr.	Director, Pepco Holdings, Inc.	March 28, 2003
Terence C. Golden	Director, Pepco Holdings, Inc.	March 28, 2003
George F. MacCormack*    George F. MacCormack	Director, Pepco Holdings, Inc.	March 28, 2003
Richard B. McGlynn*      Richard B. McGlynn	Director, Pepco Holdings, Inc.	March 28, 2003
Judith A. McHale*         Judith A. McHale	Director, Pepco Holdings, Inc.	March 28, 2003
Floretta D. McKenzie*    Floretta D. McKenzie	Director, Pepco Holdings, Inc.	March 28, 2003
Lawrence C. Nussdorf*    Lawrence C. Nussdorf	Director, Pepco Holdings, Inc.	March 28, 2003
Peter F. O'Malley*       Peter F. O'Malley	Director, Pepco Holdings, Inc.	March 28, 2003
Pauline A. Schneider*    Pauline A. Schneider	Director, Pepco Holdings, Inc.	March 28, 2003
A. Thomas Young	Director, Pepco Holdings, Inc.	March 28, 2003
/s/ WILLIAM T. TORGERSON   William T. Torgerson	Director, Pepco, Conectiv, DPL and ACE	March 28, 2003
/s/ B. S. GRAHAM           Barbara S. Graham	Director of ACE Funding	March 28, 2003
/s/D. A. CHRISTIANSEN      Dean A. Christiansen	Director of ACE Funding	March 28, 2003
/s/ O. F.                   Orlando Figueroa	Director of ACE Funding	March 28, 2003
*By: /s/ ELLEN SHERIFF ROGERS     Ellen Sheriff Rogers      Attorney-in-Fact		March 28, 2003

CERTIFICATIONS
I, John M. Derrick, Jr., Chief Executive Officer of Pepco Holdings, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K of Pepco Holdings, Inc.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ JOHN M. DERRICK, JR.              John M. Derrick, Jr. Chief Executive Officer
I, Andrew W. Williams, Chief Financial Officer of Pepco Holdings, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K of Pepco Holdings, Inc.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ A. W. WILLIAMS                    Andrew W. Williams Senior Vice President and Chief Financial Officer

CERTIFICATIONS
I, Dennis R. Wraase, Chief Executive Officer of Potomac Electric Power Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Potomac Electric Power Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ D. R. WRAASE                      Dennis R. Wraase Chief Executive Officer
I, Andrew W. Williams, Chief Financial Officer of Potomac Electric Power Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Potomac Electric Power Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ A. W. WILLIAMS                    Andrew W. Williams Senior Vice President and Chief Financial Officer

CERTIFICATIONS
I, John M. Derrick, Jr., Chief Executive Officer of Conectiv, certify that:
1.	I have reviewed this annual report on Form 10-K of Conectiv.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ JOHN M. DERRICK, JR.              John M. Derrick, Jr. Chief Executive Officer
I, Andrew W. Williams, Chief Financial Officer of Conectiv, certify that:
1.	I have reviewed this annual report on Form 10-K of Conectiv.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ A. W. WILLIAMS                    Andrew W. Williams Senior Vice President and Chief Financial Officer

CERTIFICATIONS
I, Thomas S. Shaw, Chief Executive Officer of Delmarva Power & Light Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Delmarva Power & Light Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ T. S. SHAW                        Thomas S. Shaw Chief Executive Officer
I, Andrew W. Williams, Chief Financial Officer of Delmarva Power & Light Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Delmarva Power & Light Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ A. W. WILLIAMS                    Andrew W. Williams Senior Vice President and Chief Financial Officer

CERTIFICATIONS
I, Joseph M. Rigby, Chief Executive Officer of Atlantic City Electric Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Atlantic City Electric Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ JOSEPH M. RIGBY                   Joseph M. Rigby Chief Executive Officer
I, Andrew W. Williams, Chief Financial Officer of Atlantic City Electric Company, certify that:
1.	I have reviewed this annual report on Form 10-K of Atlantic City Electric Company.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ A. W. WILLIAMS                    Andrew W. Williams Chief Financial Officer

CERTIFICATIONS
I, Thomas S. Shaw, Chairman of Atlantic City Electric Transition Funding LLC, certify that:
1.	I have reviewed this annual report on Form 10-K of Atlantic City Electric Transition Funding LLC.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ T. S. SHAW                        Thomas S. Shaw Chairman
I, James P. Lavin, Chief Financial Officer of Atlantic City Electric Transition Funding LLC, certify that:
1.	I have reviewed this annual report on Form 10-K of Atlantic City Electric Transition Funding LLC.
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date:  March 28, 2003			/s/ JAMES P. LAVIN                    James P. Lavin Chief Financial Officer

Exhibit 99.1
Certificate of Chief Executive Officer and Chief Financial Officer of Pepco Holdings, Inc. (pursuant to 18 U.S.C. Section 1350)
I, John M. Derrick, Jr., Chief Executive Officer, and I, Andrew W. Williams, Senior Vice President and Chief Financial Officer, of Pepco Holdings, Inc., certify that, to the best of my knowledge, the Annual Report on Form 10-K of Pepco Holdings, Inc. for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Pepco Holdings, Inc.
March 28, 2003	/s/ JOHN M. DERRICK, JR.             John M. Derrick, Jr. Chief Executive Officer
March 28, 2003	/s/ A. W. WILLIAMS                   Andrew W. Williams Senior Vice President and   Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Pepco Holdings, Inc. and will be retained by Pepco Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.2
Certificate of Chief Executive Officer and Chief Financial Officer of Potomac Electric Power Company (pursuant to 18 U.S.C. Section 1350)
I, Dennis R. Wraase, Chief Executive Officer, and I, Andrew W. Williams, Senior Vice President and Chief Financial Officer, of Potomac Electric Power Company, certify that, to the best of my knowledge, the Annual Report on Form 10-K of Potomac Electric Power Company for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Potomac Electric Power Company.
March 28, 2003	/s/ D. R. WRAASE                     Dennis R. Wraase Chief Executive Officer
March 28, 2003	/s/ A. W. WILLIAMS                   Andrew W. Williams Senior Vice President and   Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Potomac Electric Power Company and will be retained by Potomac Electric Power Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.3
Certificate of Chief Executive Officer and Chief Financial Officer of Conectiv (pursuant to 18 U.S.C. Section 1350)
I, John M. Derrick, Jr., Chief Executive Officer, and I, Andrew W. Williams, Senior Vice President and Chief Financial Officer, of Conectiv, certify that, to the best of my knowledge, the Annual Report on Form 10-K of Conectiv for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Conectiv.
March 28, 2003	/s/ JOHN M. DERRICK, JR.             John M. Derrick, Jr. Chief Executive Officer
March 28, 2003	/s/ A. W. WILLIAMS                   Andrew W. Williams Senior Vice President and   Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Conectiv and will be retained by Conectiv and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.4
Certificate of Chief Executive Officer and Chief Financial Officer of Delmarva Power & Light Company (pursuant to 18 U.S.C. Section 1350)
I, Thomas S. Shaw, Chief Executive Officer, and I, Andrew W. Williams, Senior Vice President and Chief Financial Officer, of Delmarva Power & Light Company, certify that, to the best of my knowledge, the Annual Report on Form 10-K of Delmarva Power & Light Company for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Delmarva Power & Light Company.
March 28, 2003	/s/ T. S. SHAW                       Thomas S. Shaw Chief Executive Officer
March 28, 2003	/s/ A. W. WILLIAMS                   Andrew W. Williams Senior Vice President and   Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Delmarva Power & Light Company and will be retained by Delmarva Power & Light Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.5
Certificate of Chief Executive Officer and Chief Financial Officer of Atlantic City Electric Company (pursuant to 18 U.S.C. Section 1350)
I, Joseph M. Rigby, Chief Executive Officer, and I, Andrew W. Williams, Chief Financial Officer, of Atlantic City Electric Company, certify that, to the best of my knowledge, the Annual Report on Form 10-K of Atlantic City Electric Company for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Atlantic City Electric Company.
March 28, 2003	/s/ JOSEPH M. RIGBY                  Joseph M. Rigby Chief Executive Officer
March 28, 2003	/s/ A. W. WILLIAMS                   Andrew W. Williams Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Atlantic City Electric Company and will be retained by Atlantic City Electric Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.6
Certificate of Chief Executive Officer and Chief Financial Officer of Atlantic City Electric Transition Funding, LLC (pursuant to 18 U.S.C. Section 1350)
I, Thomas S. Shaw, Chairman, and I, James P. Lavin, Chief Financial Officer, of Atlantic City Electric Transition Funding, LLC, certify that, to the best of my knowledge, the Annual Report on Form 10-K of Atlantic City Electric Transition Funding, LLC for the year ended December 31, 2002, filed with the Securities and Exchange Commission on the date hereof (i) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Atlantic City Electric Transition Funding, LLC.
March 28, 2003	/s/ T. S. SHAW                       Thomas S. Shaw Chairman
March 28, 2003	/s/ JAMES P. LAVIN                   James P. Lavin Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Atlantic City Electric Transition Funding, LLC and will be retained by Atlantic City Electric Transition Funding, LLC and furnished to the Securities and Exchange Commission or its staff upon request.

INDEX TO EXHIBITS FILED HEREWITH
Exhibit   No.	Registrant(s)	Description of Exhibit
3.1.1	Pepco	Restated Articles of Incorporation and Articles of Restatement of Pepco
4.15	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated June 3, 1992
4.16	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated April 29, 1998
4.17	PHI	Issuing and Paying Agency Agreement between Potomac Capital Investment Corporation and The Bank of New York dated July 7, 2000
4.19	PHI	Form of 7.45% Note due August 15, 2032.
4.20	PHI	Form of 6.45% Note due August 15, 2012.
4.21	PHI	Form of 5.50% Note due August 15, 2007.
10.11	PHI	Employment Agreement of James P. Lavin
10.12	PHI Pepco	Form of Severance Agreement between Potomac Electric Power Company and certain employees
10.17	PHI	Pepco Holdings, Inc. Stock Compensation Plan for Directors
10.18	PHI	Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan
10.19	PHI	Pepco Holdings, Inc. Supplemental Executive Retirement Plan
10.20	PHI	Pepco Holdings, Inc. Supplemental Benefit Plan
10.21	PHI	Pepco Holdings, Inc. Revised and Restated Executive and Director Deferred Compensation Plan
10.22	PHI Pepco	Potomac Electric Power Company Director and Executive Deferred Compensation Plan
10.26	PHI Conectiv	Conectiv Supplemental Executive Retirement Plan
12.1	PHI	Statements Re: Computation of Ratios
12.2	Pepco	Statements Re: Computation of Ratios
12.3	Conectiv	Statements Re: Computation of Ratios
12.4	DPL	Statements Re: Computation of Ratios
12.5	ACE	Statements Re: Computation of Ratios
23.1	PHI	Consent of Independent Accountants
23.2	Pepco	Consent of Independent Accountants
23.3	Conectiv	Consent of Independent Accountants
23.4	DPL	Consent of Independent Accountants
23.5	ACE	Consent of Independent Accountants
23.6	ACEF	Consent of Independent Accountants
24	PHI	Power of Attorney
99.1	PHI	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.2	Pepco	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.3	Conectiv	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.4	DPL	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.5	ACE	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.6	ACEF	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

EX-3

RESTATED ARTICLES OF INCORPORATION AND ARTICLES OF RESTATEMENT OF POTOMAC ELECTRIC POWER COMPANY           These Restated Articles of Incorporation and Articles of Restatement of Potomac Electric Power Company (hereinafter called the "Company"), a District of Columbia corporation and a domestic corporation of the Commonwealth of Virginia, were duly adopted by the Company in accordance with the provisions of Section 29-101.58a of the District of Columbia Business Corporation Act and Section 13.1-711 of the Virginia Stock Corporation Act. The Company's Articles of Incorporation were originally filed in the District of Columbia on April 28, 1896, and Articles of Reincorporation of an Existing Domestic Corporation were filed in the District of Columbia on February 20, 1957.           The Restated Articles of Incorporation and Articles of Restatement of the Company are as follows: I.        The name of the Company is: POTOMAC ELECTRIC POWER COMPANY II.      The duration of the Company shall be perpetual. III.     The purposes for which the Company is organized are:
	(A)     To manufacture, produce, generate, buy, sell, lease, deal in, transmit and distribute (i) power, light, energy and heat in the form of electricity or otherwise, (ii) by-products thereof and (iii) appliances, facilities and equipment for use in connection therewith;           (B)     To acquire (by construction, purchase, condemnation, lease or otherwise), use, maintain, operate, deal in and dispose of, power plants, dams, substations, office buildings, service buildings, transmission lines, distribution lines, and all other buildings, machinery, property (real, personal or mixed) and facilities (including water power and other sites), and all fixtures, equipments and appliances, necessary, appropriate, incidental or convenient for its corporate purposes; and           (C)     To conduct business as a public service company, which business is briefly described as the purchase, manufacture, generation, transmission, distribution and sale, both at wholesale and at retail, of electricity or other power or energy for light, heat and power purposes in the District of Columbia, the Commonwealth of Virginia, the State of Maryland and elsewhere.
IV.      The aggregate number of shares which the Company shall have authority to issue is 207,750,000 divided into two classes: the first consisting of 7,750,000 shares of the par value of $50 each; and the second consisting of 200,000,000 shares of $.01 par value each. V.        Said 7,750,000 shares of the par value of $50 each are designated as Serial Preferred Stock; said 200,000,000 shares of the par value of $.01 each are designated as Common Stock. Such of said authorized shares of Serial Preferred Stock and Common Stock as are unissued at any time may be issued, in whole or in part, at any time or from time to time by action of the Board of Directors of the Company, subject to the laws in force in the District of Columbia and the Commonwealth of Virginia and the terms and conditions set forth in the Articles of Incorporation of the Company.           The preferences, qualifications, limitations, and restrictions, the special or relative rights, and the voting power in respect of the shares of each said class are as follows: (A)       SERIAL PREFERRED STOCK           (a)     Subject to the provisions hereafter in this subdivision (A) set forth, the authorized and unissued shares of Serial Preferred Stock may be divided into and issued, from time to time, in one or more series as the Board of Directors may determine, and the Board of Directors is hereby expressly authorized to adopt from time to time resolutions, in respect of any unissued shares of Serial Preferred Stock, to fix and determine:
	(1)     The division of such shares into series and the designation and authorized number of the shares of the particular series;           (2)     The rate of dividend for the particular series;           (3)     The price or prices at and the terms and conditions on which shares of the particular series may be redeemed;           (4)     The amount payable upon shares of the particular series in the event of voluntary liquidation;           (5)     Sinking fund provisions (if any) for the redemption or purchase of shares of the particular series; and           (6)     The terms and conditions (if any) on which the shares of the particular series may be converted into other classes of stock of the Company;
All shares of Serial Preferred Stock shall be of equal rank with each other, regardless of series, and all shares thereof shall be identical except as to the above listed relative rights and preferences, in respect of any or all of which there may be variations between different series as fixed and determined by the Board of Directors in said resolutions. All shares of the Serial Preferred Stock of any one series shall be identical with each other in all respects.           (b)     The following terms, as used in this subdivision (A), shall have the following meanings:
	(1)     The term senior stock shall mean any class of stock ranking in its claim to assets or dividends prior to the 1,600,000 shares of Serial Preferred Stock created hereby;          (2)     The term parity stock shall mean any class of stock ranking in its claim to assets or dividends on a parity with the Serial Preferred Stock, but shall not include any of the 1,600,000 shares of Serial Preferred Stock created hereby, nor shall it include any increase in the authorized amount of the Serial Preferred Stock; and           (3)     The term junior stock shall mean the Common Stock and any other class of stock ranking in its claim to assets or dividends junior to the Serial Preferred Stock.
(c)     The holders of the Serial Preferred Stock shall be entitled to receive, but only when and as declared by the Board of Directors, cumulative cash dividends in the case of each series at the annual rate for such series theretofore fixed by the Board of Directors as hereinbefore provided, payable quarter-yearly on the first days of March, June, September and December in each year to stockholders of record on the respective dates fixed for the purpose by the Board of Directors as dividends are declared.                     No dividend shall be declared on any shares of the Serial Preferred Stock unless there shall likewise be declared on all shares of the Serial Preferred Stock at the time outstanding like dividends, ratably in proportion to the respective annual dividend rates fixed therefor.                     The dividends on shares of the Serial Preferred Stock shall be cumulative from the quarter-yearly dividend payment date next preceding the date of issue of such shares, unless such shares shall have been issued after the record date and before the payment date for a particular dividend, in which case the dividends shall be cumulative from the quarter-yearly dividend payment date next ensuing after the date of issue of such shares. Unless dividends on all outstanding shares of the Serial Preferred Stock, at the annual dividend rate or rates fixed therefor, shall have been paid for all past quarter-yearly dividend periods to which they are entitled, and the full dividend thereon at said rate or rates for the quarter-yearly dividend period current at the time shall have been paid or declared and set apart for payment, but without interest on accumulated dividends, and unless all sinking fun d payments, if any, theretofore required to have been made shall have been made or provided for, no dividends shall be declared and no other distribution shall be made on any junior stock, and no junior stock shall be purchased, retired or otherwise acquired for value by the Company. No dividend shall be declared on any junior stock payable more than 120 days after the date of declaration.                     The holders of the Serial Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends referred to in this subdivision (c).           (d)     The Company, at the option of the Board of Directors or by the operation of the sinking fund, if any, provided for the Serial Preferred Stock of any series, may, from time to time, subject to such terms and conditions, if any, as may be fixed by the Board of Directors with respect to any series as hereinbefore provided, redeem the whole or any part of such series at any time outstanding, by paying in cash the applicable redemption price therefor theretofore fixed by the Board of Directors as hereinbefore provided.                     Notice of every such redemption shall be given by publication at least once in each of two calendar weeks in each of two daily newspapers printed in the English language, one published and of general circulation in the City of Washington, District of Columbia, and the other in the Borough of Manhattan, The City of New York, the first publication to be at least thirty days and not more than sixty days prior to the date fixed for such redemption. At least thirty days' and not more than sixty days' previous notice of every such redemption shall also be mailed to the holders of record of the shares so to be redeemed, at their respective addresses as the same shall appear on the books of the Company; but failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares so to be redeemed.                     In case of the redemption of a part only of any series of the Serial Preferred Stock at the time outstanding, the Company or its duly authorized agent shall select by lot the shares so to be redeemed. The Board of Directors shall have full power and authority, subject to the limitations and provisions herein contained, to prescribe the manner in which the drawings by lot shall be conducted and the terms and conditions upon which the Serial Preferred Stock shall be redeemed from time to time.                     If such notice of redemption shall have been duly given by publication, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds, in trust for the account of the holders of the shares so called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed to be outstanding on and after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable upon redemption thereof, without interest.                     Provided, however, in the alternative, that, after giving notice by publication of any such redemption as hereinbefore provided or after giving to the bank or trust company referred to below irrevocable authorization to give or complete such notice by publication, and prior to the redemption date specified in such notice, the Company may deposit in trust, for the account of the holders of the shares of Serial Preferred Stock so to be redeemed, the funds necessary for such redemption with a bank or trust company in good standing, organized and doing business under the laws of the United States or of any state or territory or of the District of Columbia and having its principal office in the City of Washington, District of Columbia, or in the Borough of Manhattan, The City of New York, having capital, surplus and undivided profits aggregating at least Ten Million Dollars, designated in suc h notice of redemption, and thereupon all shares of the Serial Preferred Stock with respect to which such deposit shall have been made shall no longer be deemed to be outstanding, and all rights with respect to such shares of Serial Preferred Stock shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest and the right to exercise, on or before such redemption date privileges of conversion or exchange, if any, not theretofore expiring.                     Shares of Serial Preferred Stock purchased or redeemed pursuant to any obligation of the Company to purchase or redeem shares for a sinking fund, shares redeemed pursuant to the provisions hereof or purchased and for which credit shall have been taken against any sinking fund obligation, and shares surrendered pursuant to any conversion right, shall not be reissued or otherwise disposed of and shall be canceled. Any other shares of Serial Preferred Stock redeemed or otherwise acquired by the Company shall continue to be part of the authorized capital stock of the Company and may thereafter, in the discretion of the Board of Directors and to the extent permitted by law, be sold or reissued from time to time, as part of the same or another series, subject to the terms and conditions herein set forth.                     If and so long as the Company shall be in default in the payment of any quarter-yearly dividend on shares of any series of the Serial Preferred Stock, or shall be in default in the payment of funds into or the setting aside of funds for any sinking fund created for any series of the Serial Preferred Stock, the Company may not (other than by the use of unapplied funds, if any, paid into or set aside for a sinking fund or funds prior to such default) (i) redeem any shares of the Serial Preferred Stock unless all shares thereof are redeemed, or (ii) purchase or otherwise acquire for a consideration any shares of the Serial Preferred Stock, except pursuant to offers of sale made by holders of the Serial Preferred Stock in response to an invitation for tenders given simultaneously by the Company by mail to the holders of record of all shares of the Serial Preferred Stock then outstanding.           (e)     In the event of any voluntary liquidation, dissolution or winding up of the Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holder of each share of the Serial Preferred Stock shall be entitled to be paid in full in cash the amount fixed with respect to such share by the Board of Directors as hereinbefore provided, together with an amount computed at the annual dividend rate therefor from the date upon which dividends thereon became cumulative to the date fixed for the payment thereof, less the aggregate of the dividends theretofore paid thereon. If such payments shall have been made in full to the holders of the Serial Preferred Stock, the remaining assets and funds of the Company shall be distributed among the holders of the Common Stock and any other junior stock according to their respective rights, preferences, restrictions, qualifications and shares.                     In the event of any involuntary liquidation, dissolution or winding up of the Company, then, before any distribution or payment shall be made to the holders of any junior stock, the holder of each share of the Serial Preferred Stock shall be entitled to be paid in full the par value thereof in cash, together with an amount computed at the annual dividend rate therefor from the date upon which dividends thereon became cumulative to the date fixed for the payment thereof, less the aggregate of the dividends theretofore paid thereon. If such payments shall have been made in full to the holders of the Serial Preferred Stock, the remaining assets and funds of the Company shall be distributed among the holders of the Common Stock and any other junior stock according to their respective rights, preferences, restrictions, qualifications and shares.                     With respect to the payments to be made in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, all series of the Serial Preferred Stock shall rank ratably according to their respective interests without preference of any series thereof over any other series.           (f)     Subject to the limitations hereinafter specified, whenever the full dividends on the Serial Preferred Stock at the time outstanding for all past quarter-yearly dividend periods shall have been paid and the full dividend thereon for the quarter-yearly dividend period then current shall have been paid or declared and a sum sufficient for the payment thereof set apart, then such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared on the Common Stock and any other junior stock, and the Serial Preferred Stock shall not be entitled to participate in any such dividends.
(g)     So long as any shares of the Serial Preferred Stock are outstanding, no amendment to the Articles of Incorporation of the Company which would (i) create, change any junior stock into, or increase the rights and preferences of, any senior or parity stock, (ii) increase the authorized amount of the Serial Preferred Stock in excess of the 1,600,000 shares created hereby or the authorized amount of any senior or parity stock, or (iii) change the express terms of the outstanding shares of Serial Preferred Stock in any manner substantially prejudicial to the holders thereof, shall be made without the affirmative consent (given in writing without a meeting or by a vote at a meeting duly called for the purpose) of the holders of more than two thirds of the aggregate number of shares of the Serial Preferred Stock then outstanding; but any such amendment may be made with such affirmative consent, together with such addition al vote or consent of stockholders as from time to time may be required by law; provided, however, that if any such amendment would change the express terms of the outstanding shares of Serial Preferred Stock of any particular series in any manner substantially prejudicial to the holders thereof without correspondingly affecting the holders of the outstanding shares of Serial Preferred Stock of all series, then, in lieu of such consent of the holders of Serial Preferred Stock (or, if such consent of the holders of the outstanding shares of Serial Preferred Stock is required by law, in addition thereto), a like affirmative consent of the holders of more than two thirds of the Serial Preferred Stock of the affected series at the time outstanding shall be necessary for making such amendment.           (h)     So long as any shares of the Serial Preferred Stock are outstanding, the Company shall not, without the affirmative consent (given in writing without a meeting or by a vote at a meeting duly called for the purpose) of the holders of at least a majority of the aggregate number of shares of the Serial Preferred Stock then outstanding:
	(1)     issue any shares of the Serial Preferred Stock in excess of 300,000 shares thereof at any one time outstanding, or issue any shares of senior or parity stock (either directly or by reclassification), unless for a period of twelve consecutive calendar months within the fifteen calendar months next preceding the date on which such shares are to be issued net earnings (after depreciation and taxes but before deducting interest) have been at least one and one-half times the annual interest charges and dividend requirements on all indebtedness of the Company and on all shares of Serial Preferred Stock and senior and parity stock which shall then be outstanding; for the purpose of such computation, the shares and any indebtedness proposed to be issued in connection with such issue shall be included, but any indebtedness or shares proposed to be retired in connection with such issue shall be excluded, and in determining such net earnings, the Board of Directors of the Company shall make such adjustments, by way of increase or decrease in such net earnings, as shall in their opinion be necessary to give effect for the entire twelve months for which such net earnings are determined to any acquisition or disposition of property the earnings of which can be separately ascertained, and to any issue, sale, assumption or retirement of securities, which shall have occurred after the commencement of such twelve months' period and prior to or in connection with the issue of the shares of the Serial Preferred Stock or senior or parity stock; or
	(2)     issue any shares of the Serial Preferred Stock, in excess of 300,000 shares thereof at any one time outstanding, or issue any shares of senior or parity stock (either directly or by reclassification), unless immediately after such proposed issue the aggregate of (i) the capital of the Company applicable to its stock ranking junior as to assets and dividends and (ii) the surplus of the Company shall be not less than the aggregate amount payable upon involuntary liquidation to the holders of the Serial Preferred Stock and of senior and parity stock then to be outstanding, excluding from such computation all stock to be retired through such proposed issue; or           (3)     issue any unsecured notes, debentures or other securities representing unsecured indebtedness, or assume or guarantee any such unsecured securities, other than for the extension, renewal or refunding of outstanding debt securities theretofore issued or assumed, or for the redemption or retirement of shares of the Serial Preferred Stock or of any senior or parity stock, if immediately after such issue or assumption the total principal amount of such unsecured securities then outstanding would exceed twenty-five per cent of the aggregate of (i) the total principal amount of all bonds or other securities representing secured indebtedness issued, assumed or guaranteed by the Company and then to be outstanding and (ii) the capital and surplus of the Company as then stated on its books less any known excess of book value of the Company's physical property which is devoted to public use over (I) the actual cost thereof t o the Company and (II) as to such property as was not acquired as the result of arm's length negotiations, the actual cost thereof to the one first devoting the same to public use; or           (4)     merge or consolidate with or into any other corporation or corporations or sell or lease all or substantially all of its assets, unless such merger, consolidation, sale or lease, or the issue and assumption of all securities to be issued or assumed in connection with any such merger, consolidation, sale or lease shall have been ordered, approved or permitted by the regulatory authority or authorities having jurisdiction in the premises; provided that the provisions of this clause (4) shall not apply to a purchase, lease or other acquisition by the Company of the franchises or assets of another corporation, or otherwise apply in any manner which does not involve a merger or consolidation or sale or lease by the Company of all or substantially all of its assets.
(i)     So long as any shares of the Serial Preferred Stock are outstanding, the Company shall not pay any dividends on its Common Stock (other than dividends payable in Common Stock) or make any distribution on, or purchase or otherwise acquire for value, any of its Common Stock (each such payment distribution purchase and/or acquisition being herein referred to as a "Common Stock dividend") except to the extent permitted by the following provisions:
	(1)     No Common Stock dividend shall be declared or paid in an amount which, together with all other Common Stock dividends declared in the year ending on (and including) the date of the declaration of such Common Stock dividend, would in the aggregate exceed 50% of the net earnings of the Company for the period consisting of the twelve consecutive calendar months ending on the last day of the calendar month next preceding the declaration of such Common Stock dividend after deducting from such net earnings dividends accruing on any stock other than Common Stock of the Company during such period, if at the end of such period, the ratio (herein referred to as the "capitalization ratio") of the sum of (i) the capital represented by the Common Stock (including premiums on Common Stock) and (ii) the surplus accounts of the Company, to the sum of (I) the total capital and (II) the surplus accounts of the Company (after adjust ment in each case of the surplus accounts to reflect payment of such Common Stock dividend) would be less than 20%.           (2)     If such capitalization ratio, determined as aforesaid, shall be 20% or more, but less than 25%, no Common Stock dividend shall be declared or paid in an amount which, together with all other Common Stock dividends declared in the year ending on (and including) the date of the declaration of such Common Stock dividend, would in the aggregate exceed 75% of the net earnings of the Company for the period consisting of the twelve consecutive calendar months ending on the last day of the calendar month next preceding the declaration of such Common Stock dividend after deducting from such net earnings dividends accruing on any stock other than the Common Stock of the Company during such period; and           (3)     If such capitalization ratio, determined as aforesaid, shall be in excess of 25%, no Common Stock dividend shall be declared or paid which would reduce such capitalization ratio to less than 25% except to the extent permitted by the next preceding subparagraphs (1) and (2).
For the purposes of this subdivision (i) the total capital of the Company shall be deemed to consist of the aggregate of (x) the principal amount of all outstanding indebtedness of the Company represented by bonds, notes or other evidences of indebtedness maturing by their terms one year or more after the date of the issue thereof and (y) the par or stated value of all outstanding capital stock (including premiums on capital stock) of all classes of the Company. All indebtedness and shares of stock of the Company acquired by the Company and held in its treasury shall be excluded in determining total capital.             Purchases or other acquisitions of Common Stock shall be deemed, for the purposes of the foregoing provisions of this subdivision (i), to have been declared as dividends as of the date on which such purchases or acquisitions are consummated.           (j)     No holder of Serial Preferred Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock, or securities convertible into, or carrying or evidencing any right to purchase, stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise.           (k)     Except as otherwise in subdivisions (g) and (h) of this subdivision (A) or by statute specifically provided, the Serial Preferred Stock shall have no voting power unless and until dividends payable thereon are in default in an amount equivalent to four full quarter-yearly dividends on the Serial Preferred Stock at the time outstanding. In such event and until such default shall have been remedied as hereinafter provided, the holders of Serial Preferred Stock, voting separately, shall become entitled to elect twenty-five percent of the Board of Directors, or the smallest number of directors that exceeds twenty-five percent of the Board, but in no event less than two directors, and the other stockholders then entitled to vote for the election of directors, voting separately by classes if so required by the provisions applicable to such classes, shall be entitled to elect the remaining directors of the Company. Upon the accrual of such special right to the holders of Serial Preferred Stock a meeting of the stockholders then entitled to vote for the election of directors shall be held upon notice promptly given, as provided in the By-Laws for a special meeting, by the President or the Chairman of the Board of the Company. If within fifteen days after the accrual of such special right to the holders of Serial Preferred Stock, the President and the Chairman of the Board of the Company shall fail to call such meeting, then such meeting shall be held upon notice, as provided in the By-Laws for a special meeting, given by the holders of not less than five hundred shares of Serial Preferred Stock after filing with the Company notice of their intention so to do. The terms of office of all persons who may be directors of the Company at the time shall terminate upon the election of directors by the holders of Serial Preferred Stock, whether or not at the time of such termination the remaining directors of the Company shall have b een elected; and thereafter and during the continuance of such special right of the holders of Serial Preferred Stock, the Board of Directors shall be divided into two or more classes, one class consisting of the directors to be elected by the holders of Serial Preferred Stock and the other class or classes consisting of the directors to be elected by the other stockholders entitled to vote for the election of directors, and the directors of each such class elected at such meeting, or at any adjournment thereof, and the directors of each such class elected at any subsequent annual meeting for the election of directors, held during the continuance of such special right, shall hold office until the next succeeding annual election and until their respective successors by classes are elected and qualified.                  However, if and when all dividends then in default on the Serial Preferred Stock shall be paid (and such dividends shall be declared and paid as soon as reasonably practicable out of surplus or net profits, but without diminishing the amount of capital of the Company), the holders of Serial Preferred Stock shall be divested of such special right, but subject always to the same provisions for the revesting of such special right in the holders of Serial Preferred Stock in the case of any similar future default or defaults. Whenever the holders of Serial Preferred Stock shall be so divested of such special right, the method of election of the Board of Directors by the vote of the other stockholders entitled to vote for the election of directors exclusively shall be restored, and the election of directors shall take place at the next succeeding annual meeting for the election of directors, or at any adjournme nt thereof.           (l)     Except as hereinafter provided, during the continuance of the special right of the holders of Serial Preferred Stock to elect directors as provided in subdivision (k) of this subdivision (A), at all meetings for the election of directors the presence in person or by proxy of the holders of record of a majority of the outstanding shares of Serial Preferred Stock shall be necessary to constitute a quorum for the election of directors whom the holders of Serial Preferred Stock are entitled to elect, and the presence in person or by proxy of the holders of record of a majority of the outstanding shares of each other class of stock then entitled to vote for the election of directors shall be necessary to constitute a quorum for the election of the directors whom the holders of such class of stock are entitled to elect. In the absence of such a quorum of the holders of stock of any particular class then entitled to vote for the election of directors, the holders of a majority of the shares of the stock of such class so present in person or represented by proxy may adjourn from time to time the meeting for the election of directors to be elected by such stock, without notice other than announcement at the meeting, until the requisite quorum of holders of such stock shall be obtained. However, at the first meeting for the election of directors after any accrual of the special right of the holders of Serial Preferred Stock, and at any subsequent annual meeting for the election of directors held during the continuance of such special right, if there shall not be such a quorum of the holders of Serial Preferred Stock the meeting shall be adjourned from time to time as above provided until such quorum shall have been obtained; provided that, if such quorum shall not have been obtained within ninety days from the date of such meeting as originally called (or, in the case of any annual meeting held during the continuance of such special right, from the date fixed for such annual meeting), the presence in person or by proxy of the holders of record of one third of the outstanding shares of Serial Preferred Stock shall then be sufficient to constitute a quorum for the election of the directors whom the holders of Serial Preferred Stock are then entitled to elect. The absence of a quorum of the holders of any class of stock then entitled to vote for the election of directors shall not, except as hereinafter provided, prevent or invalidate the election by the other class or classes of stockholders of the directors which they are entitled to elect, if the necessary quorum of stockholders of such other class or classes is present in person or represented by proxy at any such meeting or any adjournment thereof. However, at the first meeting for the election of directors after any accrual of the special right of the holders of Serial Preferred Stock to elect directors as provided in subdivision (k) of this subdivision (A), the absence of a quorum of the holders of Serial Preferred Stock shall prevent the election of directors by the holders of Common Stock until the election of directors by the holders of Serial Preferred Stock after a quorum of the holders of Serial Preferred Stock shall have been obtained. (B)        COMMON           (a)     No holder of Common Stock shall be entitled as such as a matter of right to subscribe for or purchase any part of any new or additional issue of stock, or securities convertible into, or carrying or evidencing any right to purchase, stock, of any class whatever, whether now or hereafter authorized, and whether issued for cash, property, services or otherwise.           (b)     Except as otherwise provided by statute or by this Article V, voting rights for all purposes shall be vested exclusively in the holders of the Common Stock, who shall have one vote for each share held by them. VI.     The following provisions are set forth herein for the regulation of the internal affairs of the Company:
	At the date hereof, the Company has issued and outstanding $1,006,800,000 aggregate principal amount of First Mortgage Bonds issued under and secured by the lien of the Company's Mortgage and Deed of Trust dated July 1, 1936, as amended and supplemented, heretofore made by the Company to The Bank of New York (as successor to The Riggs National Bank of Washington, D.C.), as Trustee, which Mortgage and Deed of Trust, as amended and supplemented, constitutes a lien on substantially all the properties and franchises of the Company, other than cash, accounts receivable and other liquid assets, securities, leases by the Company as lessor, equipment and materials not installed as part of the fixed property, and electric energy and other materials, merchandise or supplies produced or purchased by the Company for sale, distribution or use. The Board of Directors of the Company may from time to time cause to be issued additional First Mortgage Bonds to be secured by said Mortgage and Deed of Trust, as heretofore or hereafter amended and supplemented, without limitation as to principal amount and without action by or approval of the Company's shareholders, and in connection therewith may cause to be executed and delivered by the Company such supplemental indentures, containing such additional covenants, as the Board may approve.           Without the assent of the shareholders of any class the stated capital of the Company may, from time to time, be reduced in respect of shares of its Serial Preferred Stock reacquired in conversion and cancelled.
VII.          The address of the Company's registered office in the District of Columbia is 701 Ninth Street, N.W., and the name of its registered agent at such address is John J. Sullivan.                  The address of the Company's registered office in Virginia is 8280 Greensboro Drive, #900, P.O. Box 9346, Tyson's Corner, McLean, Virginia 22102; and the name of its registered agent at such address is Sean F. Murphy, who is a resident of Virginia and a member of the Virginia State Bar. VIII.        The business and affairs of the Company shall be managed by or under the direction of the Board of Directors. The number of directors of the Company shall be the number from time to time fixed by, or in the manner provided in, the By-Laws of the Company. The directors shall be elected in the manner provided in the By-Laws.                  Notwithstanding the foregoing, whenever the holders of any class of stock issued by the Company shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Articles of Incorporation applicable thereto, and such directors so elected shall not be divided into classes unless expressly provided by such terms.                  IN WITNESS WHEREOF, Potomac Electric Power Company has duly caused these Restated Articles of Incorporation and Articles of Restatement to be duly executed in its name by Dennis R. Wraase, its President, and its corporate seal to be hereunto affixed and duly attested by Ellen Sheriff Rogers, its Secretary, all as of the 12th day of August, 2002.
		/s/  D. R. WRAASE                             Dennis R. Wraase       President
Attest: /s/  ELLEN SHERIFF ROGERS         Ellen Sheriff Rogers       Secretary

DISTRICT OF COLUMBIA STATEMENT OF CANCELLATION OF REDEEMABLE SHARES OF POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 29-101.59 of the District of Columbia Code, 2001 Edition, the undersigned corporation submits this statement of cancellation, pursuant to the provisions of its articles of incorporation, of redeemable shares of the corporation reacquired by it through repurchase or redemption subsequent to the close of business on December 9, 1999, 60,359 shares of Serial Preferred Stock, $2.44 Series of 1957, 126,108 shares of Serial Preferred Stock, $2.46 Series of 1958, 108,241 shares of Serial Preferred Stock, $2.28 Series of 1965, 49,970 shares of Serial Preferred Stock, $3.40 Series of 1992.
FIRST:		The name of the corporation is Potomac Electric Power Company.
SECOND:		The aggregate number of shares which the corporation has authority to issue is 207,750,000, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Common Stock					200,000,000
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992 Undesignated as to series		300,000       300,000       400,000       1,000,000       5,750,000
THIRD	The number of shares of the corporation so cancelled is 344,678, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992		60,359       126,108       108,241       49,970
FOURTH:	The number of shares which the corporation has authority to issue after giving effect to such cancellation is 207,405,322, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Common Stock					200,000,000
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992 Undesignated as to series		239,641       173,892       291,759       950,030       5,750,000
FIFTH:	The aggregate number of issued shares of the corporation after giving effect to such cancellation is 1,655,422, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Common Stock					100
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992		239,641       173,892       291,759       950,030
SIXTH:	After giving effect to such cancellation, the amounts of the stated capital and paid-in surplus of the corporation, computed in accordance with the provisions of the District of Columbia Business Corporation Act, as amended, are $82,766,101 and $506,443,994.62, respectively.
Date:  December 17, 2002 (Corporate Seal) Attest: /s/ ELLEN SHERIFF ROGERS Ellen Sheriff Rogers Secretary				POTOMAC ELECTRIC POWER COMPANY By:  /s/ A. W. WILLIAMS                   Andrew W. Williams        Senior Vice President and           Chief Financial Officer

ARTICLES OF AMENDMENT OF POTOMAC ELECTRIC POWER COMPANY
Under the provisions of Section 13.1-652 of the Code of Virginia, as amended, the undersigned corporation submits these Articles of Amendment.
FIRST:		The name of the corporation is Potomac Electric Power Company.
SECOND:		The reduction in the number of authorized shares of the corporation is 344,678, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992		60,359       126,108       108,241       49,970
THIRD:	The total number of authorized shares of the corporation remaining after giving effect to such cancellation is 207,405,322, itemized as follows:
CLASS			SERIES		NUMBER OF SHARES
Common Stock					200,000,000
Serial Preferred   Stock			$2.44 Series of 1957 $2.46 Series of 1958 $2.28 Series of 1965 $3.40 Series of 1992 Undesignated as to series		239,641       173,892       291,759       950,030       5,750,000
The Articles of Incorporation prohibit the reissuance of acquired shares.
FOURTH:	The reduction in the number of authorized shares was duly authorized by the Board of Directors on December 16, 2002.
Date:  December 17, 2002 (Corporate Seal) Attest: /s/ ELLEN SHERIFF ROGERS Ellen Sheriff Rogers Secretary				POTOMAC ELECTRIC POWER COMPANY By:  /s/ A. W. WILLIAMS                          Andrew W. Williams        Senior Vice President and           Chief Financial Officer

EX-4

ISSUING AND PAYING AGENCY AGREEMENT
AGREEMENT made on the 3rd day of June, 1992 between THE BANK OF NEW YORK, a New York banking corporation maintaining its principal corporate trust office at 101 Barclay Street, New York, New York 10286 (the "paying Agent"), and Potomac Capital Investment Corporation, a Delaware corporation having its principal place of business at 900 19th Street, N.W., suite 600, Washington, D.C. 20006 (the "Issuer").
W I T N E S S E T H
WHEREAS, the Issuer has authorized and may from time to time issue fixed rate notes, Series B ("Fixed Rate Notes") and floating rate notes, Series B ("Floating Rate Notes") eligible for resale under Rule 144A of the Securities Act of 1933 under its Medium-Term Note Program (collectively, the "Notes");             WHEREAS, the Issuer desires to appoint the Paying Agent as paying agent, issuing agent, registrar and calculation agent with respect to such Notes as hereinafter set forth; and             WHEREAS, the Paying Agent agrees to act as such paying agent, issuing agent, registrar and calculation agent;             NOW THEREFORE, in consideration of the mutual promises hereinafter contained, the Paying Agent and the Issuer hereby covenant and agree as follows:
ARTICLE I APPOINTMENT
1.       The Issuer hereby appoints the Paying Agent as its paying agent, issuing agent, registrar and calculation agent with respect to the Notes to perform the duties hereinafter set forth.             2.       The Paying Agent hereby accepts such appointment and agrees to perform the duties hereinafter set forth.
ARTICLE II ISSUANCE OF NOTES
1.       The Paying Agent hereby agrees to issue and authenticate the Notes in accordance with the procedures set forth in Exhibit D ("Administrative Procedures") to the Private Placement Agreement dated June 3, 1992 between the Issuer and the Placement Agents defined therein, a copy of which Exhibit is attached hereto and made a part hereof..             2.       The Issuer hereby agrees that it will promptly notify the Paying Agent of any amendments or modifications to such Private Placement Agreement (including the Administrative Procedures which are an exhibit thereto) and that it will only effect any such amendments or modifications (i) with the prior written consent of the Paying Agent, or (ii) following delivery to the Paying Agent of a certificate of an executive officer of the Company verifying that such amendments or modifications do not adversely affect the Paying Agent.
ARTICLE III DEPOSIT OF FUNDS
1.       Not later than five business days prior to any interest payment date described in a Note or Notes, the Issuer shall furnish, or caused to be furnished, via telephone, telecopy or other telecommunication device, promptly confirmed in writing, to the Paying Agent the following information with respect to said interest payment date and to such Notes: (a) the aggregate amount of interest to be paid on such interest payment date with respect to any Fixed Rate Note and the amount of such interest to be paid per $1,000 of principal outstanding; and (b) such other information as the Paying Agent may request from time to time.             2.       Not later than five business days prior to any date on which principal and premium, if any, is to be paid by the Paying Agent with respect to any of the Notes, whether at maturity, by acceleration, or otherwise, the Issuer shall furnish, or cause to be furnished, via telephone, telecopy or other telecommunication device, promptly confirmed in writing, to the Paying Agent a statement specifying such payment date and containing information with respect to such payment in the nature of the information described in the preceding paragraph, including such information as the Paying Agent may request from time to time.             3.       On or prior to 12:00 noon, New York City time, on each payment date described in any of the preceding paragraphs of this Article, the Issuer shall deposit, or cause to be deposited, with the Paying Agent finally collected funds, or funds which have been ordered transferred on the Federal Reserve System and for which a confirmation number has been issued, in an amount equal to the aggregate amount to be paid by the Paying Agent on such payment date. In the event the amount deposited with respect to a payment date is less than the sum of the aggregate amounts specified in statements furnished to the Paying Agent pursuant to this Article with respect to such payment date, the Paying Agent shall promptly notify the Issuer, and shall effect no payments with respect to such payment date until such discrepancy has been resolved. Until paid as hereinafter provided, the Paying Agent shall hold such amounts i n trust for the benefit of the holders of the Notes. The Paying Agent shall pay to the Issuer any interest actually earned on or with respect to amounts held or deposited hereunder prior to the relevant payment date, and invested as provided below, but shall be under no duty or obligation to otherwise pay interest or earnings on such amounts or to collateralize or pledge any security therefor, or to segregate such amounts, except as required by law. Any investments of such deposited amounts by the Paying Agent shall be as mutually agreed to by the Issuer and the Paying Agent.
ARTICLE IV PAYMENTS
1.       The Paying Agent shall effect payment of the amounts described in paragraph 1 of Article III hereof on the respective interest payment dates. Such payment may be accomplished by the Paying Agent mailing a check, payable to the registered owner of the Note on the record date, to the address of such registered owner, in accordance with the information shown on the register maintained by the Paying Agent, or, at the Issuer's option, by the Paying Agent wiring such amounts to an account specified by such registered owner in a designation in form and substance satisfactory to the Paying Agent.             2.       The Paying Agent shall effect payment of principal amounts described in paragraph 2 of Article III hereof, and payment of interest due at maturity or redemption, in immediately available funds against presentation of the Note at the principal corporate trust office of the Paying Agent, or at such other office or agency of the Issuer as the Issuer shall designate in writing to the registered owner of the Note.             3.       Notwithstanding any provision elsewhere contained herein, payments by the Paying Agent shall be made only out of amounts deposited pursuant to paragraph 3 of Article III hereof with the Paying Agent with respect to such payment.             4.       The Paying Agent will not charge, impose, collect or receive, from the holder or owner of any Note, any fee or consideration for any services performed in connection with any payment to such holder or owner of principal or interest, and any charge for postage, for wiring payment, or otherwise, shall be charged to, and promptly paid by, the Issuer.
ARTICLE V APPOINTMENT OF CALCULATION AGENT
1.       The Issuer hereby appoints The Bank of New York as Calculation Agent with respect to any Floating Rate Notes to be issued by the Issuer pursuant to the Private Placement Agreement. The Calculation Agent hereby accepts its appointment to calculate the interest rate and the amount of interest on each of the Floating Rate Notes for each interest accrual period, upon the terms and conditions set forth herein. The calculation of the base rates for the interest rates applicable to the Notes shall be determined by reference to Commercial Paper, LIBOR or Treasury Rate (the "Base Rates").             2.       Calculation of Base Rates. (i) The Calculation Agent shall calculate the interest rate and the amount of interest due on each of the Floating Rate Notes for each interest accrual period and communicate the same to the Issuer upon terms and conditions contained herein and in the Notes. The provisions of the Notes with respect to interest rate calculation shall not be changed in any respect without the express consent of the Calculation Agent. The Issuer shall provide the Calculation Agent with not less than two (2) business days' notice of the calculation date on which a particular Floating Rate calculation is to be made by the Calculation Agent, and the Calculation Agent shall notify the Issuer of such Floating Rate calculation on such calculation date and may confirm such calculation in writing within twenty-four (24) hours after so notifying the Issuer; (ii) in no event shall the interest r ate be less than the minimum interest rate, if any, or higher than the maximum interest rate, if any, designated in the applicable Floating Rate Note and in no event shall the interest rate on the Notes be higher than the maximum rate permitted by New York law as the same may be modified by United states law of general application; (iii) the Calculation Agent shall calculate the amount of interest payable on each Floating Rate Note in the manner and at the times set forth in such Note; and (iv) as soon as practicable after each Interest Determination Date, the Calculation Agent will cause to be forwarded to the Issuer information regarding the interest rates, the interest periods, the amount of interest for each interest period and the relevant Interest Payment Dates. The Calculation Agent will, upon the request of any holder of any Floating Rate Note, provide the interest rate which will become effective as a result of a determination made on the most recent Interest Determination Date with respect to such Note.
ARTICLE VI ADDITIONAL DUTIES OF PAYING AGENT
1.       As registrar and issuing agent for the Notes, the paying Agent shall: (i) authenticate the Notes originally issued by the Issuer and Notes substituted for those Notes originally issued; (ii) exchange Notes outstanding on the date hereof for Notes eligible for resales pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A") at the request of any holder; (iii) maintain an office for the registration (and for the transfer) of the Notes; (iv) maintain a register of owners of the Notes; (v) keep and maintain such other records in such form and manner as it shall determine in its sole discretion; and (vi) perform such related duties as may be necessary for a registrar and issuing agent to perform. Such records and register shall upon request be available for inspection by authorized officers, employees, and agents of the Issuer during the normal business hours of the Pay ing Agent. Upon the termination of this Agreement, the Paying Agent shall deliver to the Issuer copies of such records in the form and manner kept by the Paying Agent on such date.             2.       With respect to the transfer of Notes, the Paying Agent hereby agrees that it shall: (i) upon presentation of a Note in accordance with clause (i) or (ii) of Section 3 of this Article, or upon presentation of a Note and duly completed Transfer Letter or Certificate of Transfer in accordance with clause (iii) or (iv) of Section 3 of this Article, in any case with a written transfer of title by the registered owner satisfactory to the Paying Agent, transfer the title of such Note. The signature on such instrument shall be guaranteed by a commercial bank or trust company or a member firm of the New York Stock Exchange, Inc.; (ii) enter the name of the transferee on the books kept by the Paying Agent for purposes of listing registered owners of the Notes; (iii) cancel and retain each Note surrendered for a payment of principal upon its making a payment which reduces th e unpaid principal amount of such Note to zero. Notes cancelled hereunder may be delivered by the Paying Agent to the Issuer from time to time, and following any such delivery the Issuer shall have the sole responsibility for any failure thereafter to produce any such Note; and (iv) maintain in safekeeping any blank Note forms delivered to the Paying Agent by the Issuer. The Paying Agent shall have no responsibility for monitoring the compliance of the transferor or the transferee with the relevant provisions of the Securities Act of 1933 with respect to the transfer of the Notes.             3.       The Notes, in accordance with their terms, may be transferred only: (i) to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & smith, Incorporated, Goldman, Sachs & Co., J.P. Morgan Securities Inc. (the "Placement Agents"), or the Issuer; or (ii) to an institutional accredited investor (as defined in the Securities Act of 1933) through or by a Placement Agent or in a transaction approved by a Placement Agent; or (iii) directly to an institutional accredited investor in a transaction approved by the Issuer; or (iv) to a qualified institutional buyer in a transaction which meets the requirements of Rule 144A; provided that the foregoing restrictions on resales and transfers shall not apply to resales or other transfers made at least three years after each Note was originally issued (not giving effect to any period such Note was held by the Company or an affiliate of the Company). A ny resale or other transfer described in (iii) or (iv) above requires the submission to the Issuing and Paying Agent, as agent for the Issuer, of a duly completed Transfer Letter in the form attached as Exhibit A hereto or the completion of the Certificate of Transfer on the subject Note. The purpose of this requirement is to ensure that Notes are not resold or otherwise transferred in a manner that might call into question the non-public offering character of the offer and sale of the Note.             4.       The Paying Agent shall file such Federal and state returns concerning payments hereunder as shall be required of it by applicable law, but shall not be responsible for the collection or withholding of taxes due on such payments except, and only to the extent, required of its Paying Agent by applicable law. Without limiting the generality of the foregoing, the Issuer, and not the Paying Agent, shall file any reports with respect to original issue discount.             5.       The Paying Agent shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against the Paying Agent.
ARTICLE VII CONCERNING THE PAYING AGENT
1.       The Paying Agent shall not be liable for any loss or damage, including reasonable counsel fees and expenses, resulting from its actions or failure to act hereunder, except for any loss arising out of its own bad faith, gross negligence, or willful misconduct without limiting the generality of the foregoing, the Paying Agent shall not be liable for any action taken or omitted in reliance on any obligation, notice, direction, consent, certificate, affidavit, statement, designation or other paper or document reasonably believed by it to be genuine and to have been properly authorized and properly signed or presented.             2.       The Issuer shall indemnify and exonerate, save and hold harmless the Paying Agent from and against any and all claims, demands, expenses (including reasonable counsel fees and expenses) and liabilities of any and every nature which the Paying Agent may sustain or incur or which may be asserted against the Paying Agent as a result of any action taken or omitted by the Paying Agent without bad faith, gross negligence or willful misconduct. At any time the Paying Agent may apply to the Issuer for instructions with respect to any matter arising under this Agreement and shall be fully protected in acting in accordance with such instructions. In addition, the Paying Agent may consult counsel to the Issuer, or its own counsel, at the expense of the Issuer, and shall be fully protected with respect to any action taken or omitted in good faith in accordance with such advice or opinion of counsel to the Issue r or its own counsel.             3.       The Paying Agent may employ agents or attorneys-in- fact, and shall not be liable for any loss or damage arising out of, or in connection with, the actions or omissions to act of such agents or attorneys-in-fact provided the Paying Agent acted without bad faith, negligence, or willful misconduct in connection with the selection of such agents or attorneys-in-fact.             4.       The Paying Agent makes no representations with respect to the validity or sufficiency of the Notes, or the use or application of the proceeds of the sale or distribution thereof, and shall incur no liability with respect to the foregoing.             5.       Notwithstanding any other provision elsewhere contained in this Agreement, including, without limitation, paragraph 3 of Article III, the Paying Agent is acting solely as agent of the Issuer and does not assume any obligation or relationship of agency or trust for or with any owners or holders of Notes, other than the limited obligations with respect to amounts deposited hereunder contained in said paragraph 3 of Article III.             6.       The Issuer shall pay to the Paying Agent for its performance hereunder (i) its reasonable out-of-pocket expenses (including counsel fees and expenses) incurred in connection with this Agreement, including, without limitation, those described or referred to in paragraph 4 of Article IV hereof, and (ii) such compensation as may mutually be agreed upon in writing by the Issuer and the Paying Agent.             7.       No provision of this Agreement shall require the Paying Agent, Issuing Agent, Registrar or Calculation Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
ARTICLE VIII GENERAL
1.       Either of the parties hereto may terminate this Agreement by giving to the other a notice in writing specifying a termination date which, unless otherwise waived by the other party, is (a) at least 30 days after the giving of such notice, and (b) in case such notice is given by the Paying Agent, at least 15 days prior to the next succeeding date for the payment of interest or principal or premium, if any. Upon the date specified in such notice, the Paying Agent shall, upon making the delivery required by paragraph 1 of Article V hereof, be relieved of all duties and responsibilities pursuant to this Agreement.             2.       Any notice, request for instructions, or other instrument in writing authorized or required by this Agreement to be given to either party shall be sufficiently given if addressed and mailed or delivered to it at its offices at the address first above written, or at such other place as such party may from time to time designate in writing.             3.       This Agreement: (a) may not be amended or modified in any manner except by a written agreement executed by both parties; (b) shall extend to and be binding upon the parties hereto and their respective successors and assigns; and shall be governed by and construed in accordance with the laws of the state of New York.             IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate officers, thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written.
[SEAL] Attest: /s/  LG                                                                          Assistant Treasurer [SEAL] Attest: /s/  William Shapiro                                                Title:  Secretary	THE BANK OF NEW YORK By:  /s/ MaryJane Morrissey                                      Assistant Vice President POTOMAC CAPITAL INVESTMENT     CORPORATION By:  /s/ John P. Finneran, Jr.                                    Title:  Treasurer

EX-4

ISSUING AND PAYING AGENCY AGREEMENT

This Issuing and Paying Agency Agreement, dated as of April 29, 1998 (the Agreement"), between Potomac Capital Investment Corporation, a Delaware corporation having its principal place of business at 1801 K Street, N.W., Suite 900, Washington, D.C. 20006 (the "Issuer"), and The Bank of New York, a New York banking corporation maintaining its principal corporate trust office at 101 Barclay Street, Floor 7E, New York, New York 10286, as issuing and paying agent (the "Issuing and Paying Agent").             WHEREAS the Issuer has established a program for the issue of Medium-Term Notes, Series D, With Maturities from 9 Months and 1 Day from Date of Issue through November 30, 2008 (the "Notes");             WHEREAS the Issuing and Paying Agent has agreed to act as Issuing and Paying Agent in connection with the Notes in accordance with the provisions of this Agreement.             NOW, THEREFORE, in consideration of the covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknow1edged, the parties hereto agree as follows:             SECTION 1. Appointment of Issuing and Paying Agent. The Issuer proposes to issue from time to time the Notes in an aggregate initial offering price not to exceed $700,000,000 (provided the Issuer reserves the right to increase such authorized amount from time to time), and have appointed Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Salomon Smith Barney Inc. (or such other placement agents as appointed by the Issuer from time to time) as the placement agents for the Notes (collectively, the "Placement Agents"). The Issuer hereby appoints the Issuing and Paying Agent to act, on the terms and conditions specified herein, as issuing and paying agent for the Notes, and the Issuing and Paying Agent hereby accepts such appointments in accordance with such terms and conditions. The Issuing and Paying Agent also agrees to perform the duties and obligations required to be performed by it under the Administrative Procedures applicable to the Notes (the, Administrative Procedures"). Defined terms used and not defined herein shall have the meanings given such terms in the Private Placement Agency Agreement, dated April 29, 1998 (the "Private Placement Agency Agreement"), between the Issuer and the Placement Agents or in the Private Placement Memorandum (as defined in such Private Placement Agency Agreement), as the case may be.             SECTION 2. Forms of Note; Global Notes; Proxies; Supply of Notes; Terms. (a) Forms of Notes. The Notes shall be issued in fully registered book-entry form (the "Book- Entry Notes") represented by one or more global Notes (the "Global Notes") or in fully registered certificated form (the "Certificated Notes"), without interest coupons, substantially in the forms of Note attached hereto as Exhibit A in the case of Notes bearing interest at a fixed rate of interest (the "Fixed Rate Notes") and Exhibit B in the case of Notes bearing interest at a floating rate of interest (the "Floating Rate Notes") or in such other forms as shall be delivered to the Issuing and Paying Agent by the Issuer.              (b)       Global Notes. This Section 2(b) shall apply to all Book-Entry Notes represented by one or more Global Notes that are registered in the name of The Depository Trust Company or another depositary specified by the Issuer (the "Depositary") or a nominee thereof:

(i)       each Global Note representing Book-Entry Notes will be deposited with, or on behalf of, the Depositary and registered in the name of the Depositary or a nominee thereof;        (ii)       notwithstanding any other provisions of this Agreement or a Global Note, such Global Note shall not be transferred except as a whole by a nominee of the Depositary to the Depositary or to another nominee of the Depositary or by the Depositary or such nominee to a successor of the Depositary or a nominee of such successor. A Global Note may be exchanged for the Certificated Note in the event that (A) the Depositary has notified the Issuer that it is unwilling or unable to continue as Depositary for the Global Notes or the Depositary has ceased to be a "clearing agency" registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and a successor depositary is not appointed by the Issuer within 60 calendar days thereafter, (B) an Event of Default has occurred and is continuing with respect to the Notes or (C) the Issuer, in its sole discretion, determines that all of the Book-Entry Notes shall be exchangeable for Certificated Notes. Any Global Note exchanged pursuant to clause (A) or (C) above shall be so exchanged in whole but not in part, while any Global Note exchanged pursuant to clause (B) above may be exchanged in whole or from time to time in part as directed by the Depositary;        (iii)       Notes issued in exchange for a Global Note or any portion thereof shall be issued as Certificated Notes, without interest coupons, shall have an aggregate principal amount equal to that of such Global Note or portion thereof to be so exchanged and shall be registered in such names and be in such authorized denominations as the Depositary or an authorized representative thereof shall designate. If a Global Note to be exchanged in whole is not then held by the Issuing and Paying Agent as custodian for the Depositary or its nominee, such Global Note shall be surrendered by the Depositary to the corporate trust office of the Issuing and Paying Agent located in the Borough of Manhattan, The City of New York, to be so exchanged. With regard to any Global Note to be exchanged in part, either such Global Note shall be so surrendered for exchange by the Depositary or, if the Issuing and Paying Agent is acting as custodian for the Depositar y or its nominee with respect to such Global Note, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Issuing and Paying Agent. Upon any such surrender or adjustment, the Issuer shall execute, and upon receipt of instructions from an Authorized Representative (as defined in Section 3) of the Issuer the Issuing and Paying Agent shall authenticate and deliver, each Certificated Note issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof and, in the case of such surrender, the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, a new Global Note on behalf of the Depositary for the remaining principal amount thereof; and        (iv)       neither any members of, or participants in, the Depositary ("Participants") nor any other persons on whose behalf Participants may act shall have any rights under this Agreement with respect to any Global Note registered in the name of the Depositary or any nominee thereof, or under any such Global Note, arid the Depositary or such nominee, as the case may be, may be treated by the Issuer, the Issuing and Paying Agent and any agent of the Issuer or the Issuing and Paying Agent as the absolute owner and Registered Holder of such Global Note in accordance with Section 13(f) hereof. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Issuing and Paying Agent or any agent of the Issuer or the Issuing and Paying Agent from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Participants and any other person on whose behalf a Participant may act, the operation of customary practices of such persons governing the exercise of the rights of a Registered Holder of a Global Note.

(c)       Proxies. The Registered Holder of a Note may grant proxies and otherwise authorize any person, including Participants and persons that may hold interests through Participants, to take any action which such Registered Holder is entitled to take under this Agreement or such Note.              (d)       Supply of Notes. On the date of this Agreement, the Issuer will furnish the Issuing and Paying Agent with an adequate supply of Notes bearing consecutive control numbers, which will have the Registered Holder, principal amount and certain terms on the face thereof left blank. Upon reasonable notice given by the Issuing and Paying Agent to the Issuer, the Issuer shall provide to the Issuing and Paying Agent such additional number of Notes as is mutually agreed upon. Each Note will have been executed by the manual or facsimile signature of an Authorized Representative of the Issuer. The Issuing and Paying Agent will hold such blank Notes in safekeeping in accordance with its customary practice and shall issue such Notes in the order of the control numbers imprinted thereon.              (e)       Terms. The Notes shall have a maturity of at least 9 months and I day from the date of issuance thereof through November 30,2008 (the "Original Issue Date") and shall be issuable in minimum denominations of $250,000 and integral multiples of $l,000 in excess thereof (the "Authorized Denominations").             SECTION 3. Authorized Representatives. From time to time, the Issuer will furnish the Issuing and Paying Agent with a certificate certifying as to the incumbency and specimen signatures of officers authorized (i) to execute Notes on behalf of the Issuer by manual or facsimile signature and (ii) to give instructions to the Issuing and Paying Agent in accordance with Section 4 hereof (each such officer, an "Authorized Representative"). Until the Issuing and Paying Agent receives a subsequent incumbency certificate of the Issuer, the Issuing and Paying Agent shall be entitled to rely on the last such certificate delivered to it for purposes of determining the Authorized Representatives of the Issuer. The Issuing and Paying Agent shall have no responsibility to the Issuer to determine by whom or by what means a facsimile signature may have been affixed on the Notes, or to determine whether any facsimile or manual signature is genuine , provided that such facsimile or manual signature resembles reasonably closely the specimen signatures filed with the Issuing and Paying Agent by an Authorized Representative. Any Note bearing the manual or facsimile signature of a person who is an Authorized Representative on the date such signature is affixed thereto shall bind the Issuer after the authentication thereof by the Issuing and Paying Agent, notwithstanding that such person shall have ceased to hold office on the date such Note is authenticated and delivered by the Issuing and Paying Agent.             SECTION 4. Issuance Instructions; Registration; Authentication and Delivery; Receipt of Instructions: Payment. (a) Issuance Instructions. All Note issuance instructions shall be given by an Authorized Representative by facsimile transmission, in writing or by reasonably secure electronic means agreed to by the Issuer and the Issuing and Paying Agent. Such instructions shall include:

(i)       name of the person in whose name the related Note is to be registered (the "Registered Holder");        (ii)       address of the Registered Holder;        (iii)      wire transfer instructions, if any, for payments to the Registered Holder;        (iv)      taxpayer identifying number of the Registered Holder;        (v)       form of such Note (i.e., whether such Note is a Global Note or a Certificated Note);        (viii)    principal amount and Authorized Denominations of such Note;        (ix)      stated maturity date of such Note;        (x)       if such Note is a Fixed Rate Note, the Interest Rate;        (xi)      if such Note is a Floating Rate Note, such of the following as are applicable:

(A)       Interest Category (i.e., whether such Note is a Regular Floating Rate Note, an Inverse Floating Rate Note, a Floating Rate/Fixed Rate Note or another type of Floating Rate Note);        (B)       Interest Rate Basis or Bases and, if LIBOR and the CMT Rate, certain related information;        (C)       Initial Interest Rate;        (D)       Index Maturity;        (E)       Spread and/or Spread Multiplier;        (F)       Minimum and/or Maximum Interest Rate;        (G)       Initial Interest Reset Date;        (H)       Interest Reset Dates;        (I)         Day Count Convention; and        (J)        Calculation Agent;

(xii)       Interest Payment Dates for such Note;        (xiii)       any Initial Redemption Date, Initial Redemption Percentage and Annual Redemption Percentage Reduction;        (xiv)       any Optional Repayment Date{s);        (xv)       rate of Placement Agent's discount or commission and amount to be received in payment for such Note;        (xvi)       delivery and payment instructions for such Note; and        (xvii)       additional terms, if any.

(b)       Registration. Authentication and Delivery. Upon receipt from an Authorized Representative of the issuance instructions referred to in Section 4( a) in respect of a Note, the Issuing and Paying Agent shall withdraw the necessary Notes from safekeeping and, in accordance with such instructions, shall:

(i)       complete each Note as to the matters referred to in Section 4(a);        (ii)       record the ownership of each Note in the Note Register (as defined in Section 13(a) hereof);        (iii)       cause each Note to be manually authenticated by anyone of the officers or employees of the Issuing and Paying Agent duly authorized and designated by it for such purpose; and        (iv)       deliver each Note to the relevant Placement Agent or its designated consignee (which may be the Issuing and Paying Agent in the case of Global Notes), which delivery shall be made against payment (in the case of a sale of a Note to a Placement Agent as principal) or receipt of payment (in the case of a sale of a Note to a purchaser solicited by a Placement Agent as agent of the Issuer) in immediately available funds.

(c)       Receipt of Instructions. Instructions given by an Authorized Representative by facsimile transmission, in writing or by other electronic means must be received by the Issuing and Paying Agent not later than the times specified in the Administrative Procedures. In the event that instructions are received by the Issuing and Paying Agent later than the times specified in the Administrative Procedures, such instructions shall not be deemed to be received until the business day following such receipt.              (d)       Payment. It is understood that although the Issuing and Paying Agent is instructed to deliver Notes against payment in immediately available funds, delivery of the Notes, in accordance with the custom prevailing in the market, will be made before actual receipt of payment. Once the Issuing and Paying Agent has delivered Notes to the applicable Placement Agent or its designated consignee, as the case may be, against receipt therefor, the Issuer shall bear the risk that such Placement Agent or such designated consignee fails to remit payment for the Notes or return same to the Issuing and Paying Agent. It is further understood that each delivery of Notes hereunder shall be subject to the rules of the New York Clearing House in effect at the time of such delivery.             SECTION 5. Representations and Warranties. Each delivery of Notes to the Issuing and Paying Agent in accordance with Section 4 hereof shall constitute a continuing representation and warranty to the issuing and Paying Agent by the Issuer that the issuance and delivery of such Notes have been duly and validly authorized by the Issuer and that the Notes, when completed, authenticated and delivered pursuant hereto, will constitute the legal, valid and binding obligation of the Issuer.             SECTION 6. Proceeds of Sale of Notes. Proceeds received in payment for Notes are to be in immediately available funds and shall be immediately credited to an account designated and maintained by the Issuer with the Issuing and Paying Agent. The Issuing and Paying Agent shall provide the Issuer with advice reflecting all debits and credits to such designated bank account. Subject to the availability of funds upon receipt of instructions from an Authorized Representative, proceeds from the sale of Notes may, prior to the time such proceeds are received, be used in payment of the principal of, and premium, if any, and interest on, other Notes presented for payment on the stated maturity date or any earlier date on which the principal thereof is due and payable (the "Maturity Date"), or be transferred for credit to the (account of the Issuer at another bank.             SECTION 7. Interest Payment Dated Other Than Maturity Date; Payment Mechanics. (a) Interest Payment Dated Other Than Maturity Date. Unless otherwise specified on the face of such Notes or in an Addendum thereto, interest will be payable semi-annually on January 15 and July 15 of each year in the case of Fixed Rate Notes and such dates as are specified therein in the case of Floating Rate Notes, and, in such each case, on the Maturity Date (collectively, "Interest Payment Dates"). If any Interest Payment Date other than the Maturity Date for a Fixed Rate Note falls on a day that is not a Business Day (as defined in the Private Placement Memorandum), the related payment of interest shall be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date until such next succeeding Busines s Day. If any Interest Payment Date other than the Maturity Date for a Floating Rate Note falls on a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding day that is a Business Day, except that, if LIBOR is an applicable Interest Rate Basis and such next succeeding Business Day falls in the calendar month next succeeding such Interest Payment Date, such Interest Payment Date shall be the immediately preceding Business Day. All interest payments on an Interest Payment Date other than the Maturity Date will be made to the Registered Holders at the close of business on the fifteenth calendar day (whether or not a Business Day) immediately preceding the applicable Interest Payment Date, or such other dates specified in such Notes or in an Addendum thereto (each, a "Regular Record Date"). Any such interest not so punctually paid or duly provided for on any Interest Payment Date will forthwith cease to be payable to the Registered Holder thereof at the close of busin ess on the applicable Regular Record Date and may either be paid to the person in whose name such Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Issuer, notice whereof shall be given to the Registered Holders of Notes not less than 30 calendar days prior to such special record date, or be paid at any time in any other lawful manner. Unless otherwise specified in a Fixed Rate Note or in an Addendum thereto, interest with respect to a Fixed Rate Note will begin to accrue on the Original Issue Date of such Note and will be calculated on the basis of a 360-day year of twelve 30-day months. Interest with respect to any Floating Rate Note will begin to accrue on the Original Issue Date of such Note and will be calculated in accordance with the provisions set forth in such Note for the applicable Interest Rate Basis or Bases specified on the face thereof.             Payment Mechanics. (i) Certificated Notes. All interest payments on the Certificated Notes other than interest due on the Maturity Date will be made by check of the Issuing and Paying Agent mailed, charges prepaid, to the Registered Holders at their addresses appearing on the applicable Regular Record Date in the Note Register or to such other address in the United States as any Registered Holder shall designate to the Issuing and Paying Agent in writing not later than such Regular Record Date; provided, however, that Registered Holders of $10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in the Specified Currency) or more in aggregate principal amount of Certificated Notes (whether or not having identical terms and provisions) shall be entitled to receive payments of interest on an Interest Payment Date other than the Maturity Date by wire transfer of imme diately available funds to an account at a bank designated by each such Registered Holder not later than the Regular Record Date prior to such Interest Payment Date.                    (ii) Book-Entry Notes. On each Interest Payment Date other than the Maturity Date, the Issuer will pay to the Issuing and Paying Agent in immediately available funds an amount sufficient to make the required payment on such date and, upon receipt of such funds, the Issuing and Paying Agent, in turn, will pay to the Depositary such total amount of interest due on such Interest Payment Date.             SECTION 8. Optional Redemption. In the event the Issuer elects to redeem any Notes in whole or in part, the Issuer shall give written notice to the Issuing and Paying Agent of the principal amount of such Notes to be so redeemed not less than 35 calendar days prior to the date of redemption or such other date that the Issuer and the Issuing and Paying Agent mutually agree upon in writing. In any such written notice, (a) if Certificated Notes are to be redeemed, the Issuer shall identify such Notes by specifying the interest rate or formula pursuant to which interest is calculated on such Notes, the Interest Payment Dates, the stated maturity date and redemption terms or (b) if Book-Entry Notes are to be redeemed, the Issuer shall identify such Notes by specifying the CUSIP number assigned to the Global Note or Notes representing such Notes. The Issuing and Paying Agent shall cause notice of redemption to be given to the Registere d Holders of the Notes to be redeemed not less than 30 nor more than 60 calendar days prior to the date of redemption in the name and at the expense of the Issuer. Whenever less than all of the Notes of like tenor and terms are to be redeemed, (a) if such Notes are Global Notes held by the Issuing and Paying Agent as custodian for the Depositary or its nominee, the Issuing and Paying Agent shall reduce the principal amount of one or more Global Notes, by the amount of such redemption, by means of an appropriate adjustment on the records of the Issuing and Paying Agent or (b) in the case of all other Notes, the Issuing and Paying Agent shall select the Notes to be so redeemed by such method as the Issuing and Paying Agent shall deem fair and reasonable. Any Note which is to be redeemed in part only pursuant to clause (b) of the preceding sentence shall be surrendered to the corporate trust office of the Issuing and Paying Agent located in the Borough of Manhattan, the City of New York, and the Issuer shall ex ecute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver to the Registered Holder of such Note, without service charge, a new Note of like tenor and terms, of any Authorized Denomination as requested by such Registered Holder, in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of such Note so surrendered.             SECTION 9. Optional Repayment. In the event that any Notes permit the Registered Holder thereof to have such Notes repaid by the Issuer at such Registered Holder's option and such Registered Holder elects to have such Notes repaid in whole or in part, the Issuing and Paying Agent must receive at its corporate trust office located in the Borough of Manhattan, The City of New York, not more than 30 nor less than 10 calendar days prior to the date of repayment: or such Notes may be tendered through the normal tender procedures of The Depository Trust Company. Exercise of such repayment option by the Registered Holder of a Note shall be irrevocable with respect to such Note. Any Note which is to be repaid only in part shall be surrendered to the Issuing and Paying Agent and the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and de liver to the registered Holder of such Note, without service charge, a new Note of like tenor and terms, of any Authorized Denomination as requested by such Registered Holder, in an aggregate principal amount equal to and in exchange for the unpaid portion of the principal of such Note so surrendered.             SECTION 10. Payment on the Maturity Date. The Issuer will pay in immediately available funds the principal of, and premium, if any, and interest on, the Notes on the Maturity Date only upon presentation and surrender thereof. Interest payable on any Note on the Maturity Date will be payable to the person to whom the principal of such Note is payable. If the Maturity Date for any Note falls on a day that is not a Business Day, the related payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date until such next succeeding Business Day. The Issuing and Paying Agent will forthwith cancel each such Note pursuant to Section 22 hereof.             SECTION 11. Information Regarding Amounts Due. (a) Promptly following each Regular Record Date, the Issuing and Paying Agent will advise the Issuer of the amount of interest (to the extent then known) due on the next succeeding Interest Payment Date. The Issuing and Paying Agent will advise the Issuer in writing by the fifteenth calendar day of each month of the principal of and accrued interest to be paid on Notes maturing in the next succeeding month.                    (b) If at any time the Issuing and Paying Agent is not acting as calculation agent (the "Calculation Agent") with respect to any Note, the Issuing and Paying Agent will give the Calculation Agent written notice of each Interest Determination Date with respect to such Note at least three Business Days prior to such Interest Determination Date.             SECTION 12. Deposit of Funds. On a timely basis, the Issuer shall remit to the Issuing and Paying Agent the amount of principal, premium, if any, and/or interest payable in respect of Notes then outstanding. The Issuer shall wire such amount in immediately available funds on the relevant Interest Payment Date or the Maturity Date, as the case may be, prior to 12:00 p.m., New York City time, while the Issuing and Paying Agent will pay such amount to the Depositary (in the case of Book-Entry Notes) or the Registered Holders (in the case of Certificated Notes) on the aforementioned dates.             SECTION 13. Note Register Exchanges; Transfers; No Service Charges, etc.; Removal of Legends; Persons Deemed Owners. (a) Note Register. The Issuing and Paying Agent, as agent of the Issuer for this purpose, shall maintain at its corporate trust office located in the Borough of Manhattan, The City of New York, a register of Notes for the registration of ownership of Notes and transfers and exchanges thereof (the "Note Register"). Subject to the provisions of this Section 13, upon presentation for transfer or exchange of any Note at the corporate trust office of the Issuing and Paying Agent accompanied by a written instrument of transfer or exchange in the form approved by the Issuer (it being understood that, until notice to the contrary is given to Registered Holders, the Issuer shall be deemed to have approved the form of instrument of transfer or exchange printed on any Note), executed by the Registered Holder thereof, in person or by such Registered Holder's attorney thereunto duly authorized in writing, such Note shall be transferred upon the Note Register, and the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, a new Note of like tenor and terms, in any Authorized Denomination requested by such Registered Holder, in the name of the transferee.              (b)       Exchanges. Upon the receipt by the Issuing and Paying Agent at its corporate trust office of a Note accompanied by a written and executed instrument of exchange as provided in Section 13(a), then, if such Note is owned by the Registered Holder thereof and is being exchanged without transfer the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, in exchange for such Note one or more Notes of like tenor and terms, in any Authorized Denomination requested by such Registered Holder, in an aggregate principal amount equal to the principal amount of such Note.              (c)       Transfers. So long as the Legend (as defined in Section 13(e) hereof) has not been removed from a Note, the Issuing and Paying Agent shall not register the resale or other transfer of such Note unless such resale or other transfer is made in accordance with the Legend. In the case of a resale or other transfer of a Certificated Note, the Issuing and Paying Agent shall register the resale or other transfer of a Certificated Note to the Issuer or a Placement Agent or by, through or in a transaction approved by a Placement Agent upon the written approval of such resale or other transfer by the Issuer or Placement Agent, as the case may be. In the case of a resale or other transfer of a Certificated Note through the services of a broker, dealer or similar intermediary other than a Placement Agent, the Registered Holder and the prospective transferee of such Certificated Note shall be required t o complete the reverse of such Certificated Note or the Bond Power attached as Exhibit A to the Private Placement Memorandum and deliver the Certificated Note (and any applicable Bond Power) to the Issuing and Paying Agent to advise of the basis for such resale or other transfer being exempt from registration under the Securities Act of 1933, as amended (the "Securities Act").                   The Issuing and Paying Agent shall keep a record of all letters, notices or written communications received pursuant to this Section 13(c). The Issuer has the right to inspect all such documents, notices, letters or other written communications.              (d)       No Service Charges, etc. Registration of transfers and exchanges of Notes as aforesaid may be made from time to time, and each such registration shall be noted on the Note Register. No service charge shall be made for any registration of transfer or exchange of Notes, but the Issuing and Paying Agent or the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith {other than exchanges pursuant to this Agreement not involving any transfer).              (e)       Removal of Legends. The Notes shall contain a legend (the "Legend") to the effect that they have not been and will not be registered under the Securities Act, and that the resale or other transfer thereof is subject to certain restrictions in order to preserve the non-public nature of the offering of the Notes. If Notes are issued upon the transfer, exchange or replacement of Notes not bearing the Legend, the Notes so issued shall not bear the Legend. If Notes are issued upon the transfer, exchange or replacement of Notes bearing the Legend or if a request is made to remove the Legend on a Note, the Notes so issued shall bear the Legend or the Legend shall not be removed, as the case may be, unless there is delivered to the Issuer such satisfactory evidence as may be reasonably required by the Issuer that neither the Legend nor the resale and other transfer restrictions set forth therein ar e required to ensure that transfers thereof comply with the relevant provisions of the Securities Act or that such Notes are not "restricted securities" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence to the Issuer, the Issuing and Paying Agent, upon receipt of instructions from an Authorized Representative of the Issuer, shall authenticate and deliver a Note of like tenor and terms that does not bear the Legend. The Issuer agrees to indemnify the Issuing and Paying Agent for, and to hold it harmless against, any loss, liability or expenses, including the fees and expenses of counsel, reasonably incurred, arising out of or in connection with actions taken or omitted by the Issuing and Paying Agent in accordance with the instructions from an Authorized Representative of the Issuer; provided, however, that the Issuer shall not be required to indemnify the Issuing and Paying Agent for any loss, liability or expense arising from the negligence or willf ul misconduct of the Issuing and Paying Agent.              (f)       Persons Deemed Owners. The Issuer and the Issuing and Paying Agent (and any of their agents) may deem and treat the Registered Holder of any Note as the absolute owner of such Note for the purpose of receiving payment of the principal of, and premium, if any, and interest on, such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer nor the Issuing and Paying Agent shall be affected by notice to the contrary.             SECTION 14. Mutilated, Destroyed, Lost or Stolen Notes. In case any Note shall become mutilated or destroyed, lost or stolen, the Issuer, in its discretion, shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer, the Issuing and Paying Agent shall authenticate and deliver a new Note of like tenor and terms, having a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of and substitution for the Note destroyed, lost or stolen; provided, however, that the applicant for a substituted Note shall furnish to the Issuer and Paying Agent such security or indemnity as may be required by them to save each of them harmless and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Issuing and Paying Agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the owne rship thereof. Upon the issuance of any substituted Note, the Issuer and the Issuing and Paying Agent may require the payment of a sum sufficient to cover any fees and expenses connected therewith. In case any Note which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Issuer may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Registered Holder with the provisions of this Section 14, as hereinabove set forth.             SECTION 15. Application of Funds: Return of Unclaimed Funds. Until used or applied as herein provided, all funds received by the Issuing and Paying Agent hereunder shall be held for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. Any funds deposited with the Issuing and Paying Agent and remaining unclaimed for two years after the date upon which the last payment of the principal of, and/or premium, if any, and/or interest on, any Note to which such deposit relates shall at the written request of the Issuer be repaid to the Issuer by the Issuing and Paying Agent, and the Registered Holder of any Note to which such deposit relates entitled to receive payment thereof shall thereafter look, as an unsecured general creditor, on to the Issuer for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon ceas e.             SECTION 16. Events of Default. Upon the occurrence of an Event of Default (as defined in the Notes), the Issuer shall promptly provide the Issuing and Paying Agent written notice as to, and instruct the Issuing and Paying Agent in writing to promptly provide all of the Registered Holders of Notes of the Issuer such written notice as to, such occurrence of such Event of Default. In addition the Issuer, shall, within five calendar days after the occurrence thereof, provide the Issuing and Paying Agent written notice as to, and instruct the Issuing and Paying Agent in writing to promptly provide all of the Registered Holders of Notes such written notice as to any event which after notice or lapse of time or both would become an Event of Default under the Notes (a "Default"). Upon receipt of any such written instruction in respect of the occurrence of any such Event of Default or Default, the Issuing and Paying Agent shal1 promptly ma il to all Registered Holders of Notes, at the addresses of such Registered Holders as they appear in the Note Register, any such written notice of such Event of Default or Default unless the Issuer shal1 have notified the Issuing and Paying Agent in writing that such Event of Default or Default shall have been cured before the mailing of such written notice by the Issuing and Paying Agent.             SECTION 17. Liability. Neither the Issuing and Paying Agent nor its directors officers or employees shall be liable for any act or omission hereunder except in the case of its negligence or willful misconduct. The duties and obligations of the Issuing and Paying Agent, its officers and employees shall be determined by the express provisions of this Agreement and they shall not be liable except for the performance of such duties and obligations as are specifically set forth herein and no implied covenants shall be read into this Agreement against them. The Issuing and Paying Agent may consult with counsel and shall be fully protected in any action taken in good faith in accordance with the advice of counsel. Neither the Issuing and Paying Agent nor its officers or employees shall be required to ascertain whether the issuance or sale of the Notes (or any amendment or termination of this Agreement) has been duly authorized or is in c ompliance with any other agreement to which the Issuer is a party (whether or not the Issuing and Paying Agent is also a party to such other agreement).             SECTION 18. Indemnification. (a) The Issuer agrees to indemnify each of the Issuing and Paying Agent, its directors, officers, employees and agents for, and to hold each of them harmless against, any and all loss, liability, claim, damage or expense (including taxes other than taxes based upon the income of the Issuing and Paying Agent), incurred without negligence or willful misconduct arising out of or in connection with its or their performance under this Agreement, as well as the reasonable costs and expenses of defending against any claim or liability relating thereto. This indemnity shall survive payment of all of the Notes and, if applicable, the resignation or removal of the Issuing and Paying Agent.              (b)       Each indemnified party shall give prompt notice to the Issuer of any action commenced against it in respect of which indemnity may be sought hereunder. The Issuer shall have no liability for indemnity hereunder with respect to an action commenced against an indemnified party where such indemnified party failed to give notice to the Issuer of such action; provided, however, failure so to notify the Issuer shall not relieve the Issuer from any liability which it may otherwise have than on account of this indemnity agreement. The Issuer shall be entitled to assume the defense of any such action; provided however, that the indemnified party shall have the right prior to the employing of any counsel by the Issuer in connection with its assumption of such defense to consent to any such counsel, which consent shall not be unreasonably withheld; provided, further that if any indemnifi ed party is advised in an opinion of counsel that there may be legal defenses available to such indemnified party which are adverse to or in conflict with those available to the Issuer, the Issuer shall not have the right to assume the defense of such action, but shall be responsible for the reasonable fees and expenses of counsel retained by the indemnified party. The Issuer may participate at its own expense in the defense of such action. In no event shall the Issuer be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with anyone action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Notwithstanding anything herein to the contrary, the Issuer shall not be liable for any settlement of any action without its consent, which consent shall not be unreasonably withheld.              (c)       The Issuing and Paying Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Issuing and Paying Agent.              (d)       No provision of this Agreement shall require the Issuing and Paying Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.              (e)       The Issuing and Paying Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Issuing and Paying Agent shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.             SECTION 19. Compensation of the Issuing and Paying Agent. The Issuer agrees to pay the compensation of the Issuing and Paying Agent at such rates as shall be agreed upon from time to time and to reimburse the Issuing and Paying Agent for its reasonable out-of-pocket expenses (including legal tees and expenses), disbursements and advances incurred or made in accordance with any provisions of this Agreement. The obligations of the Issuer to the Issuing and Paying Agent pursuant to this Section 19 shall survive the resignation or removal of the Issuing and Paying Agent and the satisfaction or termination of this Agreement.             SECTION 20. Notices. (a) All communications by or on behalf of the Issuer relating to the issuance, transfer, exchange or payment of principal, premium, if any, or interest in respect of any Note shall be directed to the Issuing and Paying Agent at its address set forth in subsection (b )(ii) hereof and the Issuer will send all Notes to be completed, authenticated and delivered by the Issuing and Paying Agent to such address (or such other address as the Issuing and Paying Agent shall specify in writing to the Issuer).              (b)       Notices and other communications hereunder to the parties hereto shall be in writing, sent by facsimile transmission or by first class mail, postage prepaid, and shall be addressed as follows, or to such other addresses as the parties hereto shall specify from time to time:

(i)

if to the Issuer: Potomac Capital Investment Corporation 1801 K Street, N.W. Suite 900 Washington, D.C. 20006 Attention: Kevin M. McGowan, Treasurer Telephone: (202) 857-5760 (ii)  if to the Issuing and Paying Agent: The Bank of New York 101 Barclay Street. Floor 21 West New York, New York 10286 Attention: Mary Beth Lewicki Telephone No.: (212) 815-5939

(c)       Notices and other communications hereunder or under the Notes to the Registered Holders thereof shall be in writing, sent by first class mail, postage prepaid, to the addresses of such Registered Holders as they appear in the Note Register or in such other addresses as such Registered Holders shall specify to the Issuing and Paying Agent from time to time.             SECTION 21. Resignation or Removal of Issuing and Paying Agent. The Issuing and Paying Agent may at any time resign as such Issuing and Paying Agent by giving written notice to the Issuer of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall not be less than three months after the giving of such notice by the Issuing and Paying Agent to the Issuer. The Issuing and Paying Agent may be removed at any time by the filing with it of an instrument in writing signed by a duly authorized officer of the Issuer and specifying such removal and the date upon which it is intended to become effective. Such resignation or removal shall take effect on the date of the appointment by the Issuer of a successor Issuing and Paying Agent and the acceptance of such appointment by such successor Issuing and Paying Agent. Any successor Issuing and Paying Agent into which the Issuing and Paying Agent may be merged or converted or with which it may be consolidated or to which it may sell or transfer its corporate trust business and assets as an entirety or substantially as an entirety or any successor Issuing and Paying Agent succeeding to the business of the Issuing and Paying Agent shall be the successor of the Issuing and Paying Agent hereunder; provided, however, that such successor Issuing and Paying Agent shall succeed to the rights and assume the obligations of the Issuing and Paying Agent under this Agreement, without the execution or filing of any paper or any further act on the part of the parties hereto, notwithstanding anything herein to the contrary. In the-event of resignation by the Issuing and Paying Agent, if a successor Issuing and Paying Agent has not been appointed by the Issuer within three months after the giving of notice by the Issuing and Paying Agent of its intention to resign, the Issuing and Paying Agent may, at the expense o f the issuer, petition any court of competent jurisdiction for appointment of a successor Issuing and Paying Agent.             SECTION 22. Cancellation of Notes: All Notes surrendered for payment or registration of transfer or exchange shall, if surrendered to any person other than the Issuing and Paying Agent, be delivered to the Issuing and Paying Agent and shall be canceled by it. The Issuer may at any time deliver to the Issuing and Paying Agent for cancellation any Note previously authenticated and delivered hereunder which the Issuer may have redeemed or otherwise acquired, and all Notes so delivered shall be canceled by the Issuing and Paying Agent. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section 22, except as expressly permitted by this Agreement. All canceled Notes held by the Issuing and Paying Agent shall be returned to the Issuer. Upon the written request of the Issuer, the Issuing and Paying Agent shall cancel and return to the Issuer all unissued Notes in its possession at the time of such request.             SECTION 23. Benefit of Agreement. This Agreement is solely for the benefit of the parties hereto, their successors and assigns and the Registered Holders of Notes, and no other person shall acquire or have any right under or by a virtue hereof.             SECTION 24. Notes Held by the Issuing and Paying Agent. The Issuing and Paying Agent, in its individual or other capacity, may become the owner or pledgee of the Notes with the same rights it would have if it were not acting as Issuing and Paying Agent hereunder.             SECTION 25. Modification and Amendment. (a) Notwithstanding any other provision of this Section 25, without the consent of any Registered Holders of Notes, the Issuer and the Issuing and Paying Agent may enter into one or more modifications of this Agreement or the Notes, in form satisfactory to the Issuing and Paying Agent, to (i) evidence the succession of another corporation to the Issuer and the assumption by any such successor of the obligations of the Issuer contained in this Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of this Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in this Agreement, (iv) evidence and provide for the accept ance of appointment under this Agreement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in this Agreement or the Notes which may be inconsistent with any other provisions herein or therein, or make any other provisions with respect to matters or questions arising herein or therein; provided that such action shall not adversely affect the interests of any Registered Holder in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify eliminate or add to the provisions of this Agreement to such extent as shall be necessary to qualify this Agreement (including any supplemental agreement hereto) under the Trust Indenture Act of 1939, as amended, or under such similar statute hereafter enacted.                    (b)       With the consent of the Registered Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby, the Issuer and the Issuing and Paying Agent may enter into one or more agreements supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Agreement or of modifying in any manner the rights of the Registered Holders of Notes under this Agreement; provided, however, that no such supplemental agreement shall, without the: consent of the Registered Holder of each outstanding Note affected thereby: change the stated maturity date of the principal (or any installment of principal) of any Note; or change any Interest Payment Date on which interest on any Note is to be paid or reduce the principal amount of any Note, or reduce the rate of interest o n any Note or change the manner of calculation of interest thereof, or change any of the redemption or repayment provisions of any Note, or change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable, or impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof, or reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Registered Holders is required for the modification and amendment of, or waiver under this Agreement or the Notes or certain defaults thereunder, or modify any of the provisions in this Agreement or the Notes relating to their modification, amendment or waiver other than to increase the percentage necessary for such action or to provide that other provisions of this Agreement or the Notes cannot be modified, amended or waived without the consent of the Registered Holder of each outstanding Note affected thereby.             SECTION 26. GOVERNING LAW. THIS AGREEMENT IS TO BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITII, THE LA WS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.             SECTION 27. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts. Each such counterpart, when so executed and delivered, shall be deemed to be an original and all such counterparts shall together constitute but one and the same instrument.             IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the day and year first above written.

POTOMAC CAPITAL INVESTMENT CORPORATION By:  /s/  Kevin McGowan                              Name:  Kevin McGowan      Title:  VP & Treasurer THE BANK OF NEW YORK    as Issuing and Paying Agent By:  /s/ Mary Beth A. Lewicki                        Name:  Mary Beth Lewicki      Title:  Vice President

[FACE OF NOTE]

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN VIOLATION OF THE SECURITIES ACT OR SUCH OTHER SECURITIES LAWS. THIS NOTE MAY BE TRANSFERRED ONLY IN PRINCIPAL AMOUNTS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. THE HOLDER HEREOF, BY PURCHASING OR ACCEPTING THIS NOTE, AGREES FOR THE BENEFIT OF POTOMAC CAPITAL INVESTMENT CORPORATION (THE "COMPANY") THAT THIS NOTE MAY BE RESOLD OR OTHERWISE TRANSFERRED ONLY (1) TO THE COMPANY OR MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, GOLDMAN, SACHS & CO. AND SALOMON BROTHERS INC (EACH, AN "AGENT", AND COLLECTIVELY, THE "AGENTS"), OR BY, THROUGH, OR IN A TRANSACTION APPROVED BY, AN AGENT, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RU LE 144A (A "QIB"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN INSTITUTIONAL INVESTOR THAT QUALIFIES AS AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501 (a) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH TRANSFEREE IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (5) TO AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION; PROVIDED THAT THE AGREEMENT OF THE HOLDER HEREOF IS SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF THE HOLDER'S PROPERTY SHALL AT ALL TIMES BE AND REMAIN WITHIN ITS CONTROL. WITH RESPECT TO ANY RESALE OR OTHER TRANSFER OF THIS NOTE (IF IN CERTIFICATED FORM) DESCRIBED IN CLAUSE (2), (4) OR (5) ABOVE, THE BANK OF NEW YORK, AS THE ISSUING AND PAYING AGENT FOR THE NOTES (THE "ISSUING AND PAYING AGENT"), WILL REQUIRE THE SUBMISSION TO IT OF THIS NOTE DULY COMPLETED OR A DULY COMPLETED BOND POWER IN THE FORM ATTACHED TO THE PRIVATE PLACEMENT MEMORANDUM RELATING TO THIS NOTE AS EXHIBIT A; PROVIDED THAT THE FOREGOING SUBMISSION SHALL NOT BE REQUIRED IF THIS LEGEND HAS BEEN REMOVED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE ISSUING AND PAYING AGENCY AGREEMENT BETWEEN THE COMPANY AND THE ISSUING AND PAYING AGENT, AS AM ENDED OR MODIFIED (THE "ISSUING AND PAYING AGENCY AGREEMENT"). BY PURCHASING OR ACCEPTING THIS NOTE, THE HOLDER HEREOF REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT (1) IT IS (A) A QIB ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND IT IS AWARE THAT THE RESALE OR OTHER TRANSFER TO IT IS BEING MADE IN RELIANCE ON RULE 144A OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE (Y) FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (Z) IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT AND, IN EACH CASE, THAT IT IS ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THIS NOTE AND HAS SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AS TO BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF ACQ UIRING THIS NOTE AND (2) IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE AND OTHER TRANSFER RESTRICTIONS REFERRED TO ABOVE AND THAT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE REPRESENTED AS TO THE MATTERS IN CLAUSE (1) OF THIS SENTENCE AND THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE AGREED TO NOTIFY ITS SUBSEQUENT TRANSFEREES AS TO THE FOREGOING. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME BY THE COMPANY, WITHOUT THE CONSENT OF BUT UPON NOTICE TO THE AGENTS AND TO THE HOLDERS OF NOTES SENT TO THEIR REGISTERED ADDRESSES, TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF NOTES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO RESALES OR OTHER TRANSFERS OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS NOTE SHALL BE DEEMED, BY ITS ACCEPTANCE OR PURCHASE HEREOF, TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT (EACH OF WHICH SHALL BE CONCLUSIVE AND BINDING ON THE HOLDER HEREOF AND ALL FUTURE HOLDERS OF THIS NOTE AND ANY NOTES ISSUED IN EXCHANGE OR SUBSTITUTION HEREFOR, WHETHER OR NOT ANY NOTATION THEREOF IS MADE HEREON). UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.1 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.2 1This paragraph applies to Global Notes only. 2This paragraph applies to Global Notes only.

REGISTERED No. FLR-

CUSIP No.:

PRINCIPAL AMOUNT:

POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES D (Floating Rate)

INTEREST RATE BASIS OR BASES

ORIGINAL ISSUE DATE:

STATED MATURITY DATE:

IF LIBOR:      [ ]  LIBOR Reuters            Page      [ ]  LIBOR Telerate            Page: DESIGNATED LIBOR CURRENCY:

IF CMT RATE: Designated CMT Telerate Page: If Telerate Page 7052:      [ ]  Weekly Average      [ ]  Monthly Average Designated CMT Maturity Index:

INDEX MATURITY:

INITIAL INTEREST RATE:      %

INTEREST PAYMENT DATE(S):

SPREAD (PLUS OR MINUS:

SPREAD MULTIPLIER :           DATE:

INITIAL INTEREST RESET

MINIMUM INTEREST RATE:    %

MAXIMUM INTEREST RATE:   %

INTEREST RESET DATE(S):

INITIAL REDEMPTION DATE:

INITIAL REDEMPTION PERCENTAGE:       %

ANNUAL REDEMPTION PERCENTAGE REDUCTION:     %

OPTIONAL REPAYMENT DATE(S):

CALCULATION AGENT:

INTEREST CATEGORY: [  ]  Regular Floating Rate Note           Fixed Rate Commencement           Date:           Fixed Interest Rate:        % [  ]  Inverse Floating Rate Note           Fixed Interest Rate:         %

DAY COUNT CONVENTION: [  ]  30/360 for the period from           to                             . [  ]  Actual/360 for the period from                        to                         . [  ]  Actual/Actual for the period from                    to                    . Applicable Interest Rate Basis:

AUTHORIZED DENOMINATION:           [  ]  $250,000 and integral                 multiples of $1,000 in                 excess thereof           [  ]  Other:

EXCHANGE RATE AGENT:

ADDENDUM ATTACHED [  ]  Yes [  ]  No

OTHER/ADDITIONAL PROVISIONS:

POTOMAC CAPITAL INVESTMENT CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to                                     , or registered assigns, the Principal Amount of                                                       , on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the "Maturity Date" with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable), at a rate per annum equal to the Initial Interest Rate specified above until the Initial Interest Reset Date specified above and thereafter at a rate determined in accordance with the provisions specified above and on the reverse hereof or in an Addendum hereto with respect to one or more Interest Rate Bases specified above until the principal hereof is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an "Interest Payment Date"), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payments will commence on the second Interest Payment Date next succeeding the Original Issue Date to the registered holder (the "Holder") of this Note on the Record Date with respect to such second Interest Payment Date.             Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an "Interest Period"). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the fifteenth calendar day (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the "Record Date"); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the pri ncipal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for ("Defaulted Interest") on any Interest Payment Date other than the Maturity Date shall forthwith cease to be payable to the Holder on any Record Date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Company, written notice whereof shall be given to the Holder of this Note by the Company not less than 30 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner.

Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of a duly completed election form as contemplated on the reverse hereof) at the corporate trust office of the Issuing and Paying Agent maintained for that purpose in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained at the aforementioned office of the Issuing and Paying Age nt; provided, however, that a Holder of U.S.$10,000,000 or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Issuing and Paying Agent not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Issuing and Paying Agent shall remain in effect until revoked by such Holder.             If any Interest Payment Date other than the Maturity Date would otherwise be a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Payment Date shall be the immediately preceding Business Day. If the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after the Maturity Date to the date of such payment on the next succeeding Business Day.             As used herein, "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that if LIBOR is an applicable Interest Rate Basis, such day is also a London Business Day (as defined below). "London Business Day" means a day on which dealings in the Designated LIBOR Currency (as defined on the reverse hereof) are transacted in the London interbank market. "Principal Financial Center" means the capital city of the country to which the Designated LIBOR Currency, if applicable, relates (or, in the case of European Currency Units, Luxembourg), except, in each case, that with respect to United States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders and Swiss francs, the "Principal Financial Center" shall be The City of Ne w York, Sydney, Toronto, Frankfurt, Amsterdam and Zurich, respectively.             Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.             Notwithstanding the foregoing, if an Addendum is attached hereto or "Other/Additional Provisions" apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions".             Unless the Certificate of Authentication hereon has been executed by the Issuing and Paying Agent by manual signature, this Note shall not be entitled to any benefit under the Issuing and Paying Agency Agreement (as defined on the reverse hereof) or be valid or obligatory for any purpose.             IN WITNESS WHEREOF, Potomac Capital Investment Corporation has caused this Note to be duly executed and delivered by one of its duly authorized officers.

POTOMAC CAPITAL INVESTMENT CORPORATION By:                                                                                                   Title:

Dated: ISSUING ANDPAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes of the Company referred to in the within-mentioned Issuing and Paying Agency Agreement. THE BANK OF NEW YORK, as Issuing and Paying Agent By                                                                    Authorized Signatory

[REVERSE OF NOTE] POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES D (Floating Rate)

This Note is one of a duly authorized series of debt securities of the Company designated as "Medium-Term Notes, Series D, With Maturities from 9 Months and 1 Day from Date of Issue Through November 30, 2008" (the "Notes") issued and to be issued under an Issuing and Paying Agency Agreement, dated as of April 29, 1998, as amended or modified from time to time (the "Issuing and Paying Agency Agreement"), between the Company and The Bank of New York, as Issuing and Paying Agent (the "Issuing and Paying Agent", which term includes any successor Issuing and Paying Agent under the Issuing and Paying Agency Agreement). Reference is hereby made to the Issuing and Paying Agency Agreement for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Issuing and Paying Agent and the Holders of the Notes. In acting under the Issuing and Paying Agency Agreement, the Issuing and Paying Agent is acting solely as an agent of the Company and does not assume any obligation or relationship of agency or trust for any of the owners or Holders of Notes, except with respect to any funds held by the Issuing and Paying Agent for any payment in respect of this Note as provided below.             Subject to the restrictions set forth on the face hereof and L in the Issuing and Paying Agency Agreement, this Note is issuable only in registered form without coupons in minimum denominations of U.S.$250,000 and integral multiples of U.S. $l,000 in excess thereof or other Authorized Denomination specified on the face hereof.             This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.             This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the "Redemption Date"), on written notice given to the Holders of Notes (in accordance with the provisions of the Issuing and Paying Agency Agreement) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The "Redemption Price" shall be the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof as set forth below) mu ltiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed. Whenever less than all of the Notes of like tenor and terms are to be redeemed, the Notes to be redeemed and the Holders thereof shall be selected by the Issuing and Paying Agent by such method as the Issuing and Paying Agent shall deem fair and reasonable. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the "Repayment Date"). For this Note to be repaid, this Note must be received, together with the form hereon entitled "Option to Elect Repayment" duly completed, by the Issuing and Paying Agent at its corporate trust office. Currently the Corporate Trust office of the Trustee is located at 101 Barclay Street, Floor 7E, New York, New York 10286. not more than 30 nor less than 10 calendar days prior to the Repayment Date. Exercise of such repayment option by the Holder hereof will be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             The interest rate borne by this Note will be determined as follows:

(i) Unless the Interest Category of this Note is specified on the face hereof as a "Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note", or the face hereof specifies that either Other/Additional Provisions or an Addendum hereto applies, in each case, relating to a different interest rate formula, this Note shall be designated as a "Regular Floating Rate Note and, except as set forth below or specified on the face hereof or in an Addendum hereto, shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any, in each case as specified on the face hereof. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect f or the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate.              (ii) If the Interest Category of this Note is specified on the face hereof as a "Floating Rate/Fixed Rate Note", then, except as set forth below or specified on the face hereof or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date provided, however, that (y) the interest rate in effect for the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate and (z) the interest rate in effect for the period commencing on the Fixed Rate Commencement Date specified on the face hereof to the Maturity Date shall be the Fixed Interest Rate specified on the face h ereof or, if no such Fixed Interest Rate is specified, the interest rate in effect hereon on the day immediately preceding the Fixed Rate Commencement Date.              (iii) If the Interest Category of this Note is specified on the face hereof as an "Inverse Floating Rate Note", then, except as set forth below or specified on the face hereof or in an Addendum hereto, this Note shall bear interest at the Fixed Interest Rate minus the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any; provided, however, that, unless otherwise specified on the face hereof or in an Addendum hereto, the interest rate hereon shall not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate.

Except as set forth above or specified on the face hereof or in an Addendum hereto, the interest rate in effect on each day shall be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as defined below) immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. If any Interest Reset Date would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. In addition, if the Treasury Rate is an applicable Interest Rate Basis and the Interest Determination Date would otherwise fall on an Interest Reset Date, then such Interest Reset Date will be postponed to the next succeeding Business Day.             The interest rate applicable to each Interest Reset Period commencing on the related Interest Reset Date will be determined by the Calculation Agent as of the applicable Interest Determination Date and will be calculated by the Calculation Agent on or prior to the Calculation Date (as defined below), except with respect to the LIBOR, which will be calculated on such Interest Determination Date. The "Interest Determination Date" with respect to the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate and the Prime Rate will be the second Business Day immediately preceding the applicable Interest Reset Date; and the "Interest Determination Date" with respect to LIBOR shall be the second London Business Day immediately preceding the applicable Interest Reset Date, unless the Designated LIBOR Currency is British pounds sterling, in which case the "Interest Determination Date" will be the applicable Interest Reset Date. The "Interest D etermination Date" with respect to the Treasury Rate shall be the day in the week in which the applicable Interest Reset Date falls on which day Treasury Bills (as defined below) are normally auctioned (Treasury Bills are normally sold at an auction held on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday); provided, however, that if an auction is held on the Friday of the week preceding the applicable Interest Reset Date, the "Interest Determination Date" shall be such preceding Friday. If the interest rate of this Note is determined with reference to two or more Interest Rate Bases specified on the face hereof, the "Interest Determination Date" pertaining to this Note shall be the most recent Business Day which is at least two Business Days prior to the applicable Interest Reset Date on which each Interest Rate Basis is determinable. Each Interest Rate Basis shall be determined as of such date, and the applicable interest rate shall take effect on the related Interest Reset Date.             Unless otherwise specified on the face hereof or in an Addendum hereto, the rate with respect to each Interest Rate Basis will be determined in accordance with the applicable provisions below.             CMT Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the CMT rate, the CMT Rate shall be determined as of the applicable Interest Determination Date (a "CMT Rate Interest Determination Date") as the rate displayed on the Designated CMT Telerate Page (as defined below) under the caption " ...Treasury Constant Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45 P.M.", under the column for the Designated CMT Maturity Index (as defined below) for (i) if the Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the weekly or monthly average, as specified on the face hereof, for the week or month, as applicable, ended immediately preceding the week or month, as applicable, in which the related CMT Rate Interest Determination Date falls. If such rate is no longer displayed on the relevant pa ge or is not displayed by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index as published by the Board of Governors of the Federal Reserve System in "Statistical Release H.15(519), Selected Interest Rates" or any successor pub11cat10n ("H.15(519)"). If such rate is no longer published or is not published by 3:00 P.M., New York City time on the related Calculation Date, then the CMT Rate on such CMT Rate Interest Determination Date will be such treasury constant maturity rate for the Designated CMT Maturity Index (or other United States Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with respect to such Interest Reset Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines to be co mparable to the rate formerly displayed on the Designated CMT Telerate Page and published in H.1S(S19). If such information is not provided by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on the CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity, based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date reported, according to their written records, by three leading primary United States government securities dealers (each a "Reference Dealer") in The City of New York selected by the Calculation Agent (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or/ in the event of equality/ one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct noncallable fixed rate obligations of the U nited States ("Treasury Notes") with an original maturity of approximately the Designated CMT Maturity Index and a remaining term to maturity of not less than such Designated CMT Maturity Index minus one year. If the Calculation Agent is unable to obtain three such Treasury Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers in The City of New York {from five such Reference Dealers so selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with an original maturity of the number of years that is the next highest to the Designated CMT Maturity Index and a remaining term to maturity closest to the Designated CMT Maturity Index and in an amount of at least U.S.$100 million. If three or four (and not five) of such Reference Dealers are quoting as described above, then the CMT Rate will be based on the arithmetic mean of the offered rates obtained and neither the highest nor the lowest of such quotes will be eliminated; provided, however/ that if fewer than three Reference Dealers so selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate determined as of such CMT Rate Interest Determination Date will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two Treasury Notes with an original maturity as described in the second preceding sentence have remaining terms to maturity equally close to the Designated CMT Maturity Index, the Calculation Agent will obtain quotations for the Treasury Note with the shorter remaining term to maturity.             "Designated CMT Telerate Page" means the display on the Dow Jones Markets Limited (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying Treasury Constant Maturities as reported in H.15(519). If no such page is specified on the face hereof, the Designated CMT Telerate Page shall be 7052 for the most recent week.             "Designated CMT Maturity Index" means the original period to maturity of the United States Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified on the face hereof with respect to which the CMT Rate will be calculated. If no such maturity is specified on the face hereof, the Designated CMT Maturity Index shall be 2 years.             Commercial Paper Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Commercial Paper Rate, the Commercial Paper Rate shall be determined as of the applicable Interest Determination Date (a "Commercial Paper Rate Interest Determination Date") as the Money Market Yield (as defined below) on such date of the rate for commercial paper having the Index Maturity as published in "H.15(519) under the caption "Commercial Paper-Nonfinancial". In the event that such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be the Money Market Yield of the rate for commercial paper having the Index Maturity as published by the Federal Reserve Bank of New York in its daily statistical release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any successor publication ("C omposite Quotations") under the heading "Commercial Paper" (with an Index Maturity of one month or three months being deemed to be equivalent to an Index Maturity of 30 days or 90 days, respectively). If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on such Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and shall be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity placed for a non-financial entity whose bond rating is "Aa", or the equivalent, from a nationally recognized statistical rating organization; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate in effect on such Commercial Paper Rate Interest Determination Date.             "Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula:

Money Market Yield =                  D x 360                  x 100                                                  360 - (D x M)

where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period.             Federal Funds Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Federal Funds Rate, the Federal Funds Rate shall be determined as of the applicable Interest Determination Date (a "Federal Funds Rate Interest Determination Date") as the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)" or, if not published by 3:00 P.M., New York City time, on the Calculation Date, the rate on such Federal Funds Rate Interest Determination Date as published in Composite Quotations under the heading "Federal Funds/Effective Rate". If such rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Interest Determination Date shall be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of federal funds transactions in The City of New York selected by the Calculation Agent, prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date.             LIBOR. If an Interest Rate Basis for this Note is specified on the face hereof as LIBOR, LIBOR shall be determined by the Calculation Agent as of the applicable Interest Determination Date (a "LIBOR Interest Determination Date") in accordance with the following provisions:              (i) if (a) "LIBOR Reuters" is specified on the face hereof, the arithmetic mean of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate will be used) for deposits in the Designated LIBOR Currency having the Index Maturity, commencing on the applicable Interest Reset Date, that appear (or, if only a single rate is required as aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date, or (b) "LIBOR Telerate" is specified on the face hereof, or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the rate for deposits in the Designated LIBOR Currency having the Index Maturity, commencing on such Interest Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If fewer than two such offered rates so appear, or if no such rate so appears, as applicable, LIBOR on such LIBOR Interest Determination Date shall be determined in accordance with the provisions described in clause (ii) below.              (ii) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates appear, or no rate appears, as the case may be, on the Designated LIBOR Page as specified in clause (i) above, the Calculation Agent shall request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in the Designated LIBOR Currency for the period of the Index Maturity, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time. If at least two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date wi ll be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., in the applicable Principal Financial Center, on such LIBOR Interest Determination Date by three major banks in such Principal Financial Center selected by the Calculation Agent for loans in the Designated LIBOR Currency to leading European banks, having the Index Maturity and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date shall be LIBOR in effect on such LIBOR Interest Determination Date.             "Designated LIBOR Currency" means the currency or composite currency specified on the face hereof as to which LIBOR shall be calculated or, if no such currency or composite currency is specified on the face hereof, United States dollars.             "Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified on the face hereof, the display on the Reuter Monitor Money Rates Service (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency, or (b) if "LIBOR Telerate" is specified on the face hereof or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the display on the Dow Jones Markets Limited (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Designated LIBOR Currency.             Prime Rate. If an Interest Rate Basis for this Note is specified on the face hereto as the Prime Rate, the Prime Rate shall be determined as of the applicable Interest Determination Date (a "Prime Rate Interest Determination Date") as the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan". If such rate is not published prior to 3:00 P.M., New York City time, on the related Calculation Date, then the Prime Rate shall be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen USPRIME1 Page (as defined below) as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Interest Determination Date, the Prime Rate shall be the arithmetic mean of the prime rates or base lending rates quoted on the basi s of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date by four major money center banks in The City of New York selected by the Calculation Agent. If fewer than four such quotations are so provided, the Prime Rate shall be the arithmetic mean of four prime rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date as furnished in The City of New York by the major money center banks, if any, that have provided such quotations and by a reasonable number of substitute banks or trust companies to obtain four such prime rate quotations, provided such substitute banks or trust companies are organized and doing business under the laws of the United States, or any State thereof, each having total equity capital of at least U.S.$500 million and being subject to supervision or examination by Federal or State authority, sele cted by the Calculation Agent to provide such rate or rates; provided, however, that if the banks or trust companies so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date will be the Prime Rate in effect on such Prime Rate Interest Determination Date.             "Reuters Screen USPRIMEl Page" means the display on the Reuter Monitor Money Rates Service (or any successor service) on the "USPRIME1" Page (or such other page as may replace the USPRIME1 page on such service) for the purpose of displaying prime rates or base lending rates of major United States banks.             Treasury Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Treasury Rate, the Treasury Rate shall be determined as of the applicable Interest Determination Date (a "Treasury Rate Interest Determination Date") as the rate from the auction held on such Treasury Rate Interest Determination Date (the "Auction") of direct obligations of the United States ("Treasury Bills") having the Index Maturity, as such rate is published in H.15 (519) under the heading "Treasury bills-auction average (investment)" or, if not published by 3:00 P.M., New York City time, on the related Calculation Date, the auction average rate of such Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis} as otherwise announced by the United States Department of the Treasury. In the event that the results of the Auction of Treasury Bills having the Index Maturity are not reported as provided above by 3:00 P.M., New York City time, on such Calculation Date, or if no such Auction is held, then the Treasury Rate shall be calculated by the Calculation Agent and shall be a yield to maturity (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate Interest Determination Date, of three leading primary United States government securities dealers selected by the Calculation Agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity; provided, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate determined as of such Treasury Rate Interest Determination Date will be the Treasury Rate in effect on such Treasury Rate Interest Determination Date.             Notwithstanding the foregoing, the interest rate hereon shall not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, in each case as specified on the face hereof. The interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application.             The Calculation Agent shall calculate the interest rate hereon on or before each Calculation Date. The "Calculation Date", if applicable, pertaining to any Interest Determination Date shall be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Maturity Date, as the case may be. At the request of the Holder hereof, the Calculation Agent will provide to the Holder hereof the interest rate hereon then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next succeeding Interest Reset Date.             Accrued interest hereon shall be an amount calculated by multiplying the principal amount hereof by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day in the applicable Interest Period. Unless otherwise specified as the Day Count Convention on the face hereof, the interest factor for each such date shall be computed by dividing the interest rate applicable to such day by 360 if the Commercial Paper Rate, the Federal Funds Rate, LIBOR or the Prime Rate is an applicable Interest Rate Basis or by the actual number of days in the year if the CMT Rate or the Treasury Rate is an applicable Interest Rate Basis. Unless otherwise specified as the Day Count Convention on the face hereof, the interest factor for this Note, if the interest rate is calculated with reference to two or more Interest Rate Bases, shall be calculated in each period in the same mann er as if only the Applicable Interest Rate Basis specified on the face hereof applied.             All percentages resulting from any calculation on this Note shall be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards, and all amounts used in or resulting from such calculation on this Note shall be rounded to the nearest cent (with one-half cent being rounded upwards).             The Company will not create, assume or incur or suffer to be created, assumed or incurred or to exist any mortgage, lien, charge, security interest or encumbrance of any kind upon, or pledge of, or subject to the prior payment of any indebtedness, any of its property or assets, whether now owned or hereafter acquired, or acquire or agree to acquire any property or assets subject to any conditional sale agreement or other title retention agreement (the foregoing mortgages, liens, charges, pledges, security interests, encumbrances and priority payments, and the rights of others under conditional sales agreements and other title retention agreements, being herein sometimes collectively called "liens"); provided, however, that the foregoing restrictions will not apply to:

(i)       liens securing taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons;              (ii)       liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws;              (iii)       purchase money mortgages or other purchase money liens or conditional sale, lease-purchase or other title retention agreements upon or in respect of property acquired or leased for use in the ordinary course of its business by the Company; or              (iv)       liens on any assets of the Company or any of its subsidiaries which may constitute "Margin Stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System); or              (v)       other mortgages or liens in respect of property owned, acquired or leased by the Company not permitted by clauses (i) through (iv), provided that the property so encumbered pursuant to this clause (v) shall not have a market value in excess of 50% of the amount by which the Company's total assets (on a consolidated basis with its subsidiaries) exceeds the encumbrances made as provided in clause (iii) above.

The Company (including its consolidated subsidiaries) will maintain a minimum tangible net worth (calculated in accordance with generally accepted accounting principles in effect on April 29, 1998) of at least $100,000,000.             The following will be "Events of Default" with respect to the Notes:

(i)       default in the payment of any interest on its Note or in the payment of interest on or principal of any other Note issued pursuant to the Issuing and Paying Agency Agreement when due, which default continues and remains unremedied for at least thirty calendar days; or (ii) a decree or order by a court having jurisdiction shall have been entered adjudging the Company or Potomac Electric Power Company ("PEPCO") , a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or PEPCO under the Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of either the Company or PEPCO or of its proper ty, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or              (iii)       the Company or PEPCO shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bankruptcy Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or              (iv)       the Company shall fail to perform or observe any other term, covenant or agreement contained in the Note to be performed or observed by it, and any such failure shall continue and remain unremedied for at least thirty calendar days; or              (v)       the Company shall default in the payment when due (subject to any applicable grace period), whether at stated maturity or otherwise, of any principal of or interest on (howsoever designated) any indebtedness for borrowed money of, or guaranteed by, the Company in the aggregate principal amount of $1,000,000, whether such indebtedness now exists or shall hereafter be created; provided, however, that for the purposes of this subsection (v), the Company shall not be deemed in default if it shall be contesting in good faith its liability for the payment of the installment of interest or of the principal or premium in question, and shall have been advised in a written opinion by its counsel (a copy of which opinion will be provided upon request to the registered holder) that it has a meritorious defense to any claim of liability;

provided, however, that any default pursuant to clause (iv) or (v) of this paragraph may be waived prior to any declaration of acceleration with respect to such default by the written consent of the holders of at least a majority in aggregate principal amount of Notes at the time outstanding.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent with the consent of the Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby for the purpose of adding any provisions to, or changing in any manner or eliminating any provisions of, the Issuing and Paying Agency Agreement or of modifying the rights of the Holders of the Notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby, change the stated maturity date of the principal (or any installment of principal) of any Note, or change any interest payment date on which interest on any Note is to be paid, or reduce the principal amount of any Note, or reduce the rate of interest on any Note or change the manner of calculation of interest thereof, or change any of the redemption or repayment provisions of any Note, or change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable, or impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof, or reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Holders is required for the modification and amendment of, or waiver under, the Issuing and Paying Agency Agreement or the Notes or certain defaults thereunder, or modify any of the provisions in the Issuing and Paying Agency Agreement or the Notes relating to their modification, amendment or waiver other than to increase the percentage necessary for such action or to provide that other provisions of the Issuing and Paying Agency Agreement or the Notes cannot be modified, amended or waived without the consent of the Holder of each outstanding Note affected thereby.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent without the consent of any Holders of Notes in order to (i) evidence the succession of another corporation to the Company and the assumption by any such successor of the obligations of the Company contained in the Issuing and Paying Agency Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of the Issuing and Paying Agency Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in the Issuing and Paying Agency Agreement (iv) evidence and provide for the acceptance of appointment under the Issuing and Paying Agency A greement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in the Issuing and Paying Agency Agreement or the Notes which may be inconsistent with any other provision therein, or make any other provisions with respect to matters or questions arising therein, provided that such action shall not adversely affect the interests of the Holders of the Notes in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify, eliminate or add to the provisions of the Issuing and Paying Agency Agreement to such extent as shall be necessary to qualify the Issuing and Paying Agency Agreement (including any agreement supplemental thereto) under the Trust Indenture Act of 1939, as amended, or under any similar statute hereafter ena cted.             The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid.             In case this Note shall at any time become mutilated, destroyed, lost or stolen, and such mutilated Note or evidence of the destruction, loss or theft thereof satisfactory to the Company and the Issuing and Paying Agent (together with such indemnity as may be reasonably required by the Company or the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, a new Note of like tenor and terms will be issued by the Company in exchange for the mutilated Note or in lieu of the Note so destroyed, lost or stolen. The Issuing and Paying Agent shall authenticate any such substituted Note and deliver the same upon the written authorization of the Company. All expenses and reasonable charges associated with the issuance, authentication and delivery of a new Note and the procurement of an indemnity, if required, shall be borne by the Holder of the Note mutilated, destroyed, lost or stolen. In case any Note which has matured or i s about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a Substitute Note, payor authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Holder with the foregoing provisions.             Any funds held by the Issuing and Paying Agent for the payment of principal of, or premium, if any, or interest on, this Note that remain unclaimed for two years after such principal, premium or interest shall have become due and payable shall be repaid to the Company and any person claiming such funds shall look, as an unsecured general creditor, only to the Company for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon cease.             No provision of this Note or of the Issuing and Paying Agency Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.             The Issuing and Paying Agent has been appointed registrar, transfer agent and authenticating agent for the Notes, and the Issuing and Paying Agent will maintain at its corporate trust office in the Borough of Manhattan, The City of New York, a register (the "Security Register") for the registration, exchange and transfer of Notes. Subject to the restrictions set forth on the face hereof and in the Issuing and Paying Agency Agreement, this Note may be presented for registration of transfer or exchange at the aforementioned office of the Issuing and Paying Agent by presenting and surrendering this Note for transfer or exchange, as the case may be, duly endorsed or accompanied by a written instrument of transfer in form approved by the Issuing and Paying Agent and duly executed by the Holder hereof in person or by the Holder's attorney duly authorized in writing, and thereupon the Issuing and Paying Agent shall complete, authenticate and de liver in the name of the designated transferee or transferees, or in exchange herefor, one or more new Notes having identical terms and provisions and having a like aggregate principal amount in Authorized Denominations, subject to the terms and conditions set forth herein. Except as provided above, Notes are exchangeable at the aforementioned office of the Issuing and Paying Agent for other Notes of other Authorized Denominations of equal aggregate principal amount and having identical terms and provisions. All such transfers and exchanges of Notes will be free of charge, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith (other than exchanges pursuant to the Issuing and Paying Agency Agreement not involving any transfer). The date of registration of any Notes delivered upon any exchange or transfer shall be such that no gain or loss of interest results from such exchange or transfer.             Prior to due presentment of this Note for registration of transfer, the Company and the Issuing and Paying Agent and any agent of the Company or the Issuing and Paying Agent may treat the Holder in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Company or the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary, except as required by law.             THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT -            Custodian            TEN ENT - as tenants by the entireties                                   (Cust)                 (Minor) JT TEN - as joint tenants with right of                                  under Uniform Gifts to Minors                 survivorship and not as tenants                             Act                                                             in common                                                                                                    (State)             Additional abbreviations may also be used though not in the above list.

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [                                                                    ] [                                                                    ]                                                                           (Please print or typewr1te name and address including postal zip code of assignee)                                                                                                                                                  this Note and all rights thereunder hereby irrevocably constituting and appointing                                                                                                                                                 Attorney to transfer this Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated:

Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

OPTION TO ELECT REPAYMENT

The undersigned hereby irrevocably request(s) and instruct (s) the Company to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount to be repaid, together with unpaid interest accrued hereon to the Repayment Date, to the undersigned, at                                                                                                           &nb sp;                                                                                                                                                                                                             (Please print or typewrite name and address of the undersigned)

For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, not more than 60 nor less than 30 calendar days prior to the Repayment Date, this Note with this "Option to Elect Repayment" form duly completed.             If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of U.S. $1,000 or other Authorized Denomination specified on the face hereof (provided that any remaining principal amount shall be at least U.S.$250,000 or the minimum Authorized Denomination) which the Holder elects to have repaid and specify the denomination or denominations (which shall be U.S.$250,000 or the minimum Authorized Denomination) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).

Principal Amount to be Repaid: $                       Date:

Notice: The signature(s) on this Option to Date: Elect Repayment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

CERTIFICATE OF TRANSFER NOT REQUIRED FOR ANY RESALE OR OTHER TRANSFER TO THE COMPANY OR TO, BY, THROUGH, OR IN A TRANSFER APPROVED BY, AN AGENT

TO BE COMPLETED AND DELIVERED WITH THIS NOTE TO THE ISSUING AND PAYING AGENT IF THE UNDERSIGNED HOLDER WISHES TO SELL, ASSIGN AND TRANSFER THIS NOTE:           In connection with the resale or other transfer of this Note occurring prior to the time the legend originally set forth on the face of this Note (or one or more predecessor Notes) restricting resales and other transfers thereof has been removed in accordance with the procedures set forth in the Issuing and Paying Agency Agreement (other than a resale or other transfer made to the Company or to, by, through, or in a transaction approved by an Agent), the undersigned Holder certifies that without utilizing any general solicitation or general advertising:

[CHECK ONE]

[  ]    (a)

Such Note is being transferred by the undersigned Holder to a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

or

[  ]    (b)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that the undersigned Holder has been advised by the prospective transferee that such transferee will hold such Note for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of such transferee's property shall at all times be and remain within its control.

or

[  ]    (c)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501 (a) under the Securities Act of 1933, as amended, in an "offshore transaction", as defined in Regulation S under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder.

If none of the foregoing boxes are checked, then, so long as this Note shall bear a legend on the face thereof restricting resales and other transfers thereof (except in the case of a resale or other transfer made to the Company or to, by, through, or in a transaction approved by, an Agent), the Issuing and Paying Agent shall not be obligated to register this Note in the name of any person other than the undersigned Holder and until the conditions to any such transfer of registration set forth in this Note and in the Issuing and Paying Agency Agreement shall have been satisfied.

Dated:

[Type or print name of Holder By:                                                                  The signature of the Holder must correspond with the name as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

TO BE COMPLETED BY TRANSFEREE IF (a) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that (i) it is a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, (ii) this instrument has been executed on behalf of the undersigned transferee by one of its executive officers and (iii) it is aware that the Holder of this Note is relying upon the undersigned transferee's foregoing representations in order to claim the exemption from registration provided by Rule 144A. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (b) ABOVE IS, CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one if its executive officers. The undersigned transferee undertakes to hold this Note acquired from the Holder hereof for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of the undersigned transferee's property shall at all times be and remain within its control. The undersigned acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accord ance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (c) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one of its executive officers. In addition, the undersigned transferee represents and warrants that it is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended) and it is acquiring this Note from the Holder hereof in an "offshore transaction" (as defined in Regulation S) pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

[FACE OF NOTE]

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN VIOLATION OF THE SECURITIES ACT OR SUCH OTHER SECURITIES LAWS. THIS NOTE MAY BE TRANSFERRED ONLY IN PRINCIPAL AMOUNTS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. THE HOLDER HEREOF, BY PURCHASING OR ACCEPTING THIS NOTE, AGREES FOR THE BENEFIT OF POTOMAC CAPITAL INVESTMENT CORPORATION (THE "COMPANY") THAT THIS NOTE MAY BE RESOLD OR OTHERWISE TRANSFERRED ONLY (1) TO THE COMPANY OR MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, GOLDMAN, SACHS & CO. AND SALOMON BROTHERS INC (EACH, AN "AGENT", AND COLLECTIVELY, THE "AGENTS"), OR BY, THROUGH, OR IN A TRANSACTION APPROVED BY, AN AGENT, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RU LE 144A (A "QIB"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN INSTITUTIONAL INVESTOR THAT QUALIFIES AS AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501 (a) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH TRANSFEREE IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (5) TO AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION; PROVIDED THAT THE AGREEMENT OF THE HOLDER HEREOF IS SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF THE HOLDER'S PROPERTY SHALL AT ALL TIMES BE AND REMAIN WITHIN ITS CONTROL. WITH RESPECT TO ANY RESALE OR OTHER TRANSFER OF THIS NOTE (IF IN CERTIFICATED FORM) DESCRIBED IN CLAUSE (2), (4) OR (5) ABOVE, THE BANK OF NEW YORK, AS THE ISSUING AND PAYING AGENT FOR THE NOTES (THE "ISSUING AND PAYING AGENT"), WILL REQUIRE THE SUBMISSION TO IT OF THIS NOTE DULY COMPLETED OR A DULY COMPLETED BOND POWER IN THE FORM ATTACHED TO THE PRIVATE PLACEMENT MEMORANDUM RELATING TO THIS NOTE AS EXHIBIT A; PROVIDED THAT THE FOREGOING SUBMISSION SHALL NOT BE REQUIRED IF THIS LEGEND HAS BEEN REMOVED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE ISSUING AND PAYING AGENCY AGREEMENT BETWEEN THE COMPANY AND THE ISSUING AND PAYING AGENT, AS AM ENDED OR MODIFIED (THE "ISSUING AND PAYING AGENCY AGREEMENT"). BY PURCHASING OR ACCEPTING THIS NOTE, THE HOLDER HEREOF REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT (1) IT IS (A) A QIB ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND IT IS AWARE THAT THE RESALE OR OTHER TRANSFER TO IT IS BEING MADE IN RELIANCE ON RULE 144A OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE (Y) FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (Z) IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT AND, IN EACH CASE, THAT IT IS ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THIS NOTE AND HAS SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AS TO BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF ACQ UIRING THIS NOTE AND (2) IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE AND OTHER TRANSFER RESTRICTIONS REFERRED TO ABOVE AND THAT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE REPRESENTED AS TO THE MATTERS IN CLAUSE (1) OF THIS SENTENCE AND THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE AGREED TO NOTIFY ITS SUBSEQUENT TRANSFEREES AS TO THE FOREGOING. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME BY THE COMPANY, WITHOUT THE CONSENT OF BUT UPON NOTICE TO THE AGENTS AND TO THE HOLDERS OF NOTES SENT TO THEIR REGISTERED ADDRESSES, TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF NOTES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO RESALES OR OTHER TRANSFERS OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS NOTE SHALL BE DEEMED, BY ITS ACCEPTANCE OR PURCHASE HEREOF, TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT (EACH OF WHICH SHALL BE CONCLUSIVE AND BINDING ON THE HOLDER HEREOF AND ALL FUTURE HOLDERS OF THIS NOTE AND ANY NOTES ISSUED IN EXCHANGE OR SUBSTITUTION HEREFOR, WHETHER OR NOT ANY NOTATION THEREOF IS MADE HEREON). UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.1 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.2 1This paragraph applies to Global Notes only. 2This paragraph applies to Global Notes only.

REGISTERED No. FXR-

CUSIP No.:

PRINCIPAL AMOUNT:

POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES D (Fixed Rate)

ORIGINAL ISSUE DATE:

ORIGINAL ISSUE DATE:

STATED MATURITY DATE:

INTEREST PAYMENT DATE(S) [   ]  January 15 and July 15 [   ]  Other:

INITIAL REDEMPTION DATE:

INTEREST RATE:             %

ANNUAL REDEMPTION PERCENTAGE REDUCTION:     %

OPTIONAL REPAYMENT DATE(S):

AUTHORIZED DENOMINATION: [   ]  $250,000 and integral multiples         of $1,000 in excess there [   ]  Other

EXCHANGE RATE AGENT:

ADDENDUM ATTACHED [   ]  Yes [   ]  No

OTHER/ADDITIONAL PROVISIONS:

POTOMAC CAPITAL INVESTMENT CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to                                     , or registered assigns, the Principal Amount of                                                       , on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the "Maturity Date" with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable), at the Interest Rate per annum is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an "Interest Payment Date"), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payments will commence on the second Interest Payment Date next succeeding the Original Issue Date to the registered holder (the "Holder") of this Note on the Record Date with respect to such second Interest Payment Date.  Interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months.             Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an "Interest Period"). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the fifteenth calendar day (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the "Record Date"); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the pri ncipal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for ("Defaulted Interest") on any Interest Payment Date other than the Maturity Date shall forthwith cease to be payable to the Holder on any Record Date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Company, written notice whereof shall be given to the Holder of this Note by the Company not less than 30 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner.

Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of a duly completed election form as contemplated on the reverse hereof) at the corporate trust office of the Issuing and Paying Agent maintained for that purpose in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained at the aforementioned office of the Issuing and Paying Age nt; provided, however, that a Holder of U.S.$10,000,000 or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Issuing and Paying Agent not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Issuing and Paying Agent shall remain in effect until revoked by such Holder.             If any Interest Payment Date other than the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, as the case may be, to the date of such payment on the next succeeding Business Day.             As used herein, "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close in The City of New York.             Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.             Notwithstanding the foregoing, if an Addendum is attached hereto or "Other/Additional Provisions" apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions".             Unless the Certificate of Authentication hereon has been executed by the Issuing and Paying Agent by manual signature, this Note shall not be entitled to any benefit under the Issuing and Paying Agency Agreement (as defined on the reverse hereof) or be valid or obligatory for any purpose.             IN WITNESS WHEREOF, Potomac Capital Investment Corporation has caused this Note to be duly executed and delivered by one of its duly authorized officers.

POTOMAC CAPITAL INVESTMENT CORPORATION By:                                                                                                   Title:

Dated: ISSUING ANDPAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes of the Company referred to in the within-mentioned Issuing and Paying Agency Agreement. THE BANK OF NEW YORK, as Issuing and Paying Agent By                                                                    Authorized Signatory

[REVERSE OF NOTE] POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES D (Fixed Rate)

This Note is one of a duly authorized series of debt securities of the Company designated as "Medium-Term Notes, Series D, With Maturities from 9 Months and 1 Day from Date of Issue Through November 30, 2008" (the "Notes") issued and to be issued under an Issuing and Paying Agency Agreement, dated as of April 29, 1998, as amended or modified from time to time (the "Issuing and Paying Agency Agreement"), between the Company and The Bank of New York, as Issuing and Paying Agent (the "Issuing and Paying Agent", which term includes any successor Issuing and Paying Agent under the Issuing and Paying Agency Agreement). Reference is hereby made to the Issuing and Paying Agency Agreement for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Issuing and Paying Agent and the Holders of the Notes. In acting under the Issuing and Paying Agency Agreement, the Issuing and Paying Agent is acting solely as an agent of the Company and does not assume any obligation or relationship of agency or trust for any of the owners or Holders of Notes, except with respect to any funds held by the Issuing and Paying Agent for any payment in respect of this Note as provided below.             Subject to the restrictions set forth on the face hereof and L in the Issuing and Paying Agency Agreement, this Note is issuable only in registered form without coupons in minimum denominations of U.S.$250,000 and integral multiples of U.S. $l,000 in excess thereof or other Authorized Denomination specified on the face hereof.             This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.             This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the "Redemption Date"), on written notice given to the Holders of Notes (in accordance with the provisions of the Issuing and Paying Agency Agreement) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The "Redemption Price" shall be the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof as set forth below) mu ltiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed. Whenever less than all of the Notes of like tenor and terms are to be redeemed, the Notes to be redeemed and the Holders thereof shall be selected by the Issuing and Paying Agent by such method as the Issuing and Paying Agent shall deem fair and reasonable. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the "Repayment Date"). For this Note to be repaid, this Note must be received, together with the form hereon entitled "Option to Elect Repayment" duly completed, by the Issuing and Paying Agent at its corporate trust office. Currently the Corporate Trust office of the Trustee is located at 101 Barclay Street, Floor 7E, New York, New York 10286. not more than 30 nor less than 10 calendar days prior to the Repayment Date. Exercise of such repayment option by the Holder hereof will be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.

(i)       liens securing taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons;              (ii)       liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws;              (iii)       purchase money mortgages or other purchase money liens or conditional sale, lease-purchase or other title retention agreements upon or in respect of property acquired or leased for use in the ordinary course of its business by the Company; or              (iv)       liens on any assets of the Company or any of its subsidiaries which may constitute "Margin Stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System); or              (v)       other mortgages or liens in respect of property owned, acquired or leased by the Company not permitted by clauses (i) through (iv), provided that the property so encumbered pursuant to this clause (v) shall not have a market value in excess of 50% of the amount by which the Company's total assets (on a consolidated basis with its subsidiaries) exceeds the encumbrances made as provided in clause (iii) above.

The Company (including its consolidated subsidiaries) will maintain a minimum tangible net worth (calculated in accordance with generally accepted accounting principles in effect on April 29, 1998) of at least $100,000,000.             The following will be "Events of Default" with respect to the Notes:

(i)       default in the payment of any interest on its Note or in the payment of interest on or principal of any other Note issued pursuant to the Issuing and Paying Agency Agreement when due, which default continues and remains unremedied for at least thirty calendar days; or             (ii)       a decree or order by a court having jurisdiction shall have been entered adjudging the Company or Potomac Electric Power Company ("PEPCO") , a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or PEPCO under the Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of either the Company or PEPCO or of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or              (iii)       the Company or PEPCO shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bankruptcy Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or              (iv)       the Company shall fail to perform or observe any other term, covenant or agreement contained in the Note to be performed or observed by it, and any such failure shall continue and remain unremedied for at least thirty calendar days; or              (v)       the Company shall default in the payment when due (subject to any applicable grace period), whether at stated maturity or otherwise, of any principal of or interest on (howsoever designated) any indebtedness for borrowed money of, or guaranteed by, the Company in the aggregate principal amount of $1,000,000, whether such indebtedness now exists or shall hereafter be created; provided, however, that for the purposes of this subsection (v), the Company shall not be deemed in default if it shall be contesting in good faith its liability for the payment of the installment of interest or of the principal or premium in question, and shall have been advised in a written opinion by its counsel (a copy of which opinion will be provided upon request to the registered holder) that it has a meritorious defense to any claim of liability;

provided, however, that any default pursuant to clause (iv) or (v) of this paragraph may be waived prior to any declaration of acceleration with respect to such default by the written consent of the holders of at least a majority in aggregate principal amount of Notes at the time outstanding.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent with the consent of the Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby for the purpose of adding any provisions to, or changing in any manner or eliminating any provisions of, the Issuing and Paying Agency Agreement or of modifying the rights of the Holders of the Notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby, change the stated maturity date of the principal (or any installment of principal) of any Note, or change any interest payment date on which interest on any Note is to be paid, or reduce the principal amount of any Note, or reduce the rate of interest on any Note or change the manner of calculation of interest thereof, or change any of the redemption or repayment provisions of any Note, or change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable, or impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof, or reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Holders is required for the modification and amendment of, or waiver under, the Issuing and Paying Agency Agreement or the Notes or certain defaults thereunder, or modify any of the provisions in the Issuing and Paying Agency Agreement or the Notes relating to their modification, amendment or waiver other than to increase the percentage necessary for such action or to provide that other provisions of the Issuing and Paying Agency Agreement or the Notes cannot be modified, amended or waived without the consent of the Holder of each outstanding Note affected thereby.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent without the consent of any Holders of Notes in order to (i) evidence the succession of another corporation to the Company and the assumption by any such successor of the obligations of the Company contained in the Issuing and Paying Agency Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of the Issuing and Paying Agency Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in the Issuing and Paying Agency Agreement (iv) evidence and provide for the acceptance of appointment under the Issuing and Paying Agency A greement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in the Issuing and Paying Agency Agreement or the Notes which may be inconsistent with any other provision therein, or make any other provisions with respect to matters or questions arising therein, provided that such action shall not adversely affect the interests of the Holders of the Notes in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify, eliminate or add to the provisions of the Issuing and Paying Agency Agreement to such extent as shall be necessary to qualify the Issuing and Paying Agency Agreement (including any agreement supplemental thereto) under the Trust Indenture Act of 1939, as amended, or under any similar statute hereafter ena cted.             The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid.             In case this Note shall at any time become mutilated, destroyed, lost or stolen, and such mutilated Note or evidence of the destruction, loss or theft thereof satisfactory to the Company and the Issuing and Paying Agent (together with such indemnity as may be reasonably required by the Company or the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, a new Note of like tenor and terms will be issued by the Company in exchange for the mutilated Note or in lieu of the Note so destroyed, lost or stolen. The Issuing and Paying Agent shall authenticate any such substituted Note and deliver the same upon the written authorization of the Company. All expenses and reasonable charges associated with the issuance, authentication and delivery of a new Note and the procurement of an indemnity, if required, shall be borne by the Holder of the Note mutilated, destroyed, lost or stolen. In case any Note which has matured or i s about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a Substitute Note, payor authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Holder with the foregoing provisions.             Any funds held by the Issuing and Paying Agent for the payment of principal of, or premium, if any, or interest on, this Note that remain unclaimed for two years after such principal, premium or interest shall have become due and payable shall be repaid to the Company and any person claiming such funds shall look, as an unsecured general creditor, only to the Company for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon cease.             No provision of this Note or of the Issuing and Paying Agency Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.             The Issuing and Paying Agent has been appointed registrar, transfer agent and authenticating agent for the Notes, and the Issuing and Paying Agent will maintain at its corporate trust office in the Borough of Manhattan, The City of New York, a register (the "Security Register") for the registration, exchange and transfer of Notes. Subject to the restrictions set forth on the face hereof and in the Issuing and Paying Agency Agreement, this Note may be presented for registration of transfer or exchange at the aforementioned office of the Issuing and Paying Agent by presenting and surrendering this Note for transfer or exchange, as the case may be, duly endorsed or accompanied by a written instrument of transfer in form approved by the Issuing and Paying Agent and duly executed by the Holder hereof in person or by the Holder's attorney duly authorized in writing, and thereupon the Issuing and Paying Agent shall complete, authenticate and de liver in the name of the designated transferee or transferees, or in exchange herefor, one or more new Notes having identical terms and provisions and having a like aggregate principal amount in Authorized Denominations, subject to the terms and conditions set forth herein. Except as provided above, Notes are exchangeable at the aforementioned office of the Issuing and Paying Agent for other Notes of other Authorized Denominations of equal aggregate principal amount and having identical terms and provisions. All such transfers and exchanges of Notes will be free of charge, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith (other than exchanges pursuant to the Issuing and Paying Agency Agreement not involving any transfer). The date of registration of any Notes delivered upon any exchange or transfer shall be such that no gain or loss of interest results from such exchange or transfer.             Prior to due presentment of this Note for registration of transfer, the Company and the Issuing and Paying Agent and any agent of the Company or the Issuing and Paying Agent may treat the Holder in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Company or the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary, except as required by law.             THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT -            Custodian            TEN ENT - as tenants by the entireties                                   (Cust)                 (Minor) JT TEN - as joint tenants with right of                                  under Uniform Gifts to Minors                 survivorship and not as tenants                             Act                                                             in common                                                                                                    (State)             Additional abbreviations may also be used though not in the above list.

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [                                                                    ] [                                                                    ]                                                                           (Please print or typewrite name and address including postal zip code of assignee)                                                                                                                                                  this Note and all rights thereunder hereby irrevocably constituting and appointing                                                                                                                                                 Attorney to transfer this Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated:

Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

OPTION TO ELECT REPAYMENT

The undersigned hereby irrevocably request(s) and instruct (s) the Company to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount to be repaid, together with unpaid interest accrued hereon to the Repayment Date, to the undersigned, at                                                                                                           &nb sp;                                                                                                                                                                                                                       (Please print or typewrite name and address of the undersigned)

For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, not more than 60 nor less than 30 calendar days prior to the Repayment Date, this Note with this "Option to Elect Repayment" form duly completed.             If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of U.S. $1,000 or other Authorized Denomination specified on the face hereof (provided that any remaining principal amount shall be at least U.S.$250,000 or the minimum Authorized Denomination) which the Holder elects to have repaid and specify the denomination or denominations (which shall be U.S.$250,000 or the minimum Authorized Denomination) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).

Principal Amount to be Repaid: $                       Date:

Notice: The signature(s) on this Option to Date: Elect Repayment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

CERTIFICATE OF TRANSFER NOT REQUIRED FOR ANY RESALE OR OTHER TRANSFER TO THE COMPANY OR TO, BY, THROUGH, OR IN A TRANSFER APPROVED BY, AN AGENT

TO BE COMPLETED AND DELIVERED WITH THIS NOTE TO THE ISSUING AND PAYING AGENT IF THE UNDERSIGNED HOLDER WISHES TO SELL, ASSIGN AND TRANSFER THIS NOTE:           In connection with the resale or other transfer of this Note occurring prior to the time the legend originally set forth on the face of this Note (or one or more predecessor Notes) restricting resales and other transfers thereof has been removed in accordance with the procedures set forth in the Issuing and Paying Agency Agreement (other than a resale or other transfer made to the Company or to, by, through, or in a transaction approved by an Agent), the undersigned Holder certifies that without utilizing any general solicitation or general advertising:

[CHECK ONE]

[  ]    (a)

Such Note is being transferred by the undersigned Holder to a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

or

[  ]    (b)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that the undersigned Holder has been advised by the prospective transferee that such transferee will hold such Note for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of such transferee's property shall at all times be and remain within its control.

or

[  ]    (c)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501 (a) under the Securities Act of 1933, as amended, in an "offshore transaction", as defined in Regulation S under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder.

If none of the foregoing boxes are checked, then, so long as this Note shall bear a legend on the face thereof restricting resales and other transfers thereof (except in the case of a resale or other transfer made to the Company or to, by, through, or in a transaction approved by, an Agent), the Issuing and Paying Agent shall not be obligated to register this Note in the name of any person other than the undersigned Holder and until the conditions to any such transfer of registration set forth in this Note and in the Issuing and Paying Agency Agreement shall have been satisfied.

Dated:

[Type or print name of Holder By:                                                                  The signature of the Holder must correspond with the name as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

TO BE COMPLETED BY TRANSFEREE IF (a) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that (i) it is a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, (ii) this instrument has been executed on behalf of the undersigned transferee by one of its executive officers and (iii) it is aware that the Holder of this Note is relying upon the undersigned transferee's foregoing representations in order to claim the exemption from registration provided by Rule 144A. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (b) ABOVE IS, CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one if its executive officers. The undersigned transferee undertakes to hold this Note acquired from the Holder hereof for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of the undersigned transferee's property shall at all times be and remain within its control. The undersigned acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accord ance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (c) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one of its executive officers. In addition, the undersigned transferee represents and warrants that it is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended) and it is acquiring this Note from the Holder hereof in an "offshore transaction" (as defined in Regulation S) pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

EX-4

ISSUING AND PAYING AGENCY AGREEMENT

This Issuing and Paying Agency Agreement, dated as of July 7, 2000 (the Agreement"), between Potomac Capital Investment Corporation, a Delaware corporation having its principal place of business at 1801 K Street, N.W., Suite 900, Washington, D.C. 20006 (the "Issuer"), and The Bank of New York, a New York banking corporation maintaining its principal corporate trust office at 101 Barclay Street, Floor 7E, New York, New York 10286, as issuing and paying agent (the "Issuing and Paying Agent").             WHEREAS the Issuer has established a program for the issue of Medium-Term Notes, Series E, With Maturities from 9 Months and 1 Day from Date of Issue through November 30, 2009 (the "Notes");             WHEREAS the Issuing and Paying Agent has agreed to act as Issuing and Paying Agent in connection with the Notes in accordance with the provisions of this Agreement.             NOW, THEREFORE, in consideration of the covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknow1edged, the parties hereto agree as follows:             SECTION 1. Appointment of Issuing and Paying Agent. The Issuer proposes to issue from time to time the Notes in an aggregate initial offering price not to -exceed $900,000,000 (provided the Issuer reserves the right to increase such authorized amount from time to time), and have appointed Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Salomon Smith Barney Inc. (or such other placement agents as appointed by the Issuer from time to time) as the placement agents for the Notes (collectively, the "Placement Agents"). The Issuer hereby appoints the Issuing and Paying Agent to act, on the terms and conditions specified herein, as issuing and paying agent for the Notes, and the Issuing and Paying Agent hereby accepts such appointments in accordance with such terms and conditions. The Issuing and Paying Agent also agrees to perform the duties and obligations required to be performed by i t under the Administrative Procedures applicable to the Notes (the, Administrative Procedures"). Defined terms used and not defined herein shall have the meanings given such terms in the Private Placement Agency Agreement, dated July 7, 2000 (the "Private Placement Agency Agreement"), between the Issuer and the Placement Agents or in the Private Placement Memorandum (as defined in such Private Placement Agency Agreement), as the case may be.             SECTION 2. Forms of Note; Global Notes; Proxies; Supply of Notes; Terms. (a) Forms of Notes. The Notes shall be issued in fully registered book-entry form (the "Book- Entry Notes") represented by one or more global Notes (the "Global Notes") or in fully registered certificated form (the "Certificated Notes"), without interest coupons, substantially in the forms of Note attached hereto as Exhibit A in the case of Notes bearing interest at a fixed rate of interest (the "Fixed Rate Notes") and Exhibit B in the case of Notes bearing interest at a floating rate of interest (the "Floating Rate Notes") or in such other forms as shall be delivered to the Issuing and Paying Agent by the Issuer.              (b)       Global Notes. This Section 2(b) shall apply to all Book-Entry Notes represented by one or more Global Notes that are registered in the name of The Depository Trust Company or another depositary specified by the Issuer (the "Depositary") or a nominee thereof:

(i)       each Global Note representing Book-Entry Notes will be deposited with, or on behalf of, the Depositary and registered in the name of the Depositary or a nominee thereof;        (ii)       notwithstanding any other provisions of this Agreement or a Global Note, such Global Note shall not be transferred except as a whole by a nominee of the Depositary to the Depositary or to another nominee of the Depositary or by the Depositary or such nominee to a successor of the Depositary or a nominee of such successor. A Global Note may be exchanged for the Certificated Note in the event that (A) the Depositary has notified the Issuer that it is unwilling or unable to continue as Depositary for the Global Notes or the Depositary has ceased to be a "clearing agency" registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and a successor depositary is not appointed by the Issuer within 60 calendar days thereafter, (B) an Event of Default has occurred and is continuing with respect to the Notes or (C) the Issuer, in its sole discretion, determines that all of the Book-Entry Notes shall be exchangeable for Certificated Notes. Any Global Note exchanged pursuant to clause (A) or (C) above shall be so exchanged in whole but not in part, while any Global Note exchanged pursuant to clause (B) above may be exchanged in whole or from time to time in part as directed by the Depositary;        (iii)       Notes issued in exchange for a Global Note or any portion thereof shall be issued as Certificated Notes, without interest coupons, shall have an aggregate principal amount equal to that of such Global Note or portion thereof to be so exchanged and shall be registered in such names and be in such authorized denominations as the Depositary or an authorized representative thereof shall designate. If a Global Note to be exchanged in whole is not then held by the Issuing and Paying Agent as custodian for the Depositary or its nominee, such Global Note shall be surrendered by the Depositary to the corporate trust office of the Issuing and Paying Agent located in the Borough of Manhattan, The City of New York, to be so exchanged. With regard to any Global Note to be exchanged in part, either such Global Note shall be so surrendered for exchange by the Depositary or, if the Issuing and Paying Agent is acting as custodian for the Depositar y or its nominee with respect to such Global Note, the principal amount thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Issuing and Paying Agent. Upon any such surrender or adjustment, the Issuer shall execute, and upon receipt of instructions from an Authorized Representative (as defined in Section 3) of the Issuer the Issuing and Paying Agent shall authenticate and deliver, each Certificated Note issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof and, in the case of such surrender, the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, a new Global Note on behalf of the Depositary for the remaining principal amount thereof; and        (iv)       neither any members of, or participants in, the Depositary ("Participants") nor any other persons on whose behalf Participants may act shall have any rights under this Agreement with respect to any Global Note registered in the name of the Depositary or any nominee thereof, or under any such Global Note, arid the Depositary or such nominee, as the case may be, may be treated by the Issuer, the Issuing and Paying Agent and any agent of the Issuer or the Issuing and Paying Agent as the absolute owner and Registered Holder of such Global Note in accordance with Section 13(f) hereof. Notwithstanding the foregoing, nothing herein shall prevent the Issuer, the Issuing and Paying Agent or any agent of the Issuer or the Issuing and Paying Agent from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Participants and any other person on whose behalf a Participant may act, the operation of customary practices of such persons governing the exercise of the rights of a Registered Holder of a Global Note.

(c)       Proxies. The Registered Holder of a Note may grant proxies and otherwise authorize any person, including Participants and persons that may hold interests through Participants, to take any action which such Registered Holder is entitled to take under this Agreement or such Note.              (d)       Supply of Notes. On the date of this Agreement, the Issuer will furnish the Issuing and Paying Agent with an adequate supply of Notes bearing consecutive control numbers, which will have the Registered Holder, principal amount and certain terms on the face thereof left blank. Upon reasonable notice given by the Issuing and Paying Agent to the Issuer, the Issuer shall provide to the Issuing and Paying Agent such additional number of Notes as is mutually agreed upon. Each Note will have been executed by the manual or facsimile signature of an Authorized Representative of the Issuer. The Issuing and Paying Agent will hold such blank Notes in safekeeping in accordance with its customary practice and shall issue such Notes in the order of the control numbers imprinted thereon.              (e)       Terms. The Notes shall have a maturity of at least 9 months and I day from the date of issuance thereof through November 30,2009 (the "Original Issue Date") and shall be issuable in minimum denominations of $250,000 and integral multiples of $l,000 in excess thereof (the "Authorized Denominations").             SECTION 3. Authorized Representatives. From time to time, the Issuer will furnish the Issuing and Paying Agent with a certificate certifying as to the incumbency and specimen signatures of officers authorized (i) to execute Notes on behalf of the Issuer by manual or facsimile signature and (ii) to give instructions to the Issuing and Paying Agent in accordance with Section 4 hereof (each such officer, an "Authorized Representative"). Until the Issuing and Paying Agent receives a subsequent incumbency certificate of the Issuer, the Issuing and Paying Agent shall be entitled to rely on the last such certificate delivered to it for purposes of determining the Authorized Representatives of the Issuer. The Issuing and Paying Agent shall have no responsibility to the Issuer to determine by whom or by what means a facsimile signature may have been affixed on the Notes, or to determine whether any facsimile or manual signature is genuine , provided that such facsimile or manual signature resembles reasonably closely the specimen signatures filed with the Issuing and Paying Agent by an Authorized Representative. Any Note bearing the manual or facsimile signature of a person who is an Authorized Representative on the date such signature is affixed thereto shall bind the Issuer after the authentication thereof by the Issuing and Paying Agent, notwithstanding that such person shall have ceased to hold office on the date such Note is authenticated and delivered by the Issuing and Paying Agent.             SECTION 4. Issuance Instructions; Registration; Authentication and Delivery; Receipt of Instructions: Payment. (a) Issuance Instructions. All Note issuance instructions shall be given by an Authorized Representative by facsimile transmission, in writing or by reasonably secure electronic means agreed to by the Issuer and the Issuing and Paying Agent. Such instructions shall include:

(i)       name of the person in whose name the related Note is to be registered (the "Registered Holder");        (ii)       address of the Registered Holder;        (iii)      wire transfer instructions, if any, for payments to the Registered Holder;        (iv)      taxpayer identifying number of the Registered Holder;        (v)       form of such Note (i.e., whether such Note is a Global Note or a Certificated Note);        (viii)    principal amount and Authorized Denominations of such Note;        (ix)      stated maturity date of such Note;        (x)       if such Note is a Fixed Rate Note, the Interest Rate;        (xi)      if such Note is a Floating Rate Note, such of the following as are applicable:

(A)       Interest Category (i.e., whether such Note is a Regular Floating Rate Note, an Inverse Floating Rate Note, a Floating Rate/Fixed Rate Note or another type of Floating Rate Note);        (B)       Interest Rate Basis or Bases and, if LIBOR and the CMT Rate, certain related information;        (C)       Initial Interest Rate;        (D)       Index Maturity;        (E)       Spread and/or Spread Multiplier;        (F)       Minimum and/or Maximum Interest Rate;        (G)       Initial Interest Reset Date;        (H)       Interest Reset Dates;        (I)         Day Count Convention; and        (J)        Calculation Agent;

(xii)       Interest Payment Dates for such Note;        (xiii)       any Initial Redemption Date, Initial Redemption Percentage and Annual Redemption Percentage Reduction;        (xiv)       any Optional Repayment Date{s);        (xv)       rate of Placement Agent's discount or commission and amount to be received in payment for such Note;        (xvi)       delivery and payment instructions for such Note; and        (xvii)       additional terms, if any.

(b)       Registration. Authentication and Delivery. Upon receipt from an Authorized Representative of the issuance instructions referred to in Section 4( a) in respect of a Note, the Issuing and Paying Agent shall withdraw the necessary Notes from safekeeping and, in accordance with such instructions, shall:

(i)       complete each Note as to the matters referred to in Section 4(a);        (ii)       record the ownership of each Note in the Note Register (as defined in Section 13(a) hereof);        (iii)       cause each Note to be manually authenticated by anyone of the officers or employees of the Issuing and Paying Agent duly authorized and designated by it for such purpose; and        (iv)       deliver each Note to the relevant Placement Agent or its designated consignee (which may be the Issuing and Paying Agent in the case of Global Notes), which delivery shall be made against payment (in the case of a sale of a Note to a Placement Agent as principal) or receipt of payment (in the case of a sale of a Note to a purchaser solicited by a Placement Agent as agent of the Issuer) in immediately available funds.

(c)       Receipt of Instructions. Instructions given by an Authorized Representative by facsimile transmission, in writing or by other electronic means must be received by the Issuing and Paying Agent not later than the times specified in the Administrative Procedures. In the event that instructions are received by the Issuing and Paying Agent later than the times specified in the Administrative Procedures, such instructions shall not be deemed to be received until the business day following such receipt.              (d)       Payment. It is understood that although the Issuing and Paying Agent is instructed to deliver Notes against payment in immediately available funds, delivery of the Notes, in accordance with the custom prevailing in the market, will be made before actual receipt of payment. Once the Issuing and Paying Agent has delivered Notes to the applicable Placement Agent or its designated consignee, as the case may be, against receipt therefor, the Issuer shall bear the risk that such Placement Agent or such designated consignee fails to remit payment for the Notes or return same to the Issuing and Paying Agent. It is further understood that each delivery of Notes hereunder shall be subject to the rules of the New York Clearing House in effect at the time of such delivery.             SECTION 5. Representations and Warranties. Each delivery of Notes to the Issuing and Paying Agent in accordance with Section 4 hereof shall constitute a continuing representation and warranty to the issuing and Paying Agent by the Issuer that the issuance and delivery of such Notes have been duly and validly authorized by the Issuer and that the Notes, when completed, authenticated and delivered pursuant hereto, will constitute the legal, valid and binding obligation of the Issuer.             SECTION 6. Proceeds of Sale of Notes. Proceeds received in payment for Notes are to be in immediately available funds and shall be immediately credited to an account designated and maintained by the Issuer with the Issuing and Paying Agent. The Issuing and Paying Agent shall provide the Issuer with advice reflecting all debits and credits to such designated bank account. Subject to the availability of funds upon receipt of instructions from an Authorized Representative, proceeds from the sale of Notes may, prior to the time such proceeds are received, be used in payment of the principal of, and premium, if any, and interest on, other Notes presented for payment on the stated maturity date or any earlier date on which the principal thereof is due and payable (the "Maturity Date"), or be transferred for credit to the (account of the Issuer at another bank.             SECTION 7. Interest Payment Dated Other Than Maturity Date; Payment Mechanics. (a) Interest Payment Dated Other Than Maturity Date. Unless otherwise specified on the face of such Notes or in an Addendum thereto, interest will be payable semi-annually on January 15 and July 15 of each year in the case of Fixed Rate Notes and such dates as are specified therein in the case of Floating Rate Notes, and, in such each case, on the Maturity Date (collectively, "Interest Payment Dates"). If any Interest Payment Date other than the Maturity Date for a Fixed Rate Note falls on a day that is not a Business Day (as defined in the Private Placement Memorandum), the related payment of interest shall be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date until such next succeeding Busines s Day. If any Interest Payment Date other than the Maturity Date for a Floating Rate Note falls on a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding day that is a Business Day, except that, if LIBOR is an applicable Interest Rate Basis and such next succeeding Business Day falls in the calendar month next succeeding such Interest Payment Date, such Interest Payment Date shall be the immediately preceding Business Day. All interest payments on an Interest Payment Date other than the Maturity Date will be made to the Registered Holders at the close of business on the fifteenth calendar day (whether or not a Business Day) immediately preceding the applicable Interest Payment Date, or such other dates specified in such Notes or in an Addendum thereto (each, a "Regular Record Date"). Any such interest not so punctually paid or duly provided for on any Interest Payment Date will forthwith cease to be payable to the Registered Holder thereof at the close of busin ess on the applicable Regular Record Date and may either be paid to the person in whose name such Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Issuer, notice whereof shall be given to the Registered Holders of Notes not less than 30 calendar days prior to such special record date, or be paid at any time in any other lawful manner. Unless otherwise specified in a Fixed Rate Note or in an Addendum thereto, interest with respect to a Fixed Rate Note will begin to accrue on the Original Issue Date of such Note and will be calculated on the basis of a 360-day year of twelve 30-day months. Interest with respect to any Floating Rate Note will begin to accrue on the Original Issue Date of such Note and will be calculated in accordance with the provisions set forth in such Note for the applicable Interest Rate Basis or Bases specified on the face thereof.             Payment Mechanics. (i) Certificated Notes. All interest payments on the Certificated Notes other than interest due on the Maturity Date will be made by check of the Issuing and Paying Agent mailed, charges prepaid, to the Registered Holders at their addresses appearing on the applicable Regular Record Date in the Note Register or to such other address in the United States as any Registered Holder shall designate to the Issuing and Paying Agent in writing not later than such Regular Record Date; provided, however, that Registered Holders of $10,000,000 or more in aggregate principal amount of Certificated Notes (whether or not having identical terms and provisions) shall be entitled to receive payments of interest on an Interest Payment Date other than the Maturity Date by wire transfer of immediately available funds to an account at a bank designated by each such Registered Holder not later than the Regular R ecord Date prior to such Interest Payment Date.                    (ii) Book-Entry Notes. On each Interest Payment Date other than the Maturity Date, the Issuer will pay to the Issuing and Paying Agent in immediately available funds an amount sufficient to make the required payment on such date and, upon receipt of such funds, the Issuing and Paying Agent, in turn, will pay to the Depositary such total amount of interest due on such Interest Payment Date.             SECTION 8. Optional Redemption. In the event the Issuer elects to redeem any Notes in whole or in part, the Issuer shall give written notice to the Issuing and Paying Agent of the principal amount of such Notes to be so redeemed not less than 35 calendar days prior to the date of redemption or such other date (not more than 60 nor less than 30 calendar days prior to the date of redemption) that the Issuer and the Issuing and Paying Agent mutually agree upon in writing. In any such written notice, (a) if Certificated Notes are to be redeemed, the Issuer shall identify such Notes by specifying the interest rate or formula pursuant to which interest is calculated on such Notes, the Interest Payment Dates, the stated maturity date and redemption terms or (b) if Book-Entry Notes are to be redeemed, the Issuer shall identify such Notes by specifying the CUSIP number assigned to the Global Note or Notes representing such Notes. The Issu ing and Paying Agent shall cause notice of redemption to be given to the Registered Holders of the Notes to be redeemed not less than 30 nor more than 60 calendar days prior to the date of redemption in the name and at the expense of the Issuer. Whenever less than all of the Notes of like tenor and terms are to be redeemed, (a) if such Notes are Global Notes held by the Issuing and Paying Agent as custodian for the Depositary or its nominee, the Issuing and Paying Agent shall reduce the principal amount of one or more Global Notes, by the amount of such redemption, by means of an appropriate adjustment on the records of the Issuing and Paying Agent or (b) in the case of all other Notes, the Issuing and Paying Agent shall select the Notes to be so redeemed by such method as the Issuing and Paying Agent shall deem fair and reasonable. Any Note which is to be redeemed in part only pursuant to clause (b) of the preceding sentence shall be surrendered to the corporate trust office of the Issuing and Paying Agent located in the Borough of Manhattan, the City of New York, and the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver to the Registered Holder of such Note, without service charge, a new Note of like tenor and terms, of any Authorized Denomination as requested by such Registered Holder, in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of such Note so surrendered.             SECTION 9. Optional Repayment. In the event that any Notes permit the Registered Holder thereof to have such Notes repaid by the Issuer at such Registered Holder's option and such Registered Holder elects to have such Notes repaid in whole or in part, the Issuing and Paying Agent must receive at its corporate trust office located in the Borough of Manhattan, The City of New York, not more than 30 nor less than 10 calendar days prior to the date of repayment: (a) in the case of a Certificated Note, such Note with the form entitled "Option to Elect Repayment" contained thereon duly completed, or (b) in the case of a Book-Entry Note, instructions to that effect from the Beneficial Owners of such Book-Entry Note to the Depository and forwarded by the Depository. Exercise of such repayment option by the Registered Holder of a Note shall be irrevocable with respect to such Note. Any Note which is to be repaid only in part shall be surre ndered to the Issuing and Paying Agent and the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver to the Registered Holder of such Note, without service charge, a new Note of like tenor and terms, of any Authorized Denomination as requested by such Registered Holder, in an aggregate principal amount equal to and in exchange for the unpaid portion of the principal of such Note so surrendered.             SECTION 10. Payment on the Maturity Date. The Issuer will pay in immediately available funds the principal of, and premium, if any, and interest on, the Notes on the Maturity Date only upon presentation and surrender thereof. Interest payable on any Note on the Maturity Date will be payable to the person to whom the principal of such Note is payable. If the Maturity Date for any Note falls on a day that is not a Business Day, the related payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date until such next succeeding Business Day. The Issuing and Paying Agent will forthwith cancel each such Note pursuant to Section 22 hereof.             SECTION 11. Information Regarding Amounts Due. (a) Promptly following each Regular Record Date, the Issuing and Paying Agent will advise the Issuer of the amount of interest (to the extent then known) due on the next succeeding Interest Payment Date. The Issuing and Paying Agent will advise the Issuer in writing by the fifteenth calendar day of each month of the principal of and accrued interest to be paid on Notes maturing in the next succeeding month.                    (b) If at any time the Issuing and Paying Agent is not acting as calculation agent (the "Calculation Agent") with respect to any Note, the Issuing and Paying Agent will give the Calculation Agent written notice of each Interest Determination Date with respect to such Note at least three Business Days prior to such Interest Determination Date.             SECTION 12. Deposit of Funds. On a timely basis, the Issuer shall remit to the Issuing and Paying Agent the amount of principal, premium, if any, and/or interest payable in respect of Notes then outstanding. The Issuer shall wire such amount in immediately available funds on the relevant Interest Payment Date or the Maturity Date, as the case may be, prior to 12:00 p.m., New York City time, while the Issuing and Paying Agent will pay such amount to the Depositary (in the case of Book-Entry Notes) or the Registered Holders (in the case of Certificated Notes) on the aforementioned dates.             SECTION 13. Note Register Exchanges; Transfers; No Service Charges, etc.; Removal of Legends; Persons Deemed Owners. (a) Note Register. The Issuing and Paying Agent, as agent of the Issuer for this purpose, shall maintain at its corporate trust office located in the Borough of Manhattan, The City of New York, a register of Notes for the registration of ownership of Notes and transfers and exchanges thereof (the "Note Register"). Subject to the provisions of this Section 13, upon presentation for transfer or exchange of any Note at the corporate trust office of the Issuing and Paying Agent accompanied by a written instrument of transfer or exchange in the form approved by the Issuer (it being understood that, until notice to the contrary is given to Registered Holders, the Issuer shall be deemed to have approved the form of instrument of transfer or exchange printed on any Note), executed by the Registered Holder thereof, in person or by such Registered Holder's attorney thereunto duly authorized in writing, such Note shall be transferred upon the Note Register, and the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, a new Note of like tenor and terms, in any Authorized Denomination requested by such Registered Holder, in the name of the transferee.              (b)       Exchanges. Upon the receipt by the Issuing and Paying Agent at its corporate trust office of a Note accompanied by a written and executed instrument of exchange as provided in Section 13(a), then, if such Note is owned by the Registered Holder thereof and is being exchanged without transfer the Issuer shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer the Issuing and Paying Agent shall authenticate and deliver, in exchange for such Note one or more Notes of like tenor and terms, in any Authorized Denomination requested by such Registered Holder, in an aggregate principal amount equal to the principal amount of such Note.              (c) Transfers. So long as the Legend (as defined in Section 13(e) hereof) has not been removed from a Note, the Issuing and Paying Agent shall not register the resale or other transfer of such Note unless such resale or other transfer is made in accordance with the Legend. In the case of a resale or other transfer of a Certificated Note, the Issuing and Paying Agent shall register the resale or other transfer of a Certificated Note to the Issuer or a Placement Agent or by, through or in a transaction approved by a Placement Agent upon the written approval of such resale or other transfer by the Issuer or Placement Agent, as the case may be. In the case of a resale or other transfer of a Certificated Note through the services of a broker, dealer or similar intermediary other than a Placement Agent, the Registered Holder and the prospective transferee of such Certificated Note shall be required to complete the reverse of such Certi ficated Note or the Bond Power attached as Exhibit A to the Private Placement Memorandum and deliver the Certificated Note (and any applicable Bond Power) to the Issuing and Paying Agent to advise of the basis for such resale or other transfer being exempt from registration under the Securities Act of 1933, as amended (the "Securities Act").                   The Issuing and Paying Agent shall keep a record of all letters, notices or written communications received pursuant to this Section 13(c). The Issuer has the right to inspect all such documents, notices, letters or other written communications.              (d)       No Service Charges, etc. Registration of transfers and exchanges of Notes as aforesaid may be made from time to time, and each such registration shall be noted on the Note Register. No service charge shall be made for any registration of transfer or exchange of Notes, but the Issuing and Paying Agent or the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith {other than exchanges pursuant to this Agreement not involving any transfer).              (e)       Removal of Legends. The Notes shall contain a legend (the "Legend") to the effect that they have not been and will not be registered under the Securities Act, and that the resale or other transfer thereof is subject to certain restrictions in order to preserve the non-public nature of the offering of the Notes. If Notes are issued upon the transfer, exchange or replacement of Notes not bearing the Legend, the Notes so issued shall not bear the Legend. If Notes are issued upon the transfer, exchange or replacement of Notes bearing the Legend or if a request is made to remove the Legend on a Note, the Notes so issued shall bear the Legend or the Legend shall not be removed, as the case may be, unless there is delivered to the Issuer such satisfactory evidence as may be reasonably required by the Issuer that neither the Legend nor the resale and other transfer restrictions set forth therein ar e required to ensure that transfers thereof comply with the relevant provisions of the Securities Act or that such Notes are not "restricted securities" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence to the Issuer, the Issuing and Paying Agent, upon receipt of instructions from an Authorized Representative of the Issuer, shall authenticate and deliver a Note of like tenor and terms that does not bear the Legend. The Issuer agrees to indemnify the Issuing and Paying Agent for, and to hold it harmless against, any loss, liability or expenses, including the fees and expenses of counsel, reasonably incurred, arising out of or in connection with actions taken or omitted by the Issuing and Paying Agent in accordance with the instructions from an Authorized Representative of the Issuer; provided, however, that the Issuer shall not be required to indemnify the Issuing and Paying Agent for any loss, liability or expense arising from the negligence or willf ul misconduct of the Issuing and Paying Agent.                    (f) Persons Deemed Owners. The Issuer and the Issuing and Paying Agent (and any of their agents) may deem and treat the Registered Holder of any Note as the absolute owner of such Note for the purpose of receiving payment of the principal of, and premium, if any, and interest on, such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer nor the Issuing and Paying Agent shall be affected by notice to the contrary.             SECTION 14. Mutilated, Destroyed, Lost or Stolen Notes. In case any Note shall become mutilated or destroyed, lost or stolen, the Issuer, in its discretion, shall execute, and upon receipt of instructions from an Authorized Representative of the Issuer, the Issuing and Paying Agent shall authenticate and deliver a new Note of like tenor and terms, having a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note or in lieu of and substitution for the Note destroyed, lost or stolen; provided, however, that the applicant for a substituted Note shall furnish to the Issuer and Paying Agent such security or indemnity as may be required by them to save each of them harmless and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Issuing and Paying Agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the owne rship thereof. Upon the issuance of any substituted Note, the Issuer and the Issuing and Paying Agent may require the payment of a sum sufficient to cover any fees and expenses connected therewith. In case any Note which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Issuer may, instead of issuing a substitute Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Registered Holder with the provisions of this Section 14, as hereinabove set forth.             SECTION 15. Application of Funds: Return of Unclaimed Funds. Until used or applied as herein provided, all funds received by the Issuing and Paying Agent hereunder shall be held for the purposes for which they were received but need not be segregated from other funds except to the extent required by law. Any funds deposited with the Issuing and Paying Agent and remaining unclaimed for two years after the date upon which the last payment of the principal of, and/or premium, if any, and/or interest on, any Note to which such deposit relates shall at the written request of the Issuer be repaid to the Issuer by the Issuing and Paying Agent, and the Registered Holder of any Note to which such deposit relates entitled to receive payment thereof shall thereafter look, as an unsecured general creditor, on to the Issuer for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon ceas e.             SECTION 16. Events of Default. Upon the occurrence of an Event of Default (as defined in the Notes), the Issuer shall promptly provide the Issuing and Paying Agent written notice as to, and instruct the Issuing and Paying Agent in writing to promptly provide all of the Registered Holders of Notes of the Issuer such written notice as to, such occurrence of such Event of Default. In addition the Issuer, shall, within five calendar days after the occurrence thereof, provide the Issuing and Paying Agent written notice as to, and instruct the Issuing and Paying Agent in writing to promptly provide all of the Registered Holders of Notes such written notice as to any event which after notice or lapse of time or both would become an Event of Default under the Notes (a "Default"). Upon receipt of any such written instruction in respect of the occurrence of any such Event of Default or Default, the Issuing and Paying Agent shal1 promptly ma il to all Registered Holders of Notes, at the addresses of such Registered Holders as they appear in the Note Register, any such written notice of such Event of Default or Default unless the Issuer shal1 have notified the Issuing and Paying Agent in writing that such Event of Default or Default shall have been cured before the mailing of such written notice by the Issuing and Paying Agent.             SECTION 17. Liability. Neither the Issuing and Paying Agent nor its directors officers or employees shall be liable for any act or omission hereunder except in the case of its negligence or willful misconduct. The duties and obligations of the Issuing and Paying Agent, its officers and employees shall be determined by the express provisions of this Agreement and they shall not be liable except for the performance of such duties and obligations as are specifically set forth herein and no implied covenants shall be read into this Agreement against them. The Issuing and Paying Agent may consult with counsel and shall be fully protected in any action taken in good faith in accordance with the advice of counsel. Neither the Issuing and Paying Agent nor its officers or employees shall be required to ascertain whether the issuance or sale of the Notes (or any amendment or termination of this Agreement) has been duly authorized or is in c ompliance with any other agreement to which the Issuer is a party (whether or not the Issuing and Paying Agent is also a party to such other agreement).             SECTION 18. Indemnification. (a) The Issuer agrees to indemnify each of the Issuing and Paying Agent, its directors, officers, employees and agents for, and to hold each of them harmless against, any and all loss, liability, claim, damage or expense (including taxes other than taxes based upon the income of the Issuing and Paying Agent), incurred without negligence or willful misconduct arising out of or in connection with its or their performance under this Agreement, as well as the reasonable costs and expenses of defending against any claim or liability relating thereto. This indemnity shall survive payment of all of the Notes and, if applicable, the resignation or removal of the Issuing and Paying Agent.              (b)       Each indemnified party shall give prompt notice to the Issuer of any action commenced against it in respect of which indemnity may be sought hereunder. The Issuer shall have no liability for indemnity hereunder with respect to an action commenced against an indemnified party where such indemnified party failed to give notice to the Issuer of such action; provided, however, failure so to notify the Issuer shall not relieve the Issuer from any liability which it may otherwise have than on account of this indemnity agreement. The Issuer shall be entitled to assume the defense of any such action; provided however, that the indemnified party shall have the right prior to the employing of any counsel by the Issuer in connection with its assumption of such defense to consent to any such counsel, which consent shall not be unreasonably withheld; provided, further that if any indemnifi ed party is advised in an opinion of counsel that there may be legal defenses available to such indemnified party which are adverse to or in conflict with those available to the Issuer, the Issuer shall not have the right to assume the defense of such action, but shall be responsible for the reasonable fees and expenses of counsel retained by the indemnified party. The Issuer may participate at its own expense in the defense of such action. In no event shall the Issuer be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with anyone action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. Notwithstanding anything herein to the contrary, the Issuer shall not be liable for any settlement of any action without its consent, which consent shall not be unreasonably withheld.              (c)       The Issuing and Paying Agent undertakes to perform such duties and only such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Issuing and Paying Agent.              (d)       No provision of this Agreement shall require the Issuing and Paying Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.              (e)       The Issuing and Paying Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Issuing and Paying Agent shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder.             SECTION 19. Compensation of the Issuing and Paying Agent. The Issuer agrees to pay the compensation of the Issuing and Paying Agent at such rates as shall be agreed upon from time to time and to reimburse the Issuing and Paying Agent for its reasonable out-of-pocket expenses (including legal tees and expenses), disbursements and advances incurred or made in accordance with any provisions of this Agreement. The obligations of the Issuer to the Issuing and Paying Agent pursuant to this Section 19 shall survive the resignation or removal of the Issuing and Paying Agent and the satisfaction or termination of this Agreement.             SECTION 20. Notices. (a) All communications by or on behalf of the Issuer relating to the issuance, transfer, exchange or payment of principal, premium, if any, or interest in respect of any Note shall be directed to the Issuing and Paying Agent at its address set forth in subsection (b )(ii) hereof and the Issuer will send all Notes to be completed, authenticated and delivered by the Issuing and Paying Agent to such address (or such other address as the Issuing and Paying Agent shall specify in writing to the Issuer).              (b)       Notices and other communications hereunder to the parties hereto shall be in writing, sent by facsimile transmission or by first class mail, postage prepaid, and shall be addressed as follows, or to such other addresses as the parties hereto shall specify from time to time:

(i)

if to the Issuer: Potomac Capital Investment Corporation 1801 K Street, N.W. Suite 900 Washington, D.C. 20006 Attention: Kevin M. McGowan, Treasurer Telephone: (202) 857-5760 (ii)  if to the Issuing and Paying Agent: The Bank of New York 101 Barclay Street. Floor 21 West New York, New York 10286 Attention: Ming Shiang Telephone No.: (212) 815-2745

(c)       Notices and other communications hereunder or under the Notes to the Registered Holders thereof shall be in writing, sent by first class mail, postage prepaid, to the addresses of such Registered Holders as they appear in the Note Register or in such other addresses as such Registered Holders shall specify to the Issuing and Paying Agent from time to time.             SECTION 21. Resignation or Removal of Issuing and Paying Agent. The Issuing and Paying Agent may at any time resign as such Issuing and Paying Agent by giving written notice to the Issuer of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall not be less than three months after the giving of such notice by the Issuing and Paying Agent to the Issuer. The Issuing and Paying Agent may be removed at any time by the filing with it of an instrument in writing signed by a duly authorized officer of the Issuer and specifying such removal and the date upon which it is intended to become effective. Such resignation or removal shall take effect on the date of the appointment by the Issuer of a successor Issuing and Paying Agent and the acceptance of such appointment by such successor Issuing and Paying Agent. Any successor Issuing and Paying Agent into which the Issuing and Paying Agent may be merged or converted or with which it may be consolidated or to which it may sell or transfer its corporate trust business and assets as an entirety or substantially as an entirety or any successor Issuing and Paying Agent succeeding to the business of the Issuing and Paying Agent shall be the successor of the Issuing and Paying Agent hereunder; provided, however, that such successor Issuing and Paying Agent shall succeed to the rights and assume the obligations of the Issuing and Paying Agent under this Agreement, without the execution or filing of any paper or any further act on the part of the parties hereto, notwithstanding anything herein to the contrary. In the-event of resignation by the Issuing and Paying Agent, if a successor Issuing and Paying Agent has not been appointed by the Issuer within three months after the giving of notice by the Issuing and Paying Agent of its intention to resign, the Issuing and Paying Agent may, at the expense o f the issuer, petition any court of competent jurisdiction for appointment of a successor Issuing and Paying Agent.             SECTION 22. Cancellation of Notes: All Notes surrendered for payment or registration of transfer or exchange shall, if surrendered to any person other than the Issuing and Paying Agent, be delivered to the Issuing and Paying Agent and shall be canceled by it. The Issuer may at any time deliver to the Issuing and Paying Agent for cancellation any Note previously authenticated and delivered hereunder which the Issuer may have redeemed or otherwise acquired, and all Notes so delivered shall be canceled by the Issuing and Paying Agent. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section 22, except as expressly permitted by this Agreement. All canceled Notes held by the Issuing and Paying Agent shall be returned to the Issuer. Upon the written request of the Issuer, the Issuing and Paying Agent shall cancel and return to the Issuer all unissued Notes in its possession at the time of such request.             SECTION 23. Benefit of Agreement. This Agreement is solely for the benefit of the parties hereto, their successors and assigns and the Registered Holders of Notes, and no other person shall acquire or have any right under or by a virtue hereof.             SECTION 24. Notes Held by the Issuing and Paying Agent. The Issuing and Paying Agent, in its individual or other capacity, may become the owner or pledgee of the Notes with the same rights it would have if it were not acting as Issuing and Paying Agent hereunder.             SECTION 25. Modification and Amendment. (a) Notwithstanding any other provision of this Section 25, without the consent of any Registered Holders of Notes, the Issuer and the Issuing and Paying Agent may enter into one or more modifications of this Agreement or the Notes, in form satisfactory to the Issuing and Paying Agent, to (i) evidence the succession of another corporation to the Issuer and the assumption by any such successor of the obligations of the Issuer contained in this Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of this Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in this Agreement, (iv) evidence and provide for the accept ance of appointment under this Agreement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in this Agreement or the Notes which may be inconsistent with any other provisions herein or therein, or make any other provisions with respect to matters or questions arising herein or therein; provided that such action shall not adversely affect the interests of any Registered Holder in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify eliminate or add to the provisions of this Agreement to such extent as shall be necessary to qualify this Agreement (including any supplemental agreement hereto) under the Trust Indenture Act of 1939, as amended, or under such similar statute hereafter enacted.                    (b)       With the consent of the Registered Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby, the Issuer and the Issuing and Paying Agent may enter into one or more agreements supplemental hereto for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Agreement or of modifying in any manner the rights of the Registered Holders of Notes under this Agreement; provided, however, that no such supplemental agreement shall, without the: consent of the Registered Holder of each outstanding Note affected thereby: (i) change the stated maturity date of the principal (or any installment of principal) of any Note; (ii) change any Interest Payment Date on which interest on any Note is to be paid; (iii) reduce the principal amount of any Note; (iv) reduce the rate o f interest on any Note; (v) change the manner of calculation of interest thereof; (vi) change any of the redemption or repayment provisions of any Note; (vii) change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable; (viii) impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof; (ix) reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Registered Holders is required for the modification and amendment of, or waiver under this Agreement or the Notes or certain defaults thereunder; or; (x) modify any of the provisions in this Agreement or the Notes relating to their modification, amendment or waiver other than (a) to increase the percentage necessary for such action or (b) to provide that other provisions of this Agreement or the Notes cannot be modified, amended or waived without the consent of the Registered Holder of each o utstanding Note affected thereby.             SECTION 26. GOVERNING LAW. THIS AGREEMENT IS TO BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITII, THE LA WS OF THE STATE OF NEW YORK. INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATION LAW OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.             SECTION 27. Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts. Each such counterpart, when so executed and delivered, shall be deemed to be an original and all such counterparts shall together constitute but one and the same instrument.             IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, all as of the day and year first above written.

POTOMAC CAPITAL INVESTMENT CORPORATION By:  /s/  Kevin McGowan                              Name:  Kevin McGowan      Title:  VP & Treasurer THE BANK OF NEW YORK    as Issuing and Paying Agent By:  Ming J. Shiang                                       Name:  Ming J. Shiang      Title:  Vice President

[FACE OF NOTE]

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN VIOLATION OF THE SECURITIES ACT OR SUCH OTHER SECURITIES LAWS. THIS NOTE MAY BE TRANSFERRED ONLY IN PRINCIPAL AMOUNTS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. THE HOLDER HEREOF, BY PURCHASING OR ACCEPTING THIS NOTE, AGREES FOR THE BENEFIT OF POTOMAC CAPITAL INVESTMENT CORPORATION (THE "COMPANY") THAT THIS NOTE MAY BE RESOLD OR OTHERWISE TRANSFERRED ONLY (1) TO THE COMPANY OR MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, SALOMON SMITH BARNEY INC. AND BANC OF AMERICA SECURITIES LLC (EACH, AN "AGENT", AND COLLECTIVELY, THE "AGENTS"), OR BY, THROUGH, OR IN A TRANSACTION APPROVED BY, AN AGENT, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEFINED IN RULE 144A (A "QI B"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN INSTITUTIONAL INVESTOR THAT QUALIFIES AS AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501 (a) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH TRANSFEREE IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (5) TO AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT OR (6) PURSUANT TO AN EFFECTIVE REG ISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION; PROVIDED THAT THE AGREEMENT OF THE HOLDER HEREOF IS SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF THE HOLDER'S PROPERTY SHALL AT ALL TIMES BE AND REMAIN WITHIN ITS CONTROL. WITH RESPECT TO ANY RESALE OR OTHER TRANSFER OF THIS NOTE (IF IN CERTIFICATED FORM) DESCRIBED IN CLAUSE (2), (4) OR (5) ABOVE, THE BANK OF NEW YORK, AS THE ISSUING AND PAYING AGENT FOR THE NOTES (THE "ISSUING AND PAYING AGENT"), WILL REQUIRE THE SUBMISSION TO IT OF THIS NOTE DULY COMPLETED OR A DULY COMPLETED BOND POWER IN THE FORM ATTACHED TO THE PRIVATE PLACEMENT MEMORANDUM RELATING TO THIS NOTE AS EXHIBIT A; PROVIDED THAT THE FOREGOING SUBMISSION SHALL NOT BE REQUIRED IF THIS LEGEND HAS BEEN REMOVED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE ISSUING AND PAYING AGENCY AGREEMENT BETWEEN THE COMPANY AND THE ISSUING AND PAYING AGENT, AS AMENDED OR MODIF IED (THE "ISSUING AND PAYING AGENCY AGREEMENT"). BY PURCHASING OR ACCEPTING THIS NOTE, THE HOLDER HEREOF REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT (1) IT IS (A) A QIB ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND IT IS AWARE THAT THE RESALE OR OTHER TRANSFER TO IT IS BEING MADE IN RELIANCE ON RULE 144A OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE (Y) FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (Z) IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT AND, IN EACH CASE, THAT IT IS ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THIS NOTE AND HAS SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AS TO BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF ACQ UIRING THIS NOTE AND (2) IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE AND OTHER TRANSFER RESTRICTIONS REFERRED TO ABOVE AND THAT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE REPRESENTED AS TO THE MATTERS IN CLAUSE (1) OF THIS SENTENCE AND THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE AGREED TO NOTIFY ITS SUBSEQUENT TRANSFEREES AS TO THE FOREGOING. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME BY THE COMPANY, WITHOUT THE CONSENT OF BUT UPON NOTICE TO THE AGENTS AND TO THE HOLDERS OF NOTES SENT TO THEIR REGISTERED ADDRESSES, TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF NOTES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO RESALES OR OTHER TRANSFERS OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS NOTE SHALL BE DEEMED, BY ITS ACCEPTANCE OR PURCHASE HEREOF, TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT (EACH OF WHICH SHALL BE CONCLUSIVE AND BINDING ON THE HOLDER HEREOF AND ALL FUTURE HOLDERS OF THIS NOTE AND ANY NOTES ISSUED IN EXCHANGE OR SUBSTITUTION HEREFOR, WHETHER OR NOT ANY NOTATION THEREOF IS MADE HEREON). UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.1 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.2                                                  1This paragraph applies to Global Notes only. 2This paragraph applies to Global Notes only.

REGISTERED No. FLR-

CUSIP No.:

PRINCIPAL AMOUNT:

POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES E (Floating Rate)

INTEREST RATE BASIS OR BASES

ORIGINAL ISSUE DATE:

STATED MATURITY DATE:

IF LIBOR:      [ ]  LIBOR Reuters            Page      [ ]  LIBOR Telerate            Page: DESIGNATED LIBOR CURRENCY:

IF CMT RATE: Designated CMT Telerate Page:  7051 If Telerate Page 7052:      [ ]  Weekly Average      [ ]  Monthly Average Designated CMT Maturity Index:

INDEX MATURITY:

INITIAL INTEREST RATE:      %

INTEREST PAYMENT DATE(S):

SPREAD (PLUS OR MINUS:

SPREAD MULTIPLIER :           DATE:

INITIAL INTEREST RESET

MINIMUM INTEREST RATE:    %

MAXIMUM INTEREST RATE:   %

INTEREST RESET DATE(S):

INITIAL REDEMPTION DATE:

INITIAL REDEMPTION PERCENTAGE:       %

ANNUAL REDEMPTION PERCENTAGE REDUCTION:     %

OPTIONAL REPAYMENT DATE(S):

CALCULATION AGENT:

INTEREST CATEGORY: [  ]  Regular Floating Rate Note           Fixed Rate Commencement           Date:           Fixed Interest Rate:        % [  ]  Inverse Floating Rate Note           Fixed Interest Rate:         %

DAY COUNT CONVENTION: [  ]  30/360 for the period from           to                             . [  ]  Actual/360 for the period from                        to                         . [  ]  Actual/Actual for the period from                    to                    . Applicable Interest Rate Basis:

AUTHORIZED DENOMINATION:           [  ]  $250,000 and integral                 multiples of $1,000 in                 excess thereof           [  ]  Other:

EXCHANGE RATE AGENT:

ADDENDUM ATTACHED [  ]  Yes [  ]  No

OTHER/ADDITIONAL PROVISIONS:

POTOMAC CAPITAL INVESTMENT CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to                                     , or registered assigns, the Principal Amount of                                                       , on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the "Maturity Date" with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable), at a rate per annum equal to the Initial Interest Rate specified above until the Initial Interest Reset Date specified above and thereafter at a rate determined in accordance with the provisions specified above and on the reverse hereof or in an Addendum hereto with respect to one or more Interest Rate Bases specified above until the principal hereof is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an "Interest Payment Date"), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payments will commence on the second Interest Payment Date next succeeding the Original Issue Date to the registered holder (the "Holder") of this Note on the Record Date with respect to such second Interest Payment Date.             Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an "Interest Period"). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the fifteenth calendar day (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the "Record Date"); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the pri ncipal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for ("Defaulted Interest") on any Interest Payment Date other than the Maturity Date shall forthwith cease to be payable to the Holder on any Record Date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Company, written notice whereof shall be given to the Holder of this Note by the Company not less than 30 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner.

Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of a duly completed election form as contemplated on the reverse hereof) at the corporate trust office of the Issuing and Paying Agent maintained for that purpose in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained at the aforementioned office of the Issuing and Paying Age nt; provided, however, that a Holder of U.S.$10,000,000 or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Issuing and Paying Agent not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Issuing and Paying Agent shall remain in effect until revoked by such Holder.             If any Interest Payment Date other than the Maturity Date would otherwise be a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Payment Date shall be the immediately preceding Business Day. If the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after the Maturity Date to the date of such payment on the next succeeding Business Day.             As used herein, "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that if LIBOR is an applicable Interest Rate Basis, such day is also a London Banking Day (as defined below). "London Banking Day" means a day on which commercial banks are open for business (including dealings in the LIBOR Currency (as defined on the reverse hereof)) in London. "Principal Financial Center" means the capital city of the country to which the LIBOR Currency, if applicable, relates, except, in each case, that with respect to United States dollars, Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian lire Portuguese escudos, South African rand and Swiss francs, the "Principal Financial Center" shall be The City of New York, Sydney, Toronto, Frankfurt, Amsterdam, Milan, London, Johannesburg and Zurich, respectively.             Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.             Notwithstanding the foregoing, if an Addendum is attached hereto or "Other/Additional Provisions" apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions".             Unless the Certificate of Authentication hereon has been executed by the Issuing and Paying Agent by manual signature, this Note shall not be entitled to any benefit under the Issuing and Paying Agency Agreement (as defined on the reverse hereof) or be valid or obligatory for any purpose.             IN WITNESS WHEREOF, Potomac Capital Investment Corporation has caused this Note to be duly executed and delivered by one of its duly authorized officers.

POTOMAC CAPITAL INVESTMENT CORPORATION By:                                                                                                   Title:

Dated: ISSUING ANDPAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes of the Company referred to in the within-mentioned Issuing and Paying Agency Agreement. THE BANK OF NEW YORK, as Issuing and Paying Agent By                                                                    Authorized Signatory

[REVERSE OF NOTE] POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES E (Floating Rate)

This Note is one of a duly authorized series of debt securities of the Company designated as "Medium-Term Notes, Series E, With Maturities from 9 Months and 1 Day from Date of Issue Through November 30, 2009" (the "Notes") issued and to be issued under an Issuing and Paying Agency Agreement, dated as of July 7, 2000, as amended or modified from time to time (the "Issuing and Paying Agency Agreement"), between the Company and The Bank of New York, as Issuing and Paying Agent (the "Issuing and Paying Agent", which term includes any successor Issuing and Paying Agent under the Issuing and Paying Agency Agreement). Reference is hereby made to the Issuing and Paying Agency Agreement for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Issuing and Paying Agent and the Holders of the Notes. In acting under the Issuing and Paying Agency Agreement, the Issuing and Paying Agent is acting solely as an agent of the Company and does not assume any obligation or relationship of agency or trust for any of the owners or Holders of Notes, except with respect to any funds held by the Issuing and Paying Agent for any payment in respect of this Note as provided below.             Subject to the restrictions set forth on the face hereof and L in the Issuing and Paying Agency Agreement, this Note is issuable only in registered form without coupons in minimum denominations of U.S.$250,000 and integral multiples of U.S. $l,000 in excess thereof or other Authorized Denomination specified on the face hereof.             This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.             This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the "Redemption Date"), on written notice given to the Holders of Notes (in accordance with the provisions of the Issuing and Paying Agency Agreement) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The "Redemption Price" shall be the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof as set forth below) mu ltiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed.             Whenever less than all of the Notes of like tenor and terms are to be redeemed, the Notes to be redeemed and the Holders thereof shall be selected by the Issuing and Paying Agent by such method as the Issuing and Paying Agent shall deem fair and reasonable. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the "Repayment Date"). For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office located at 101 Barclay Street, Floor 21 West, New York, New York 10286. not more than 60 nor less than 30 calendar days prior to the Repayment Date, such Note and [the form thereon entitled "Option to Elect Repayment" duly completed]3 [instructions to such effect forwarded by the Holder he reof]4. Exercise of such repayment option by the Holder hereof will be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             The interest rate borne by this Note will be determined as follows:                                                   3 This text applies to Certificated Notes only. 4 This text applies to Global Notes only.

(i) Unless the Interest Category of this Note is specified on the face hereof as a "Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note", or the face hereof specifies that either Other/Additional Provisions or an Addendum hereto applies, in each case, relating to a different interest rate formula, this Note shall be designated as a "Regular Floating Rate Note and, except as set forth below or specified on the face hereof or in an Addendum hereto, shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any, in each case as specified on the face hereof. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date specified on the face hereof; provided, however, that the interest rate in effect f or the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate.              (ii) If the Interest Category of this Note is specified on the face hereof as a "Floating Rate/Fixed Rate Note", then, except as set forth below or specified on the face hereof or in an Addendum hereto, this Note shall bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date provided, however, that (y) the interest rate in effect for the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate and (z) the interest rate in effect (the "Fixed Interest Rate:) for the period commencing on the Fixed Rate Commencement Date specified on the face hereof to the Maturity Date shall be the Fixed Interest Rate specified on the face hereof or, if no such Fixed Interest Rate is specified, the interest rate in effect hereon on the day immediately preceding the Fixed Rate Commencement Date.              (iii) If the Interest Category of this Note is specified on the face hereof as an "Inverse Floating Rate Note", then, except as set forth below or specified on the face hereof or in an Addendum hereto, this Note shall bear interest at the Fixed Interest Rate minus the rate determined by reference to the applicable Interest Rate Basis or Bases (a) plus or minus the Spread, if any, and/or (b) multiplied by the Spread Multiplier, if any; provided, however, that, unless otherwise specified on the face hereof or in an Addendum hereto, the interest rate hereon shall not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on this Note shall be payable shall be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period, if any, from the Original Issue Date to the Initial Interest Reset Date shall be the Initial Interest Rate.

Except as set forth above or specified on the face hereof or in an Addendum hereto, the interest rate in effect on each day shall be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as defined below) immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. If any Interest Reset Date would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding Business Day, except that if LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. In addition, if the Treasury Rate is an applicable Interest Rate Basis and if such Interest Reset Date would otherwise be a day on which Treasury Bills (as defined below) are auctioned, then such Interest Reset Date will be the first Business Day immediately following such auction day.             The interest rate applicable to each Interest Reset Period commencing on the related Interest Reset Date will be determined by the Calculation Agent as of the applicable Interest Determination Date and will be calculated by the Calculation Agent on or prior to the Calculation Date (as defined below), except with respect to the LIBOR, which will be calculated on such Interest Determination Date. The "Interest Determination Date" with respect to the CMT Rate and the Commercial Paper Rate will be the second Business Day immediately preceding the applicable Interest Reset Date; and the "Interest Determination Date" with respect to the Federal Funds Rate and the Prime Rate will be Business Day immediately preceding the applicable Interest Reset Date; and the "Interest Determination Date" with respect to LIBOR shall be the second London Banking Day immediately preceding the applicable Interest Reset Date. The "Interest Determination Date" wit h respect to the Treasury Rate shall be the day in the week in which the applicable Interest Reset Date falls on which day Treasury Bills are normally auctioned (Treasury Bills are normally sold at an auction held on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday); provided, however, that if an auction is held on the Friday of the week preceding the applicable Interest Reset Date, the "Interest Determination Date" shall be such preceding Friday. If the interest rate of this Note is determined with reference to two or more Interest Rate Bases specified on the face hereof, the "Interest Determination Date" pertaining to this Note shall be the most recent Business Day which is at least two Business Days prior to the applicable Interest Reset Date on which each Interest Rate Basis is determinable. Each Interest Rate Basis shall be determined as of such date, and the a pplicable interest rate shall take effect on the related Interest Reset Date.             Unless otherwise specified on the face hereof or in an Addendum hereto, the rate with respect to each Interest Rate Basis will be determined in accordance with the applicable provisions below.             CMT Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the CMT rate, the CMT Rate shall be determined by the Calculation Agent as of the applicable Interest Determination Date (a "CMT Rate Interest Determination Date") in accordance with the following provisions:             (i)      if "CMT Telerate Page 7051" is specified on the face hereof, the CMT Rate on the CMT Rate Interest Determination Date shall be a percentage equal to the yield for United States Treasury securities at "constant maturity" having the Index Maturity specified on the face hereof as set forth in H.15(519) under the caption "Treasury Constant Maturities", as such yield is displayed on Bridge Telerate, Inc. (or any successor service) on page 7051 (or any other page as may replace such page on such service) ("Telerate Page 7051") for such CMT Rate Interest Determination Date. If such rate does not appear on Telerate Page 7051, the CMT rate on such CMT Rate Interest Determination Date shall be a percentage equal to the yield for United States Treasury securities at "constant maturity" having the Index Maturity and for such CMT Rate Interest Determination Date as set forth in H.15(519) under the caption "Trea sury Constant Maturities". If such rate does not appear in H.15(519), the CMT Rate on such CMT Rate Interest Determination Date shall be the rate for the period of the Index Maturity as may then be published by either the Federal Reserve System Board of Governors or the United States Department of the Treasury that the Calculation Agent determines to be comparable to the rate which would otherwise have been published in H.15(519) . If the Federal Reserve System board of Governors or the United States Department of the Treasury does not publish a yield on United States Treasury securities at "constant Maturity" having the Index Maturity for such CMT Rate Interest Determination Date, the CMT Rate on such CMT Rate Interest Determination Date shall be calculated by the Calculation Agent and shall be a yield-to-maturity based on the arithmetic mean of the secondary market bid prices at approximately 3:30 p.m., New York City time, on such CMT Rate Interest Determination Date of three leading primary United State s government securities dealers in The City of New York (each, a "Reference Dealer") selected by the Calculation Agent (from five such Reference Dealers and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)) for United States Treasury securities with an original maturity equal to the Index Maturity, a remaining term to maturity no more than 1 year shorter than the Index Maturity and in a principal amount that is representative for a single transaction is such securities in such market at such time. If fewer than five but more than two such prices are provided as requested, the CMT Rate on such CMT Rate Interest Determination Date shall be based on the arithmetic mean of the bid prices obtained and neither the highest nor lowest of such quotations shall be eliminated. If fewer than three prices are provided as requested, the CMT Rate on such CMT Rate Interest Determination Date shall be calculated b y the Calculation Agent and shall be a yield-to-maturity based on the arithmetic mean of the secondary market bid prices as of approximately 3:30 p.m., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers selected by the Calculation Agent (from five such Reference Dealers and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)) for United States Treasury securities with an original maturity greater than the Index Maturity, a remaining term to maturity closest to the Index Maturity and in a principal amount that is representative for a single transaction in such securities in such market at such time. If fewer than five but more than two such prices are provided as requested, the CMT Rate on such CMT Rate Interest Determination Date shall be based on the arithmetic mean of the bid prices obtained and neither the highest or the lowest of such quotations shall be el iminated; provided, however, that if fewer than three such prices are provided as requested, the CMT Rate determined as of such CMT Rate Interest Determination Date. If two such United State Treasury securities with an original maturity greater than the Index Maturity have remaining terms to maturity equally close to the Index Maturity, the quotes for the Treasury security with the shorter original term to maturity will be used.             (ii)      If "CMT Telerate Page 7052" is specified on the face hereof, the CMT Rate on the CMT Rate Interest Determination Date shall be a percentage equal to the one-week or one-month, as specified on the face hereof, average yield for United States Treasury securities at "constant maturity" having the Index Maturity specified on the face hereof as set forth in H.15(519) opposite the caption "Treasury Constant Maturities", as such yield is displayed on Bridge Telerate, Inc. (or any successor service) on page 7052 (or any other page as may replace such page on such service) ("Telerate Page 7052") for the week or month, as applicable, ended immediately preceding the week or month, as applicable, in which such CMT Rate Interest Determination Date falls. If such rate does not appear on the Telerate Page 7052, the CMT Rate on such CMT Rate Interest Determination Date shall be a percentage equal to the one-week ofr one-month, as specified on the face hereof, average yield for United State Treasury securities at "constant maturity" having the Index Maturity and for the week or month, as applicable, preceding such CMT Rate Interest Determinate Date as set forth in H.15(519) opposite the caption "Treasury Constant Maturities". If such rate does not appear in H.15(519), the CMT Rate on such CMT Rate Interest Determination Date shall be the one-week or one-month, as specified on the face hereof, average yield for United States Treasury securities at "constant maturity" having the Index Maturity as otherwise announced by the Federal Reserve Bank of New York for the week or month, as applicable, ended immediately preceding the week or month, as applicable, in which such CMT Rate Interest Determination Date falls, If the Federal Reserve Bank of New York does not publish a one-week or one-month, as specified on the face hereof, average yield on United States Treasury securities at "constant Maturity" having the Index Matu rity for the applicable week or month, the CMT Rate on such CMT Rate Interest based on the arithmetic mean of the secondary market bid prices at approximately 3:30 p.m., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers selected by the Calculation Agent (from five such Reference Dealers and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)) for United States Treasury securities with an original maturity longer than the Index Maturity, a remaining term to maturity closest to the Index Maturity and in a principal amount that is representative for a single transaction in such securities in such market at such time. If fewer than five but more than two such prices are provided as requested, the CMT Rate on such CMT Rate Interest Determination Date shall be based on the arithmetic mean of the bid prices obtained and neither the highest nor lowest of such quotatio ns shall be eliminated; provided, however, that if fewer than three such prices are provided as requested, the CMT Rate determined as of such CMT Rate Interest Determination Date shall be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two United States Treasury securities with an original maturity greater than the Index Maturity have remaining terms to maturity equally close to the Index Maturity, the quotes for the Treasury security with the shorter original term to maturity will be used.             Commercial Paper Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Commercial Paper Rate, the Commercial Paper Rate shall be determined as of the applicable Interest Determination Date (a "Commercial Paper Rate Interest Determination Date") as the Money Market Yield (as defined below) on such date of the rate for commercial paper having the Index Maturity as published in H.15(519) under the caption "Commercial Paper-Nonfinancial". In the event that such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be the Money Market Yield of the rate for commercial paper having the Index Maturity as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "Commercial Paper-Nonfinancial." If such rate is not yet published in either H.15(519), H.15 Daily Update or another recognized electronic source by 3:00 P.M., New York City time, on such Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and shall be the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper having the Index Maturity placed for industrial issuers whose bond rating is "AA", or the equivalent, from a nationally recognized statistical rating organization; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date will be the Co mmercial Paper Rate in effect on such Commercial Paper Rate Interest Determination Date.             "Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula:

Money Market Yield =                  D x 360                  x 100                                                  360 - (D x M)

where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period.             Federal Funds Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Federal Funds Rate, the Federal Funds Rate shall be determined as of the applicable Interest Determination Date (a "Federal Funds Rate Interest Determination Date") as the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)" as such rate is displayed on Bridge Telerate, Inc. (or any successor service) on page 120 (or any other page as may replace such page on such service)("Telerate Page 120"), or, if such rate does not appear on Telerate Page 120 or is not so published by 3:00 P.M., New York City time, on the Calculation Date, the rate on such Federal Funds Rate Interest Determination Date for United States dollar federal funds as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under th e caption "Federal Funds (Effective)." If such rate does not appear on Telerate Page 120 or is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source by 3:00 P.M., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Interest Determination Date shall be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of United States dollar federal funds transactions in The City of New York selected by the Calculation Agent, prior to 9:00 A.M., New York City time, on such Federal Funds Rate interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate in effect on such Federal Funds Rate Intere st Determination Date.             LIBOR. If an Interest Rate Basis for this Note is specified on the face hereof as LIBOR, LIBOR shall be determined by the Calculation Agent as of the applicable Interest Determination Date (a "LIBOR Interest Determination Date") in accordance with the following provisions:              (i) if (a) "LIBOR Reuters" is specified on the face hereof, the arithmetic mean of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate will be used) for deposits in the Designated LIBOR Currency having the Index Maturity, commencing on the applicable Interest Reset Date, that appear (or, if only a single rate is required as aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date, or (b) "LIBOR Telerate" is specified on the face hereof, or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the rate for deposits in the Designated LIBOR Currency having the Index Maturity, commencing on such Interest Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If fewer than two such offered rates so appear, or if no such rate so appears, as applicable, LIBOR on such LIBOR Interest Determination Date shall be determined in accordance with the provisions described in clause (ii) below.              (ii) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates appear, or no rate appears, as the case may be, on the Designated LIBOR Page as specified in clause (i) above, the Calculation Agent shall request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in the Designated LIBOR Currency for the period of the Index Maturity, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time. If at least two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date wi ll be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M., in the applicable Principal Financial Center, on such LIBOR Interest Determination Date by three major banks in such Principal Financial Center selected by the Calculation Agent for loans in the Designated LIBOR Currency to leading European banks, having the Index Maturity and in a principal amount that is representative for a single transaction in the Designated LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date shall be LIBOR in effect on such LIBOR Interest Determination Date.             "LIBOR Currency" means the currency or composite currency specified on the face hereof as to which LIBOR shall be calculated or, if no such currency or composite currency is specified on the face hereof, United States dollars.             "Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified on the face hereof, the display on the Reuter Monitor Money Rates Service (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the LIBOR Currency, or (b) if "LIBOR Telerate" is specified on the face hereof or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified on the face hereof as the method for calculating LIBOR, the display on the Bridge Telerate, Inc. (or any successor service) on the page specified on the face hereof (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the LIBOR Currency.             Prime Rate. If an Interest Rate Basis for this Note is specified on the face hereto as the Prime Rate, the Prime Rate shall be determined as of the applicable Interest Determination Date (a "Prime Rate Interest Determination Date") as the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan" of if not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Prime Rate Interest Determination Date as published in H.15 Daily Update, the rate on such Prime Rate interest Determination Date as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "Bank Prime Loan." If such rate is not yet published in H.15(519), H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "Bank Prime Loan." If such rate is not ye t published in H.15(519), H.15 Daily Update or another recognized electronic source by 3:00 P.M., New York City time, on the related Calculation Date, the Prime Rate shall be the arithmetic mean of the rates of interest publicly announced by at least four banks that appear on the Reuters Screen US PRIME 1 Page (as defined below) as such bank's prime rate or base lending rate as of 11:00 A.M., New York City time, on such Prime Rate Interest Determination Date. If fewer than four such rates so appear on the Reuters Screen US PRIME 1 Page for such Prime Rate Interest Determination Date, then the Prime Rate shall be the arithmetic mean of the prime rates or base lending rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date by three major banks in The City of New York, selected by the Calculation Agent; provided, however, that if the banks or trust companies so selected by the Calculation Agent are n ot quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date will be the Prime Rate in effect on such Prime Rate Interest Determination Date.             "Reuters Screen US PRIME l Page" means the display on the Reuter Monitor Money Rates Service (or any successor service) on the "US PRIME 1" Page (or such other page as may replace the US PRIME 1 page on such service) for the purpose of displaying prime rates or base lending rates of major United States banks.             Treasury Rate. If an Interest Rate Basis for this Note is specified on the face hereof as the Treasury Rate, the Treasury Rate shall be determined as of the applicable Interest Determination Date (a "Treasury Rate Interest Determination Date") as the rate from the auction held on such Treasury Rate Interest Determination Date (the "Auction") of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified on the face hereof under the caption "INVESTMENT RATE" on the display on Bridge Telerate, Inc. (or any successor service) on page 56 (or any other page as may replace such page on such service) ("Telerate Page 56") or page 57 (or any other page as may replace such page on such service) ("Telerate Page 57") or, if not so published by 3:00 P.M., New York City time, on the related Calculation Date, the Bond Equivalent Yield (as defined below) of the rate for such Treasury Bills as published in H.15 D aily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "U.S. Government Securities/Treasury Bills/Auction High." If such rate is not so published in H.15 Daily Update or another recognized electronic source by 3:00 P.M., New York City time, on the related Calculation Date, the Treasury Rate on such Treasury Rate Interest Determination Date shall be Bond Equivalent Yield of the auction event that such auction rate is not so announced by the united States Department of Treasury. In the event that such auction is not so announced by the United States Department of Treasury on such Calculation Date, or if no such Auction is held, then the Treasury Rate on such Treasury Rate Interest Determination Date of Treasury Bills having the Index Maturity as published in H.15(519) under the caption "U.S. Government Securities/Treasury Bills/Secondary Market" or, if not yet published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Treasury Rate Interest Determination Date of such Treasury Bills as published in H.15 Daily Update, or such other recognized electronic source used for the purpose of displaying such rate, under the caption "U.S. Government Securities/Treasury Bills/Secondary Market." If such rate is not yet published in H.15(519), H.15 Daily Update or another recognized electronic source by 3:00 P.M., New York City time, on the related Calculation Date, then the Treasury Rate on such Treasury Rate Interest Determination Date shall be calculated by the Calculation Agent and shall be the Bond Equivalent Yield of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate Interest Determination Date, of three primary United States government securities dealers selected by the Calculation Agent, for the issue of Treasury bills with a remaining maturity closest to the Index Maturity; provided, however, that if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate determined as of such Treasury Rate Interest Determination Date will be the Treasury Rate in effect on such Treasury Rate Interest Determination Date.             "Bond Equivalent Yield" means the yield (expressed as a percentage) calculated in accordance with the following formula:             Bond Equivalent Yield =                  D x N                  x 100                                                               360 - (D x M) where "D" refers to the applicable per annum rate for Treasury Bills quoted on a bank discount basis and expressed as a decimal, N refers to 365 or 366, as the case may be, and "M" refers to the actual number of days in the applicable Interest Reset Period.             Notwithstanding the foregoing, the interest rate hereon shall not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, in each case as specified on the face hereof. The interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application.             The Calculation Agent shall calculate the interest rate hereon on or before each Calculation Date. The "Calculation Date", if applicable, pertaining to any Interest Determination Date shall be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Maturity Date, as the case may be. At the request of the Holder hereof, the Calculation Agent will provide to the Holder hereof the interest rate hereon then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next succeeding Interest Reset Date.             Accrued interest hereon shall be an amount calculated by multiplying the principal amount hereof by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day in the applicable Interest Period. Unless otherwise specified as the Day Count Convention on the face hereof, the interest factor for each such date shall be computed by dividing the interest rate applicable to such day by 360 if the Commercial Paper Rate, the Federal Funds Rate, LIBOR or the Prime Rate is an applicable Interest Rate Basis or by the actual number of days in the year if the CMT Rate or the Treasury Rate is an applicable Interest Rate Basis. Unless otherwise specified as the Day Count Convention on the face hereof, the interest factor for this Note, if the interest rate is calculated with reference to two or more Interest Rate Bases, shall be calculated in each period in the same mann er as if only the Applicable Interest Rate Basis specified on the face hereof applied.             All percentages resulting from any calculation on this Note shall be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards, and all amounts used in or resulting from such calculation on this Note shall be rounded to the nearest cent (with one-half cent being rounded upwards).             The Company will not create, assume or incur or suffer to be created, assumed or incurred or to exist any mortgage, lien, charge, security interest or encumbrance of any kind upon, or pledge of, or subject to the prior payment of any indebtedness, any of its property or assets, whether now owned or hereafter acquired, or acquire or agree to acquire any property or assets subject to any conditional sale agreement or other title retention agreement (the foregoing mortgages, liens, charges, pledges, security interests, encumbrances and priority payments, and the rights of others under conditional sales agreements and other title retention agreements, being herein sometimes collectively called "liens"); provided, however, that the foregoing restrictions will not apply to:

(i)       liens securing taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons;              (ii)       liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws;              (iii)       purchase money mortgages or other purchase money liens or conditional sale, lease-purchase or other title retention agreements upon or in respect of property acquired or leased for use in the ordinary course of its business by the Company; or              (iv)       liens on any assets of the Company or any of its subsidiaries which may constitute "Margin Stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System); or              (v)       other mortgages or liens in respect of property owned, acquired or leased by the Company not permitted by clauses (i) through (iv), provided that the property so encumbered pursuant to this clause (v) shall not have a market value in excess of 50% of the amount by which the Company's total assets (on a consolidated basis with its subsidiaries) exceeds the encumbrances made as provided in clause (iii) above.

The Company (including its consolidated subsidiaries) will maintain a minimum tangible net worth (calculated in accordance with generally accepted accounting principles in effect on July 7, 2000) of at least $100,000,000.             The following will be "Events of Default" with respect to the Notes:

(i)       default in the payment of any interest on its Note or in the payment of interest on or principal of any other Note issued pursuant to the Issuing and Paying Agency Agreement when due, which default continues and remains unremedied for at least thirty calendar days; or             (ii)       a decree or order by a court having jurisdiction shall have been entered adjudging the Company or Potomac Electric Power Company ("PEPCO") or Pepco Holdings, Inc. ("PHI"), a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or PEPCO or PHI under the Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of either the Company, PEPCO or PHI or of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or              (iii)       the Company, PEPCO or PHI shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bankruptcy Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or              (iv)       the Company shall fail to perform or observe any other term, covenant or agreement contained in the Note to be performed or observed by it, and any such failure shall continue and remain unremedied for at least thirty calendar days; or              (v)       the Company shall default in the payment when due (subject to any applicable grace period), whether at stated maturity or otherwise, of any principal of or interest on (howsoever designated) any indebtedness for borrowed money of, or guaranteed by, the Company in the aggregate principal amount of $1,000,000, whether such indebtedness now exists or shall hereafter be created; provided, however, that for the purposes of this subsection (v), the Company shall not be deemed in default if it shall be contesting in good faith its liability for the payment of the installment of interest or of the principal or premium in question, and shall have been advised in a written opinion by its counsel (a copy of which opinion will be provided upon request to the registered holder) that it has a meritorious defense to any claim of liability;

provided, however, that any default pursuant to clause (iv) or (v) of this paragraph may be waived prior to any declaration of acceleration with respect to such default by the written consent of the holders of at least a majority in aggregate principal amount of Notes at the time outstanding.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent with the consent of the Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby for the purpose of adding any provisions to, or changing in any manner or eliminating any provisions of, the Issuing and Paying Agency Agreement or of modifying the rights of the Holders of the Notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby, (i) change the stated maturity date of the principal (or any installment of principal) of any Note, (ii) change any interest payment date on which interest on any Note is to be paid, (iii) reduce the principal amount of any Note, (iv) reduce the rate of interest on any Note (v) change the manner of calculation of interest thereof, (vi ) change any of the redemption or repayment provisions of any Note, (vii) change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable, (viii) impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof, (ix) reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Holders is required for the modification and amendment of, or waiver under, the Issuing and Paying Agency Agreement or the Notes or certain defaults thereunder, or (x) modify any of the provisions in the Issuing and Paying Agency Agreement or the Notes relating to their modification, amendment or waiver other than (a) to increase the percentage necessary for such action or (b) to provide that other provisions of the Issuing and Paying Agency Agreement or the Notes cannot be modified, amended or waived without the consent of the Holder of each outstanding Note affected thereby .             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent without the consent of any Holders of Notes in order to (i) evidence the succession of another corporation to the Company and the assumption by any such successor of the obligations of the Company contained in the Issuing and Paying Agency Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of the Issuing and Paying Agency Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in the Issuing and Paying Agency Agreement (iv) evidence and provide for the acceptance of appointment under the Issuing and Paying Agency A greement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in the Issuing and Paying Agency Agreement or the Notes which may be inconsistent with any other provision therein, or make any other provisions with respect to matters or questions arising therein, provided that such action shall not adversely affect the interests of the Holders of the Notes in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify, eliminate or add to the provisions of the Issuing and Paying Agency Agreement to such extent as shall be necessary to qualify the Issuing and Paying Agency Agreement (including any agreement supplemental thereto) under the Trust Indenture Act of 1939, as amended, or under any similar statute hereafter ena cted.             The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid.             In case this Note shall at any time become mutilated, destroyed, lost or stolen, and such mutilated Note or evidence of the destruction, loss or theft thereof satisfactory to the Company and the Issuing and Paying Agent (together with such indemnity as may be reasonably required by the Company or the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, a new Note of like tenor and terms will be issued by the Company in exchange for the mutilated Note or in lieu of the Note so destroyed, lost or stolen. The Issuing and Paying Agent shall authenticate any such substituted Note and deliver the same upon the written authorization of the Company. All expenses and reasonable charges associated with the issuance, authentication and delivery of a new Note and the procurement of an indemnity, if required, shall be borne by the Holder of the Note mutilated, destroyed, lost or stolen. In case any Note which has matured or i s about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a Substitute Note, payor authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Holder with the foregoing provisions.             Any funds held by the Issuing and Paying Agent for the payment of principal of, or premium, if any, or interest on, this Note that remain unclaimed for two years after such principal, premium or interest shall have become due and payable shall be repaid to the Company and any person claiming such funds shall look, as an unsecured general creditor, only to the Company for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon cease.             No provision of this Note or of the Issuing and Paying Agency Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.             The Issuing and Paying Agent has been appointed registrar, transfer agent and authenticating agent for the Notes, and the Issuing and Paying Agent will maintain at its corporate trust office in the Borough of Manhattan, The City of New York, a register (the "Security Register") for the registration, exchange and transfer of Notes. Subject to the restrictions set forth on the face hereof and in the Issuing and Paying Agency Agreement, this Note may be presented for registration of transfer or exchange at the aforementioned office of the Issuing and Paying Agent by presenting and surrendering this Note for transfer or exchange, as the case may be, duly endorsed or accompanied by a written instrument of transfer in form approved by the Issuing and Paying Agent and duly executed by the Holder hereof in person or by the Holder's attorney duly authorized in writing, and thereupon the Issuing and Paying Agent shall complete, authenticate and de liver in the name of the designated transferee or transferees, or in exchange herefor, one or more new Notes having identical terms and provisions and having a like aggregate principal amount in Authorized Denominations, subject to the terms and conditions set forth herein.             Except as provided above, Notes are exchangeable at the aforementioned office of the Issuing and Paying Agent for other Notes of other Authorized Denominations of equal aggregate principal amount and having identical terms and provisions. All such transfers and exchanges of Notes will be free of charge, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith (other than exchanges pursuant to the Issuing and Paying Agency Agreement not involving any transfer). The date of registration of any Notes delivered upon any exchange or transfer shall be such that no gain or loss of interest results from such exchange or transfer.             Prior to due presentment of this Note for registration of transfer, the Company and the Issuing and Paying Agent and any agent of the Company or the Issuing and Paying Agent may treat the Holder in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Company or the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary, except as required by law.             THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT -            Custodian            TEN ENT - as tenants by the entireties                                   (Cust)                 (Minor) JT TEN - as joint tenants with right of                                  under Uniform Gifts to Minors                 survivorship and not as tenants                             Act                                                             in common                                                                                                    (State)             Additional abbreviations may also be used though not in the above list.

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [                                                                    ] [                                                                    ]                                                                           (Please print or typewr1te name and address including postal zip code of assignee)                                                                                                                                                  this Note and all rights thereunder hereby irrevocably constituting and appointing                                                                                                                                                 Attorney to transfer this Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated:

Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

OPTION TO ELECT REPAYMENT

The undersigned hereby irrevocably request(s) and instruct (s) the Company to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount to be repaid, together with unpaid interest accrued hereon to the Repayment Date, to the undersigned, at                                                                                                           &nb sp;                                                                                                                                                                                  (Please print or typewrite name and address of the undersigned)

For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, not more than 60 nor less than 30 calendar days prior to the Repayment Date, this Note with this "Option to Elect Repayment" form duly completed.             If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of U.S. $1,000 or other Authorized Denomination specified on the face hereof (provided that any remaining principal amount shall be at least U.S.$250,000 or the minimum Authorized Denomination) which the Holder elects to have repaid and specify the denomination or denominations (which shall be U.S.$250,000 or the minimum Authorized Denomination) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).

Principal Amount to be Repaid: $                       Date:                                                                                                                5 This form applies to certificated Notes only.

Notice: The signature(s) on this Option to Date: Elect Repayment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.5

BOND POWER NOT REQUIRED FOR ANY RESALE OR OTHER TRANSFER TO THE COMPANY OR TO, BY, THROUGH, OR IN A TRANSFER APPROVED BY, AN AGENT

TO BE COMPLETED AND DELIVERED WITH THIS NOTE TO THE ISSUING AND PAYING AGENT IF THE UNDERSIGNED HOLDER WISHES TO SELL, ASSIGN AND TRANSFER THIS NOTE:           In connection with the resale or other transfer of this Note occurring prior to the time the legend originally set forth on the face of this Note (or one or more predecessor Notes) restricting resales and other transfers thereof has been removed in accordance with the procedures set forth in the Issuing and Paying Agency Agreement (other than a resale or other transfer made to the Company or to, by, through, or in a transaction approved by an Agent), the undersigned Holder certifies that without utilizing any general solicitation or general advertising:

[CHECK ONE]

[  ]    (a)

Such Note is being transferred by the undersigned Holder to a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

Or

[  ]    (b)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that the undersigned Holder has been advised by the prospective transferee that such transferee will hold such Note for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of such transferee's property shall at all times be and remain within its control.

or

[  ]    (c)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501 (a) under the Securities Act of 1933, as amended, in an "offshore transaction", as defined in Regulation S under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder.

If none of the foregoing boxes are checked, then, so long as this Note shall bear a legend on the face thereof restricting resales and other transfers thereof (except in the case of a resale or other transfer made to the Company or to, by, through, or in a transaction approved by, an Agent), the Issuing and Paying Agent shall not be obligated to register this Note in the name of any person other than the undersigned Holder and until the conditions to any such transfer of registration set forth in this Note and in the Issuing and Paying Agency Agreement shall have been satisfied.

Dated:

[Type or print name of Holder By:                                                                  The signature of the Holder must correspond with the name as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

TO BE COMPLETED BY TRANSFEREE IF (a) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that (i) it is a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, and acknowledges that the undersigned either has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and (ii) this instrument has been executed on behalf of the undersigned transferee by one of its executive officers and (iii) it is aware that the Holder of this Note is relying upon the undersigned transferee's foregoing representations in order to claim the exemption from registration provided by Rule 144A. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the f ace hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (b) ABOVE IS, CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one if its executive officers. The undersigned transferee undertakes to hold this Note acquired from the Holder hereof for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), subject to any requirement of law that the disposition of the undersigned transferee's property shall at all times be and remain within its control. The undersigned acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictio ns set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (c) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that this instrument has been executed on behalf of the undersigned transferee by one of its executive officers. In addition, the undersigned transferee represents and warrants that it is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended) and it is acquiring this Note from the Holder hereof in an "offshore transaction" (as defined in Regulation S) pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

[FACE OF NOTE]

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN VIOLATION OF THE SECURITIES ACT OR SUCH OTHER SECURITIES LAWS. THIS NOTE MAY BE TRANSFERRED ONLY IN PRINCIPAL AMOUNTS OF $250,000 AND INTEGRAL MULTIPLES OF $1,000 IN EXCESS THEREOF. THE HOLDER HEREOF, BY PURCHASING OR ACCEPTING THIS NOTE, AGREES FOR THE BENEFIT OF POTOMAC CAPITAL INVESTMENT CORPORATION (THE "COMPANY") THAT THIS NOTE MAY BE RESOLD OR OTHERWISE TRANSFERRED ONLY (1) TO THE COMPANY OR MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, BANC OF AMERICA SECURITIES LLC AND SALOMON SMITH BARNEY INC (EACH, AN "AGENT", AND COLLECTIVELY, THE "AGENTS"), OR BY, THROUGH, OR IN A TRANSACTION APPROVED BY, AN AGENT, (2) SO LONG AS THIS NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, AS DEF INED IN RULE 144A (A "QIB"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN INSTITUTIONAL INVESTOR THAT QUALIFIES AS AN ACCREDITED INVESTOR, AS DEFINED IN RULE 501 (a) UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH TRANSFEREE IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (5) TO AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT OR (6) PURS UANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER JURISDICTION; PROVIDED THAT THE AGREEMENT OF THE HOLDER HEREOF IS SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF THE HOLDER'S PROPERTY SHALL AT ALL TIMES BE AND REMAIN WITHIN ITS CONTROL. WITH RESPECT TO ANY RESALE OR OTHER TRANSFER OF THIS NOTE (IF IN CERTIFICATED FORM) DESCRIBED IN CLAUSE (2), (4) OR (5) ABOVE, THE BANK OF NEW YORK, AS THE ISSUING AND PAYING AGENT FOR THE NOTES (THE "ISSUING AND PAYING AGENT"), WILL REQUIRE THE SUBMISSION TO IT OF THIS NOTE DULY COMPLETED OR A DULY COMPLETED BOND POWER IN THE FORM ATTACHED TO THE PRIVATE PLACEMENT MEMORANDUM RELATING TO THIS NOTE AS EXHIBIT A; PROVIDED THAT THE FOREGOING SUBMISSION SHALL NOT BE REQUIRED IF THIS LEGEND HAS BEEN REMOVED IN ACCORDANCE WITH THE PROCEDURES SET FORTH IN THE ISSUING AND PAYING AGENCY AGREEMENT BETWEEN THE COMPANY AND THE ISSUING AND PAYING AG ENT, AS AMENDED OR MODIFIED (THE "ISSUING AND PAYING AGENCY AGREEMENT"). BY PURCHASING OR ACCEPTING THIS NOTE, THE HOLDER HEREOF REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT (1) IT IS (A) A QIB ACQUIRING THIS NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS) AND IT IS AWARE THAT THE RESALE OR OTHER TRANSFER TO IT IS BEING MADE IN RELIANCE ON RULE 144A OR (B) AN INSTITUTIONAL ACCREDITED INVESTOR ACQUIRING THIS NOTE (Y) FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE INSTITUTIONAL ACCREDITED INVESTORS UNLESS SUCH HOLDER IS A BANK ACTING IN ITS FIDUCIARY CAPACITY) FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (Z) IN AN OFFSHORE TRANSACTION PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT AND, IN EACH CASE, THAT IT IS ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THIS NOTE AND HAS SUCH KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AS TO BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF ACQ UIRING THIS NOTE AND (2) IT WILL NOTIFY ANY PURCHASER OF THIS NOTE FROM IT OF THE RESALE AND OTHER TRANSFER RESTRICTIONS REFERRED TO ABOVE AND THAT THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT, THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE REPRESENTED AS TO THE MATTERS IN CLAUSE (1) OF THIS SENTENCE AND THAT SUCH PURCHASER SHALL BE DEEMED TO HAVE AGREED TO NOTIFY ITS SUBSEQUENT TRANSFEREES AS TO THE FOREGOING. THIS NOTE AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME BY THE COMPANY, WITHOUT THE CONSENT OF BUT UPON NOTICE TO THE AGENTS AND TO THE HOLDERS OF NOTES SENT TO THEIR REGISTERED ADDRESSES, TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER TRANSFERS OF NOTES TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO RESALES OR OTHER TRANSFERS OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS NOTE SHALL BE DEEMED, BY ITS ACCEPTANCE OR PURCHASE HEREOF, TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT (EACH OF WHICH SHALL BE CONCLUSIVE AND BINDING ON THE HOLDER HEREOF AND ALL FUTURE HOLDERS OF THIS NOTE AND ANY NOTES ISSUED IN EXCHANGE OR SUBSTITUTION HEREFOR, WHETHER OR NOT ANY NOTATION THEREOF IS MADE HEREON). UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY") (55 WATER STREET, NEW YORK, NEW YORK) TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.1 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.2 1This paragraph applies to Global Notes only. 2This paragraph applies to Global Notes only.

REGISTERED No. FXR-

CUSIP No.:

PRINCIPAL AMOUNT:

POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES E (Fixed Rate)

ORIGINAL ISSUE DATE:

INTEREST RATE:

STATED MATURITY DATE:

INTEREST PAYMENT DATE(S) [   ]  January 15 and July 15 [   ]  Other:

INITIAL REDEMPTION DATE:

INITIAL REDEMPTION PERCENTAGE:             %

ANNUAL REDEMPTION PERCENTAGE REDUCTION:     %

OPTIONAL REPAYMENT DATE(S):

AUTHORIZED DENOMINATION: [   ]  $250,000 and integral multiples         of $1,000 in excess there [   ]  Other

EXCHANGE RATE AGENT:

ADDENDUM ATTACHED [   ]  Yes [   ]  No

OTHER/ADDITIONAL PROVISIONS:

POTOMAC CAPITAL INVESTMENT CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to                                     , or registered assigns, the Principal Amount of                                                       , on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the "Maturity Date" with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable), at the Interest Rate per annum is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an "Interest Payment Date"), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payments will commence on the second Interest Payment Date next succeeding the Original Issue Date to the registered holder (the "Holder") of this Note on the Record Date with respect to such second Interest Payment Date.  Interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months.             Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an "Interest Period"). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the fifteenth calendar day (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the "Record Date"); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the pri ncipal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for ("Defaulted Interest") on any Interest Payment Date other than the Maturity Date shall forthwith cease to be payable to the Holder on any Record Date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Company, written notice whereof shall be given to the Holder of this Note by the Company not less than 30 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner.

Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of a duly completed election form as contemplated on the reverse hereof) at the corporate trust office of the Issuing and Paying Agent maintained for that purpose in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 21 West, New York, New York 10286, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained at the aforementioned office of the Issuing and Payin g Agent; provided, however, that a Holder of U.S.$10,000,000 or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if appropriate wire transfer instructions have been received in writing by the Issuing and Paying Agent not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Issuing and Paying Agent shall remain in effect until revoked by such Holder.             If any Interest Payment Date other than the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, as the case may be, to the date of such payment on the next succeeding Business Day.             As used herein, "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York.             Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.             Notwithstanding the foregoing, if an Addendum is attached hereto or "Other/Additional Provisions" apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such "Other/Additional Provisions".             Unless the Certificate of Authentication hereon has been executed by the Issuing and Paying Agent by manual signature, this Note shall not be entitled to any benefit under the Issuing and Paying Agency Agreement (as defined on the reverse hereof) or be valid or obligatory for any purpose.             IN WITNESS WHEREOF, Potomac Capital Investment Corporation has caused this Note to be duly executed and delivered by one of its duly authorized officers.

POTOMAC CAPITAL INVESTMENT CORPORATION By:                                                                                                   Title:

Dated: ISSUING ANDPAYING AGENT'S CERTIFICATE OF AUTHENTICATION This is one of the Notes of the Company referred to in the within-mentioned Issuing and Paying Agency Agreement. THE BANK OF NEW YORK, as Issuing and Paying Agent By                                                                    Authorized Signatory

[REVERSE OF NOTE] POTOMAC CAPITAL INVESTMENT CORPORATION MEDIUM-TERM NOTE, SERIES E (Fixed Rate)

This Note is one of a duly authorized series of debt securities of the Company designated as "Medium-Term Notes, Series E, With Maturities from 9 Months and 1 Day from Date of Issue Through November 30, 2009" (the "Notes") issued and to be issued under an Issuing and Paying Agency Agreement, dated as of July 7, 2000, as amended or modified from time to time (the "Issuing and Paying Agency Agreement"), between the Company and The Bank of New York, as Issuing and Paying Agent (the "Issuing and Paying Agent", which term includes any successor Issuing and Paying Agent under the Issuing and Paying Agency Agreement). Reference is hereby made to the Issuing and Paying Agency Agreement for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Issuing and Paying Agent and the Holders of the Notes. In acting under the Issuing and Paying Agency Agreement, the Issuing and Paying Agent is acting solely as an agent of the Company and does not assume any obligation or relationship of agency or trust for any of the owners or Holders of Notes, except with respect to any funds held by the Issuing and Paying Agent for any payment in respect of this Note as provided below.             Subject to the restrictions set forth on the face hereof and L in the Issuing and Paying Agency Agreement, this Note is issuable only in registered form without coupons in minimum denominations of U.S.$250,000 and integral multiples of U.S. $l,000 in excess thereof or other Authorized Denomination specified on the face hereof.             This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.             This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the "Redemption Date"), on written notice given to the Holders of Notes (in accordance with the provisions of the Issuing and Paying Agency Agreement) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The "Redemption Price" shall be the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof as set forth below) mu ltiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed. Whenever less than all of the Notes of like tenor and terms are to be redeemed, the Notes to be redeemed and the Holders thereof shall be selected by the Issuing and Paying Agent by such method as the Issuing and Paying Agent shall deem fair and reasonable. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $l,000 or other Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S.$250,000 or the minimum Authorized Denomination) at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the "Repayment Date"). For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office, located at 101 Barclay Street, Floor 7E, New York, New York 10286, not more than 60 nor less than 30 calendar days prior to the Repayment Date, such Note and [the form thereon entitled "Option to Elect Repayment" duly completed]3 [instructions to such effect forwarded by the Holder hereof ]4. Exercise of such repayment option by the Holder hereof will be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.             The Company will not create, assume or incur or suffer to be created, assumed or incurred or to exist any mortgage, lien, charge, security interest or encumbrance of any kind upon, or pledge of, or subject to the prior payment of any indebtedness, any of its property or assets, whether now owned or hereafter acquired, or acquire or agree to acquire any property or assets subject to any conditional sale agreement or other title retention agreement (the foregoing mortgages, liens, charges, pledges, security interests, encumbrances and priority payments, and the rights of others under conditional sales agreements and other title retention agreements, being herein sometimes collectively called "liens"); provided, however, that the foregoing will not apply to:

(i)       liens securing taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons;              (ii)       liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws;              (iii)       purchase money mortgages or other purchase money liens or conditional sale, lease-purchase or other title retention agreements upon or in respect of property acquired or leased for use in the ordinary course of its business by the Company; or              (iv)       liens on any assets of the Company or any of its subsidiaries which may constitute "Margin Stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System); or              (v)       other mortgages or liens in respect of property owned, acquired or leased by the Company not permitted by clauses (i) through (iv), provided that the property so encumbered pursuant to this clause (v) shall not have a market value in excess of 50% of the amount by which the Company's total assets (on a consolidated basis with its subsidiaries) exceeds the encumbrances made as provided in clause (iii) above.

The Company (including its consolidated subsidiaries) will maintain a minimum tangible net worth (calculated in accordance with generally accepted accounting principles in effect on July 7, 2000) of at least $100,000,000.             The following will be "Events of Default" with respect to the Notes:                                    3 This text applies to Certificated Notes only. 4 This text applies to Global Notes only.

(i)       default in the payment of any interest on its Note or in the payment of interest on or principal of any other Note issued pursuant to the Issuing and Paying Agency Agreement when due, which default continues and remains unremedied for at least thirty calendar days; or             (ii)       a decree or order by a court having jurisdiction shall have been entered adjudging the Company or Potomac Electric Power Company ("PEPCO") , a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or PEPCO under the Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of either the Company or PEPCO or of its property, or for the winding up or liquidation of its affairs, shall have been entered, and such decree or order shall have continued undischarged and unstayed for a period of sixty days; or              (iii)       the Company or PEPCO shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization under the Bankruptcy Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or              (iv)       the Company shall fail to perform or observe any other term, covenant or agreement contained in the Note to be performed or observed by it, and any such failure shall continue and remain unremedied for at least thirty calendar days; or              (v)       the Company shall default in the payment when due (subject to any applicable grace period), whether at stated maturity or otherwise, of any principal of or interest on (howsoever designated) any indebtedness for borrowed money of, or guaranteed by, the Company in the aggregate principal amount of $1,000,000, whether such indebtedness now exists or shall hereafter be created; provided, however, that for the purposes of this subsection (v), the Company shall not be deemed in default if it shall be contesting in good faith its liability for the payment of the installment of interest or of the principal or premium in question, and shall have been advised in a written opinion by its counsel (a copy of which opinion will be provided upon request to the registered holder) that it has a meritorious defense to any claim of liability;

provided, however, that any default pursuant to clause (iv) or (v) of this paragraph may be waived prior to any declaration of acceleration with respect to such default by the written consent of the holders of at least a majority in aggregate principal amount of Notes at the time outstanding.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent with the consent of the Holders of a majority in aggregate principal amount of the outstanding Notes affected thereby for the purpose of adding any provisions to, or changing in any manner or eliminating any provisions of, the Issuing and Paying Agency Agreement or of modifying the rights of the Holders of the Notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Note affected thereby, change the stated maturity date of the principal (or any installment of principal) of any Note, or change any interest payment date on which interest on any Note is to be paid, or reduce the principal amount of any Note, or reduce the rate of interest on any Note or change the manner of calculation of interest thereof, or change any of the redemption or repayment provisions of any Note, or change any place of payment where the principal of, or premium, if any, or interest on, any Note is payable, or impair the right to institute suit for the enforcement of any required payment in respect of any Note on or after the stated maturity thereof, or reduce the percentage of the aggregate principal amount of the outstanding Notes, the consent of whose Holders is required for the modification and amendment of, or waiver under, the Issuing and Paying Agency Agreement or the Notes or certain defaults thereunder, or modify any of the provisions in the Issuing and Paying Agency Agreement or the Notes relating to their modification, amendment or waiver other than to increase the percentage necessary for such action or to provide that other provisions of the Issuing and Paying Agency Agreement or the Notes cannot be modified, amended or waived without the consent of the Holder of each outstanding Note affected thereby.             Modification and amendment of the Issuing and Paying Agency Agreement and the Notes may be effected by the Company and the Issuing and Paying Agent without the consent of any Holders of Notes in order to (i) evidence the succession of another corporation to the Company and the assumption by any such successor of the obligations of the Company contained in the Issuing and Paying Agency Agreement and in the Notes, as the case may be, (ii) change or eliminate any of the provisions of the Issuing and Paying Agency Agreement, provided that any such change or elimination shall become effective only when there is no outstanding Note created prior to the execution of such amendment or modification which is entitled to the benefit of such provisions, (iii) establish other forms or terms of Notes as permitted in the Issuing and Paying Agency Agreement (iv) evidence and provide for the acceptance of appointment under the Issuing and Paying Agency A greement by a successor Issuing and Paying Agent, (v) cure any ambiguity, correct or supplement any provision in the Issuing and Paying Agency Agreement or the Notes which may be inconsistent with any other provision therein, or make any other provisions with respect to matters or questions arising therein, provided that such action shall not adversely affect the interests of the Holders of the Notes in any material respect, (vi) modify the restrictions on and procedures for resales and other transfers of the Notes to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to the resale or other transfer of restricted securities generally, or (vii) modify, eliminate or add to the provisions of the Issuing and Paying Agency Agreement to such extent as shall be necessary to qualify the Issuing and Paying Agency Agreement (including any agreement supplemental thereto) under the Trust Indenture Act of 1939, as amended, or under any similar statute hereafter ena cted.             The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid.             In case this Note shall at any time become mutilated, destroyed, lost or stolen, and such mutilated Note or evidence of the destruction, loss or theft thereof satisfactory to the Company and the Issuing and Paying Agent (together with such indemnity as may be reasonably required by the Company or the Issuing and Paying Agent) shall be delivered to the Issuing and Paying Agent, a new Note of like tenor and terms will be issued by the Company in exchange for the mutilated Note or in lieu of the Note so destroyed, lost or stolen. The Issuing and Paying Agent shall authenticate any such substituted Note and deliver the same upon the written authorization of the Company. All expenses and reasonable charges associated with the issuance, authentication and delivery of a new Note and the procurement of an indemnity, if required, shall be borne by the Holder of the Note mutilated, destroyed, lost or stolen. In case any Note which has matured or i s about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a Substitute Note, payor authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) upon compliance by the Holder with the foregoing provisions.             Any funds held by the Issuing and Paying Agent for the payment of principal of, or premium, if any, or interest on, this Note that remain unclaimed for two years after such principal, premium or interest shall have become due and payable shall be repaid to the Company and any person claiming such funds shall look, as an unsecured general creditor, only to the Company for the payment thereof and all liability of the Issuing and Paying Agent with respect to such funds shall thereupon cease.             No provision of this Note or of the Issuing and Paying Agency Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.             The Issuing and Paying Agent has been appointed registrar, transfer agent and authenticating agent for the Notes, and the Issuing and Paying Agent will maintain at its corporate trust office in the Borough of Manhattan, The City of New York, a register (the "Security Register") for the registration, exchange and transfer of Notes. Subject to the restrictions set forth on the face hereof and in the Issuing and Paying Agency Agreement, this Note may be presented for registration of transfer or exchange at the aforementioned office of the Issuing and Paying Agent by presenting and surrendering this Note for transfer or exchange, as the case may be, duly endorsed or accompanied by a written instrument of transfer in form approved by the Issuing and Paying Agent and duly executed by the Holder hereof in person or by the Holder's attorney duly authorized in writing, and thereupon the Issuing and Paying Agent shall complete, authenticate and de liver in the name of the designated transferee or transferees, or in exchange herefor, one or more new Notes having identical terms and provisions and having a like aggregate principal amount in Authorized Denominations, subject to the terms and conditions set forth herein. Except as provided above, Notes are exchangeable at the aforementioned office of the Issuing and Paying Agent for other Notes of other Authorized Denominations of equal aggregate principal amount and having identical terms and provisions. All such transfers and exchanges of Notes will be free of charge, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith (other than exchanges pursuant to the Issuing and Paying Agency Agreement not involving any transfer). The date of registration of any Notes delivered upon any exchange or transfer shall be such that no gain or loss of interest results from such exchange or transfer.             Prior to due presentment of this Note for registration of transfer, the Company and the Issuing and Paying Agent and any agent of the Company or the Issuing and Paying Agent may treat the Holder in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Company or the Issuing and Paying Agent nor any such agent shall be affected by notice to the contrary, except as required by law.             THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.

ABBREVIATIONS

The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT -            Custodian            TEN ENT - as tenants by the entireties                                   (Cust)                 (Minor) JT TEN - as joint tenants with right of                                  under Uniform Gifts to Minors                 survivorship and not as tenants                             Act                                                             in common                                                                                                    (State)             Additional abbreviations may also be used though not in the above list.

ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [                                                                    ] [                                                                    ]                                                                           (Please print or typewrite name and address including postal zip code of assignee)                                                                                                                                                  this Note and all rights thereunder hereby irrevocably constituting and appointing                                                                                                                                                 Attorney to transfer this Note on the books of the Issuing and Paying Agent, with full power of substitution in the premises. Dated:

Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

OPTION TO ELECT REPAYMENT

[The undersigned hereby irrevocably request(s) and instruct (s) the Company to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to 100% of the principal amount to be repaid, together with unpaid interest accrued hereon to the Repayment Date, to the undersigned, at                                                                                                           &n bsp;                                                                                                                                                                                  (Please print or typewrite name and address of the undersigned)

For this Note to be repaid, the Issuing and Paying Agent must receive at its corporate trust office in the Borough of Manhattan, The City of New York, currently located at 101 Barclay Street, Floor 7E, New York, New York 10286, not more than 60 nor less than 30 calendar days prior to the Repayment Date, this Note with this "Option to Elect Repayment" form duly completed.             If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be increments of U.S. $1,000 or other Authorized Denomination specified on the face hereof (provided that any remaining principal amount shall be at least U.S.$250,000 or the minimum Authorized Denomination) which the Holder elects to have repaid and specify the denomination or denominations (which shall be U.S.$250,000 or the minimum Authorized Denomination) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).

Principal Amount to be Repaid: $                       Date:                                                                                                            5 This form applies to Certificated Notes only.

Notice: The signature(s) on this Option to Date: Elect Repayment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.]5

BOND POWER NOT REQUIRED FOR ANY RESALE OR OTHER TRANSFER TO THE COMPANY OR TO, BY, THROUGH, OR IN A TRANSFER APPROVED BY, AN AGENT

TO BE COMPLETED AND DELIVERED WITH THIS NOTE TO THE ISSUING AND PAYING AGENT IF THE UNDERSIGNED HOLDER WISHES TO SELL, ASSIGN AND TRANSFER THIS NOTE:           In connection with the resale or other transfer of this Note occurring prior to the time the legend originally set forth on the face of this Note (or one or more predecessor Notes) restricting resales and other transfers thereof has been removed in accordance with the procedures set forth in the Issuing and Paying Agency Agreement (other than a resale or other transfer made to the Company or to, by, through, or in a transaction approved by an Agent), the undersigned Holder certifies that without utilizing any general solicitation or general advertising:

[CHECK ONE]

[  ]    (a)

Such Note is being transferred by the undersigned Holder to a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

Or

[  ]    (b)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that the undersigned Holder has been advised by the prospective transferee that such transferee will hold such Note for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of such transferee's property shall at all times be and remain within its control.

or

[  ]    (c)

Such Note is being transferred by the undersigned Holder to an institutional investor which is an "accredited investor", as defined in Rule 501 (a) under the Securities Act of 1933, as amended, in an "offshore transaction", as defined in Regulation S under the Securities Act of 1933, as amended, pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder.

If none of the foregoing boxes are checked, then, so long as this Note shall bear a legend on the face thereof restricting resales and other transfers thereof (except in the case of a resale or other transfer made to the Company or to, by, through, or in a transaction approved by, an Agent), the Issuing and Paying Agent shall not be obligated to register this Note in the name of any person other than the undersigned Holder and until the conditions to any such transfer of registration set forth in this Note and in the Issuing and Paying Agency Agreement shall have been satisfied.

Dated:

[Type or print name of Holder By:                                                                  The signature of the Holder must correspond with the name as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever.

TO BE COMPLETED BY TRANSFEREE IF (a) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that (i) it is a "qualified institutional buyer", as defined in Rule 144A under the Securities Act of 1933, as amended, (ii) this instrument has been executed on behalf of the undersigned transferee by one of its executive officers and (iii) it is aware that the Holder of this Note is relying upon the undersigned transferee's foregoing representations in order to claim the exemption from registration provided by Rule 144A. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (b) ABOVE IS, CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one if its executive officers. The undersigned transferee undertakes to hold this Note acquired from the Holder hereof for its own account, or as a fiduciary or agent for others (which others are also institutional accredited investors, unless such transferee is a bank acting in its fiduciary capacity), for investment purposes and not for distribution, subject to any requirement of law that the disposition of the undersigned transferee's property shall at all times be and remain within its control. The undersigned acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accord ance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

TO BE COMPLETED BY TRANSFEREE IF (c) ABOVE IS CHECKED:

The undersigned transferee represents and warrants that it is an institutional investor and an "accredited investor", as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that this instrument has been executed on behalf of the undersigned transferee by one of its executive officers. In addition, the undersigned transferee represents and warrants that it is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended) and it is acquiring this Note from the Holder hereof in an "offshore transaction" (as defined in Regulation S) pursuant to the exemption from registration under the Securities Act of 1933, as amended, provided by Regulation S thereunder. The undersigned transferee acknowledges and agrees that this Note has not been registered under the Securities Act of 1933, as amended, and may not be transferred except in accordance with the resale and other transfer restrictions set forth in the legend on the face hereof.

Dated:

[Type or print name of transferee] By:                                                      Executive Officer

EX-4

THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF PEPCO HOLDINGS, INC. THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1)(a) TO PEPCO HOLDINGS, INC. OR ANY OF ITS SUBSIDIARIES, (b) IN THE UNITED STATES TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION SATISFYING THE REQUIREMENTS OF RULE 144A, (c) OUTSIDE THE UNITED STATES IN A TRANSACTION COMPLYING WITH THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (e) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (2) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO HEREIN. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE TRANSFERRED TO, OR REGISTERED OR EXCHANGED FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY OR A NOMINEE THEREOF, AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. EVERY SECURITY AUTHENTICATED AND DELIVERED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS SECURITY SHALL BE A GLOBAL SECURITY THAT IS SUBJECT TO THE FOREGOING, EXCEPT IN SUCH LIMITED CIRCUMSTANCES.
No. R-			Cusip No.
[FORM OF FACE OF 7.45% NOTE DUE AUGUST 15, 2032] PEPCO HOLDINGS, INC. 7.45% NOTE DUE AUGUST 15, 2032
PEPCO HOLDINGS, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company", which terms includes any successor Person under the Indenture), for value received, hereby promises to pay to or registered assigns, the principal sum of                                      Dollars on August 15, 2032, and to pay interest on said principal sum semi-annually on August 15 and February 15 of each year commencing February 15, 2003 (each an "Interest Payment Date") at the rate of 7.45% per annum, until the principal hereof is paid or made available for payment. Interest on the Securities of this series will accrue from September 6, 2002, to the first Interest Payment Date, and thereafter will accrue from the last Interest Payment Date to which interest has been paid or duly provided for. In the event that any Interest Payment Date is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of s uch delay) with the same force and effect as if made on the Interest Payment Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the first calendar day of the month in which such Interest Payment Date occurs, provided, however, that interest payable at Maturity will be paid to the Person to whom principal is paid. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Secur ities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture referred to on the reverse hereof.                Payment of the principal of and interest on this Security will be made upon presentation at the office or agency of the Company maintained for that purpose in The City of New York, the State of New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, provided, however, that, at the option of the Company, interest on this Security may be paid by check mailed to the address of the person entitled thereto, as such address shall appear on the Security Register or by wire transfer to an account designated by the person entitled thereto; and provided further, that so long as the Securities of this series are registered in the name of The Depository Trust Company or a nominee thereof, all payments of principal, premium, if any, and interest in respect of the Securities of this series will be made in immediately available funds.                Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Any capitalized term which is used herein and not otherwise defined shall have the meaning ascribed to such term in the Indenture.                Unless the certificate of authentication hereon has been executed by the Trustee referred to below by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.                IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its name by the Vice President of the Company and its corporate seal to be affixed hereto and attested by the Secretary of the Company.
Attest: By:                                                        Secretary			PEPCO HOLDINGS, INC. By:                                                         Vice President
[FORM OF CERTIFICATE OF AUTHENTICATION] CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated:
			THE BANK OF NEW YORK, as Trustee By:                                                                    Authorized Signatory
[FORM OF REVERSE OF 7.45% NOTE DUE AUGUST 15, 2032]
This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), of the series designated "7.45% Notes due August 15, 2032," all issued and to be issued under the Indenture (For Unsecured Debt Securities), dated as of September 6, 2002 (herein, together with any amendments thereto, called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture, including the Board Resolutions and Officer's Certificate filed with the Trustee on September 6, 2002, creating such series for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms u pon which the Securities are, and are to be, authenticated and delivered. Optional Redemption                The Securities of this series shall be redeemable at the option of the Company prior to the Stated Maturity, in whole or in part, at any time. The Company shall give notice of its intent to redeem such Securities of this series at least 30 days but no more than 60 days prior to the Redemption Date. If the Company redeems all or any part of the Securities of this series pursuant to the provisions of this paragraph, it shall pay a Redemption Price equal to the greater of
	1.	100% of the principal amount of the Securities of this series being redeemed, and
	2.	the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 40 basis points,
plus, in each case, accrued interest on those Securities of this series to the Redemption Date.                 "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.                 "Comparable Treasury Issue" means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the Securities of this series to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities of this series.                 "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank or (ii) if such release (or any successor release) is not published or does not contain prices on such Business Day, the Reference Treasury Dealer Quotations actually obtained by the Trustee for such Redemption Date.                 "H.15 (519)" means the weekly statistical release entitled "H.15 (519) Selected Interest Rates," or any successor publication, published by the Board of Governors of the Federal Reserve System.                 "H.15 Daily Update" means the daily update of H.15 (519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.                 "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company.                 "Reference Treasury Dealer" means each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc One Capital Markets, Inc. and their respective successors; provided, however, that if either of the foregoing shall cease to be a primary United States Treasury securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefore another Primary Treasury Dealer.                 "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date.                The Company shall deliver to the Trustee before any Redemption Date for the Securities of this series its calculation of the Redemption Price applicable to such redemption. Except with respect to the obligations of the Trustee expressly set forth in the foregoing definitions of "Comparable Treasury Price" and "Reference Treasury Dealer Quotations," the Trustee shall be under no duty to inquire into, may presume the correctness of, and shall be fully protected in acting upon the Company's calculation of any Redemption Price of the Securities of this series.                In lieu of stating the Redemption Price, notices of redemption of the Securities of this series shall state substantially the following: "The Redemption Price of the Notes to be redeemed shall equal the sum of (a) the greater of (i) 100% of the principal amount of such Notes, and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 40 basis points, plus (b) accrued interest on the principal amount hereof to the Redemption Date."                If at the time notice of redemption is given, the redemption moneys are not on deposit with the Trustee, then the redemption shall be subject to their receipt on or before the Redemption Date and such notice shall be of no effect unless such moneys are received. Additional Interest                Under certain circumstances, the Company may be obligated to pay additional interest on this Security, all as and to the extent set forth in the Registration Rights Agreement, dated as of September 6, 2002, among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc One Capital Markets, Inc., Credit Suisse First Boston Corporation, Scotia Capital (USA) Inc., Wachovia Securities, Inc., Banc Of America Securities LLC, Legg Mason Wood Walker, Incorporated, BNY Capital Markets, Inc., Mellon Financial Markets, LLC, Suntrust Capital Markets, Inc. and The Williams Capital Group, L.P., the terms of which are incorporated herein by reference. General Provisions                The Indenture contains provisions for defeasance of the entire indebtedness of this Security upon compliance with certain conditions set forth in the Indenture .                If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.                The Indenture permits, with certain exceptions as therein provided, the amendment thereof by supplemental indenture and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected. The Indenture contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities of all series then Outstanding to waive compliance by the Company with certain provisions of the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive cer tain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor on in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.                As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class, shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee and offered the Trustee indemnity reasonably satisfactory to the Trustee, the Trustee for 60 days after receipt of such notice, request and offer of indemnity shal l have failed to institute any such proceeding, and no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon on or after the respective due dates expressed herein.                No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.                The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and in integral multiples thereof.                As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor and of authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.                The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.                No recourse shall be had for the payment of the principal of or premium, if any, or interest, if any, on this Security, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement under the Indenture, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor corporation (either directly or through the Company or a predecessor or successor corporation), whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed and understood by the Holder hereof that the Indenture and this Security are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be incurred by, any incorporator, shareholder, officer o r director, past, present or future, of the Company or of any predecessor or successor corporation, either directly or indirectly through the Company or any predecessor or successor corporation, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants or agreements contained in the Indenture or in this Security or to be implied therefrom or herefrom, and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the issuance of this Security.                All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture and in the Officer's Certificate establishing the terms of the Securities of this series.

EX-4

THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF PEPCO HOLDINGS, INC. THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1)(a) TO PEPCO HOLDINGS, INC. OR ANY OF ITS SUBSIDIARIES, (b) IN THE UNITED STATES TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION SATISFYING THE REQUIREMENTS OF RULE 144A, (c) OUTSIDE THE UNITED STATES IN A TRANSACTION COMPLYING WITH THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (e) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (2) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO HEREIN. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE TRANSFERRED TO, OR REGISTERED OR EXCHANGED FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY OR A NOMINEE THEREOF, AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. EVERY SECURITY AUTHENTICATED AND DELIVERED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS SECURITY SHALL BE A GLOBAL SECURITY THAT IS SUBJECT TO THE FOREGOING, EXCEPT IN SUCH LIMITED CIRCUMSTANCES.
No. R-			Cusip No.
[FORM OF FACE OF 6.45% NOTE DUE AUGUST 15, 2012] PEPCO HOLDINGS, INC. 6.45% NOTE DUE AUGUST 15, 2012
PEPCO HOLDINGS, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company", which terms includes any successor Person under the Indenture), for value received, hereby promises to pay to or registered assigns, the principal sum of                                  Dollars on August 15, 2012, and to pay interest on said principal sum semi-annually on August 15 and February 15 of each year commencing February 15, 2003 (each an "Interest Payment Date") at the rate of 6.45% per annum, until the principal hereof is paid or made available for payment. Interest on the Securities of this series will accrue from September 6, 2002, to the first Interest Payment Date, and thereafter will accrue from the last Interest Payment Date to which interest has been paid or duly provided for. In the event that any Interest Payment Date is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of such delay) with the same force and effect as if made on the Interest Payment Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the first calendar day of the month in which such Interest Payment Date occurs, provided, however, that interest payable at Maturity will be paid to the Person to whom principal is paid. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture referred to on the reverse hereof.                Payment of the principal of and interest on this Security will be made upon presentation at the office or agency of the Company maintained for that purpose in The City of New York, the State of New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, provided, however, that, at the option of the Company, interest on this Security may be paid by check mailed to the address of the person entitled thereto, as such address shall appear on the Security Register or by wire transfer to an account designated by the person entitled thereto; and provided further, that so long as the Securities of this series are registered in the name of The Depository Trust Company or a nominee thereof, all payments of principal, premium, if any, and interest in respect of the Securities of this series will be made in immediately available funds.                Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Any capitalized term which is used herein and not otherwise defined shall have the meaning ascribed to such term in the Indenture.                Unless the certificate of authentication hereon has been executed by the Trustee referred to below by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.                IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its name by the Vice President of the Company and its corporate seal to be affixed hereto and attested by the Secretary of the Company.
Attest: By:                                                                Secretary			PEPCO HOLDINGS, INC. By:                                                                      Vice President
[FORM OF CERTIFICATE OF AUTHENTICATION] CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated:
			THE BANK OF NEW YORK, as Trustee By:                                                                Authorized Signatory
[FORM OF REVERSE OF 6.45% NOTE DUE AUGUST 15, 2012]                This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), of the series designated "6.45% Notes due August 15, 2012," all issued and to be issued under the Indenture (For Unsecured Debt Securities), dated as of September 6, 2002 (herein, together with any amendments thereto, called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture, including the Board Resolutions and Officer's Certificate filed with the Trustee on September 6, 2002, creating such series for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon wh ich the Securities are, and are to be, authenticated and delivered. Optional Redemption                The Securities of this series shall be redeemable at the option of the Company prior to the Stated Maturity, in whole or in part, at any time. The Company shall give notice of its intent to redeem such Securities of this series at least 30 days but no more than 60 days prior to the Redemption Date. If the Company redeems all or any part of the Securities of this series pursuant to the provisions of this paragraph, it shall pay a Redemption Price equal to the greater of
	1.	100% of the principal amount of the Securities of this series being redeemed, and
	2.	the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 35 basis points,
plus, in each case, accrued interest on those Securities of this series to the Redemption Date.                 "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.                 "Comparable Treasury Issue" means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the Securities of this series to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities of this series.                 "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank or (ii) if such release (or any successor release) is not published or does not contain prices on such Business Day, the Reference Treasury Dealer Quotations actually obtained by the Trustee for such Redemption Date.                 "H.15 (519)" means the weekly statistical release entitled "H.15 (519) Selected Interest Rates," or any successor publication, published by the Board of Governors of the Federal Reserve System.                 "H.15 Daily Update" means the daily update of H.15 (519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.                 "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company.                 "Reference Treasury Dealer" means each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc One Capital Markets, Inc. and their respective successors; provided, however, that if either of the foregoing shall cease to be a primary United States Treasury securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefore another Primary Treasury Dealer.                 "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date.                The Company shall deliver to the Trustee before any Redemption Date for the Securities of this series its calculation of the Redemption Price applicable to such redemption. Except with respect to the obligations of the Trustee expressly set forth in the foregoing definitions of "Comparable Treasury Price" and "Reference Treasury Dealer Quotations," the Trustee shall be under no duty to inquire into, may presume the correctness of, and shall be fully protected in acting upon the Company's calculation of any Redemption Price of the Securities of this series.                In lieu of stating the Redemption Price, notices of redemption of the Securities of this series shall state substantially the following: "The Redemption Price of the Notes to be redeemed shall equal the sum of (a) the greater of (i) 100% of the principal amount of such Notes, and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 35 basis points, plus (b) accrued interest on the principal amount hereof to the Redemption Date."                If at the time notice of redemption is given, the redemption moneys are not on deposit with the Trustee, then the redemption shall be subject to their receipt on or before the Redemption Date and such notice shall be of no effect unless such moneys are received. Additional Interest                Under certain circumstances, the Company may be obligated to pay additional interest on this Security, all as and to the extent set forth in the Registration Rights Agreement, dated as of September 6, 2002, among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc One Capital Markets, Inc., Credit Suisse First Boston Corporation, Scotia Capital (USA) Inc., Wachovia Securities, Inc., Banc Of America Securities LLC, Legg Mason Wood Walker, Incorporated, BNY Capital Markets, Inc., Mellon Financial Markets, LLC, Suntrust Capital Markets, Inc. and The Williams Capital Group, L.P., the terms of which are incorporated herein by reference. General Provisions                The Indenture contains provisions for defeasance of the entire indebtedness of this Security upon compliance with certain conditions set forth in the Indenture .                If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.                The Indenture permits, with certain exceptions as therein provided, the amendment thereof by supplemental indenture and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected. The Indenture contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities of all series then Outstanding to waive compliance by the Company with certain provisions of the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive cer tain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor on in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.                As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class, shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee and offered the Trustee indemnity reasonably satisfactory to the Trustee, the Trustee for 60 days after receipt of such notice, request and offer of indemnity shal l have failed to institute any such proceeding, and no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon on or after the respective due dates expressed herein.                No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.                The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and in integral multiples thereof.                As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor and of authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.                The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.                No recourse shall be had for the payment of the principal of or premium, if any, or interest, if any, on this Security, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement under the Indenture, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor corporation (either directly or through the Company or a predecessor or successor corporation), whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed and understood by the Holder hereof that the Indenture and this Security are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be incurred by, any incorporator, shareholder, officer o r director, past, present or future, of the Company or of any predecessor or successor corporation, either directly or indirectly through the Company or any predecessor or successor corporation, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants or agreements contained in the Indenture or in this Security or to be implied therefrom or herefrom, and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the issuance of this Security.                All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture and in the Officer's Certificate establishing the terms of the Securities of this series.

EX-4

THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF PEPCO HOLDINGS, INC. THAT (A) THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1)(a) TO PEPCO HOLDINGS, INC. OR ANY OF ITS SUBSIDIARIES, (b) IN THE UNITED STATES TO A PERSON WHO THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION SATISFYING THE REQUIREMENTS OF RULE 144A, (c) OUTSIDE THE UNITED STATES IN A TRANSACTION COMPLYING WITH THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (e) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (2) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO HEREIN. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE TRANSFERRED TO, OR REGISTERED OR EXCHANGED FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY OR A NOMINEE THEREOF, AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. EVERY SECURITY AUTHENTICATED AND DELIVERED UPON REGISTRATION OF TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS SECURITY SHALL BE A GLOBAL SECURITY THAT IS SUBJECT TO THE FOREGOING, EXCEPT IN SUCH LIMITED CIRCUMSTANCES.
No. R-			Cusip No.
[FORM OF FACE OF 5.50% NOTE DUE AUGUST 15, 2007] PEPCO HOLDINGS, INC. 5.50% NOTE DUE AUGUST 15, 2007
PEPCO HOLDINGS, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company", which terms includes any successor Person under the Indenture), for value received, hereby promises to pay to or registered assigns, the principal sum of                                     Dollars on August 15, 2007, and to pay interest on said principal sum semi-annually on August 15 and February 15 of each year commencing February 15, 2003 (each an "Interest Payment Date") at the rate of 5.50% per annum, until the principal hereof is paid or made available for payment. Interest on the Securities of this series will accrue from September 6, 2002, to the first Interest Payment Date, and thereafter will accrue from the last Interest Payment Date to which interest has been paid or duly provided for. In the event that any Interest Payment Date is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of such de lay) with the same force and effect as if made on the Interest Payment Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the first calendar day of the month in which such Interest Payment Date occurs, provided, however, that interest payable at Maturity will be paid to the Person to whom principal is paid. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture referred to on the reverse hereof.                Payment of the principal of and interest on this Security will be made upon presentation at the office or agency of the Company maintained for that purpose in The City of New York, the State of New York in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, provided, however, that, at the option of the Company, interest on this Security may be paid by check mailed to the address of the person entitled thereto, as such address shall appear on the Security Register or by wire transfer to an account designated by the person entitled thereto; and provided further, that so long as the Securities of this series are registered in the name of The Depository Trust Company or a nominee thereof, all payments of principal, premium, if any, and interest in respect of the Securities of this series will be made in immediately available funds.                Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Any capitalized term which is used herein and not otherwise defined shall have the meaning ascribed to such term in the Indenture.                Unless the certificate of authentication hereon has been executed by the Trustee referred to below by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.                IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed in its name by the Vice President of the Company and its corporate seal to be affixed hereto and attested by the Secretary of the Company.
Attest: By:                                                            Secretary			PEPCO HOLDINGS, INC. By:                                                             Vice President
[FORM OF CERTIFICATE OF AUTHENTICATION] CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated:
			THE BANK OF NEW YORK, as Trustee By:                                                                    Authorized Signatory
[FORM OF REVERSE OF 5.50% NOTE DUE AUGUST 15, 2007]
This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), of the series designated "5.50% Notes due August 15, 2007," all issued and to be issued under the Indenture (For Unsecured Debt Securities), dated as of September 6, 2002 (herein, together with any amendments thereto, called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and The Bank of New York, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture, including the Board Resolutions and Officer's Certificate filed with the Trustee on September 6, 2002, creating such series for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon whi ch the Securities are, and are to be, authenticated and delivered. Optional Redemption                The Securities of this series shall be redeemable at the option of the Company prior to the Stated Maturity, in whole or in part, at any time. The Company shall give notice of its intent to redeem such Securities of this series at least 30 days but no more than 60 days prior to the Redemption Date. If the Company redeems all or any part of the Securities of this series pursuant to the provisions of this paragraph, it shall pay a Redemption Price equal to the greater of
	1.	100% of the principal amount of the Securities of this series being redeemed, and
	2.	the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 35 basis points,
plus, in each case, accrued interest on those Securities of this series to the Redemption Date.                 "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date.                 "Comparable Treasury Issue" means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the Securities of this series to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities of this series.                 "Comparable Treasury Price" means, with respect to any Redemption Date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as percentage of its principal amount) on the third Business Day preceding such Redemption Date, as set forth in the H.15 Daily Update of the Federal Reserve Bank or (ii) if such release (or any successor release) is not published or does not contain prices on such Business Day, the Reference Treasury Dealer Quotations actually obtained by the Trustee for such Redemption Date.                 "H.15 (519)" means the weekly statistical release entitled "H.15 (519) Selected Interest Rates," or any successor publication, published by the Board of Governors of the Federal Reserve System.                 "H.15 Daily Update" means the daily update of H.15 (519) available through the worldwide website of the Board of Governors of the Federal Reserve System or any successor site or publication.                 "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company.                 "Reference Treasury Dealer" means each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc One Capital Markets, Inc. and their respective successors; provided, however, that if either of the foregoing shall cease to be a primary United States Treasury securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefore another Primary Treasury Dealer.                 "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Redemption Date.                The Company shall deliver to the Trustee before any Redemption Date for the Securities of this series its calculation of the Redemption Price applicable to such redemption. Except with respect to the obligations of the Trustee expressly set forth in the foregoing definitions of "Comparable Treasury Price" and "Reference Treasury Dealer Quotations," the Trustee shall be under no duty to inquire into, may presume the correctness of, and shall be fully protected in acting upon the Company's calculation of any Redemption Price of the Securities of this series.                In lieu of stating the Redemption Price, notices of redemption of the Securities of this series shall state substantially the following: "The Redemption Price of the Notes to be redeemed shall equal the sum of (a) the greater of (i) 100% of the principal amount of such Notes, and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Securities of this series being redeemed, discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 35 basis points, plus (b) accrued interest on the principal amount hereof to the Redemption Date."                If at the time notice of redemption is given, the redemption moneys are not on deposit with the Trustee, then the redemption shall be subject to their receipt on or before the Redemption Date and such notice shall be of no effect unless such moneys are received. Additional Interest                Under certain circumstances, the Company may be obligated to pay additional interest on this Security, all as and to the extent set forth in the Registration Rights Agreement, dated as of September 6, 2002, among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc One Capital Markets, Inc., Credit Suisse First Boston Corporation, Scotia Capital (USA) Inc., Wachovia Securities, Inc., Banc Of America Securities LLC, Legg Mason Wood Walker, Incorporated, BNY Capital Markets, Inc., Mellon Financial Markets, LLC, Suntrust Capital Markets, Inc. and The Williams Capital Group, L.P., the terms of which are incorporated herein by reference. General Provisions                The Indenture contains provisions for defeasance of the entire indebtedness of this Security upon compliance with certain conditions set forth in the Indenture .                If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.                The Indenture permits, with certain exceptions as therein provided, the amendment thereof by supplemental indenture and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of all series to be affected. The Indenture contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities of all series then Outstanding to waive compliance by the Company with certain provisions of the Indenture. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive certain pa st defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor on in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.                As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class, shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee and offered the Trustee indemnity reasonably satisfactory to the Trustee, the Trustee for 60 days after receipt of such notice, request and offer of indemnity shall have failed to institute any such proceeding, and no direction inconsistent with such written request shall have been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding in respect of which an Event of Default shall have occurred and be continuing, considered as one class. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon on or after the respective due dates expressed herein.                No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.                The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and in integral multiples thereof.                As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor and of authorized denominations, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.                The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the absolute owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.                No recourse shall be had for the payment of the principal of or premium, if any, or interest, if any, on this Security, or for any claim based thereon or otherwise in respect thereof, or of the indebtedness represented thereby, or upon any obligation, covenant or agreement under the Indenture, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or of any predecessor or successor corporation (either directly or through the Company or a predecessor or successor corporation), whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed and understood by the Holder hereof that the Indenture and this Security are solely corporate obligations, and that no personal liability whatsoever shall attach to, or be incurred by, any incorporator, shareholder, officer or direc tor, past, present or future, of the Company or of any predecessor or successor corporation, either directly or indirectly through the Company or any predecessor or successor corporation, because of the indebtedness hereby authorized or under or by reason of any of the obligations, covenants or agreements contained in the Indenture or in this Security or to be implied therefrom or herefrom, and that any such personal liability is hereby expressly waived and released as a condition of, and as part of the consideration for, the issuance of this Security.                All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture and in the Officer's Certificate establishing the terms of the Securities of this series.

EX-10

EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the" Agreement") is made as of August 1, 2002 between PEPCO HOLDINGS, INC. (the "Company") and JAMES P. LAVIN (the "Executive").             WHEREAS, the Company desires to retain the employment of the Executive as a key member of the Company's management team, and the Executive desires to serve the Company in such capacity; and             WHEREAS, the parties hereto desire to set forth their agreement with respect to the terms and provisions of the Executive's employment with the Company.             NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:             1. Term of this Agreement.             The Company hereby agrees to employ the Executive and the Executive hereby agrees to continue to serve the Company, in accordance with the terms and conditions set forth herein, for a period of three (3) years, commencing as of the date set forth above, subject, however, to earlier termination as expressly provided herein.             At the expiration of the three (3) year period of employment, this contract shall expire and the employment of Executive by the Company shall be subject to similar terms and conditions as other similarly situated key members of the Company's management team with similar levels of responsibility as Executive and, as such, shall continue on an at-will basis.             Any obligations of the Company or the Executive hereunder which have not been satisfied as of the last day of the Term of this Agreement shall survive the expiration of the Term of this Agreement and shall remain in effect until such time as all such obligations have been satisfied. No additional payments are required by the termination of this Agreement.             2. Duties.             During the term of this Agreement, the Executive agrees to serve in a key management position with the Company. The Executive (a) will devote his knowledge, skill and best efforts on a full- time basis to performing his duties and obligations to the Company (with the exception of absences on account of illness or vacation in accordance with the Company's policies and civic and charitable commitments not involving a conflict with the Company's business), and (b) will comply with the directions and orders of the Board of Directors, the Chief Executive Officer of the Company, the Chief Financial Officer of the Company, or any designee thereof, with respect to the performance of his duties.             3. Affiliates.             Employment by an Affiliate of the Company or a successor to the Company will be considered employment by the Company for purposes of this Agreement, and the Executive's employment with the Company shall be considered terminated only if the Executive is no longer employed by the Company or any of its Affiliates or successors. The term "Company" as used in this Agreement will be deemed to include Affiliates and successors. For purposes of this Agreement, the term" Affiliate" means the subsidiaries of the Company and other entities under common control with the Company. If the Executive is employed by an Affiliate or a successor, the term "Board of Directors" as used in this Sections 4 and 5 means the Board of Directors of the Executive's employer.             4. Compensation and Benefits.             As remuneration for all services to be rendered by the Executive during the term of this Agreement, and as consideration for complying with the covenants herein, the Company shall pay and provide to the Executive the following:                   4.1. Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors of the Company or the Board's designee provided; however, that, subject to Section 5.4 (a), such Base Salary shall not be less than the base salary of the Executive as of the date of this Agreement. Base Salary shall be paid to the Executive in periodic installments at such times as salaries are generally paid to other key members of the Company's management team and consistent with the normal payroll practices of the Company.                   The Executive's Base Salary shall be reviewed at least annually during the term of this Agreement to ascertain whether, in the judgment of the Board or the Board's designee, such Base Salary should be increased, based primarily on the performance of the Executive during the year and the market pay for similarly situated professionals performing similar duties to the Executive.                   4.2. Incentive Award. The Executive will be entitled to receive incentive awards if and to the extent that the Board of Directors determines in good faith that the Executive's performance merits payment of an award according to the terms of any incentive compensation plans applicable to key members of the Company's management team.                   4.3. Other Cash Remuneration. Except as set forth in Section 5, in addition to the remuneration set forth herein, the Company agrees as follows:
	(a)       The Company shall make a payment to the Executive in the amount of $300,000.00. Such payment shall be made between the date this Agreement is signed by both parties and January 2, 2003, inclusive. The date of payment shall be at the option of the Executive who shall give the Company seven (7) days notice of the date to receive the payment.
	(b)       If the Executive remains employed for the entire initial term of this Agreement, the Company agrees to pay Executive the amount of $390,000.00.
	(c)       If Executive's employment terminates before the expiration of the initial term of this Agreement, but after the second anniversary, the Company shall pay to the Executive the amount of $270,000.00.
	(d)       If Executive's employment terminates before the date in Section 4.3 (c), but after the first anniversary of this Agreement, the Company shall pay to the Executive the amount of $ 150,000.00.
	All payments by the Company to the Executive made pursuant to this Section 4.3 shall be made as soon as possible after the applicable date and in a lump sum, less applicable taxes as determined by the Company.

4.4. Other Benefits.                   During the Term of this Agreement, while the Executive is employed by the Company, the Executive will be eligible to participate in a similar manner as other key members of the Company's management team in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs provided by the Company for its executives or employees from time to time.                   4.5. Relocation.                   Within one year from the date of this Agreement, the Executive agrees to relocate his principal office to the Company's headquarters in Washington, D.C. In this regard, the Company agrees to pay Executive's relocation expenses under the Company's relocation policy for similarly situated executives as in effect on the date of Executive's relocation.             5. Termination of Employment.                   5.1 Disability or Death. If the Executive dies during the term of this Agreement, the Company shall pay to the Executive's estate, in a lump sum and as soon as practicable after the date of death, any remaining amounts to which the Executive would have been entitled under Section 4.3 of the Agreement, had the Executive remained actively employed for the entire term of this Agreement. If the Executive becomes disabled during the term of this Agreement and is found to be entitled to long-term disability benefits under the Company's disability plan or policy, the Company shall pay to the Executive any remaining amounts to which the Executive would have been entitled under Section 4.3 of the Agreement had the Executive remained actively employed, as if the Executive had remained actively employed.                   5.2. Involuntary Termination by the Company Without Cause. The Board may terminate the Executive's employment, as provided under this Agreement, at any time, for reasons other than death, Disability, Retirement, or for Cause, by notifying the Executive in writing of the Company's intent to terminate, at least thirty (30) calendar days prior the effective date of such termination.                   Upon the effective date of such termination, following the expiration of the thirty (30) day notice period, the Company shall pay to the Executive a lump-sum cash payment equal to the amount the Company would have paid to the Executive under Section 4.3 had the Executive remained employed by the Company through the initial Term of the Agreement. In addition, if the Company makes provisions generally applicable to other key members of the management regarding involuntary termination in the case of a Change in Control, Executive shall be eligible for the same provisions as similarly situated key members of management team.                   5.3. Termination for Cause. Nothing in this Agreement shall be construed to prevent the Board from terminating the Executive's employment under this Agreement for "Cause." For purposes of this Agreement, the term "Cause" means (i) intentional fraud or material misappropriation with respect to the business or assets of the Company, (ii) persistent refusal or willful failure of the Executive to perform substantially his duties and responsibilities to the Company, which continues after the Executive receives notice of such refusal or failure, (iii) conduct that constitutes disloyalty to the Company, and that materially damages the property, business or reputation of the Company, or (iv) conviction of a felony involving moral turpitude. If the Executive is terminated for Cause, no payments will be due under this Agreement.                   5.4. Termination by Executive for Good Reason. At any time during the term of this Agreement, the Executive may terminate this Agreement for Good Reason (as defined below) by giving the Board of Directors of the Company thirty (30) calendar days written notice of intent to terminate, which notice sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination.                   Upon the expiration of the thirty (30) day notice period, the Good Reason termination shall become effective, and the Company shall pay and provide to the Executive the benefits set forth in this Section 4.3.Good Reason shall mean, without the Executive's express written consent, the occurrence of any one or more of the following:
	(a)       A reduction by the Company of the Executive's base salary in effect on the date of this Agreement, or as the same shall be increased from time to time, unless such reduction is (i) replaced by an incentive opportunity of equal value; or (ii) is consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress;
	(b)       The assignment of the Executive to duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, titles, and reporting requirements) as an officer of the Company, or a reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect during the immediately preceding fiscal year, other than an insubstantial and inadvertent act that is remedied by the Company promptly after receipt of notice thereof given by the Executive;
	(c)       Except as provided in Section 4.5, without the Executive's consent, the Company's requires the Executive to be based at a location which is at least fifty (50) miles further from the Executive's residence (as of the first anniversary of this Agreement), than is such residence from the Company's current headquarters, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations;
	(d)       A failure by the Company to meet any obligation under Section 4 herein.
	(e)       The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform this Agreement.
	Upon a termination of the Executive's employment for Good Reason under this Agreement, the Executive shall be entitled to receive the same payments and benefits as he would be entitled to receive following an involuntary termination of his employment by the Company without Cause, as specified in Section 5.2 herein within thirty (30) calendar days following the effective date of employment termination.
WITNESS the following signatures:
PEPCO HOLDINGS, INC. DENNIS R. WRAASE By:  D. R. Wraase                                                      President and Chief Operating Officer		EXECUTIVE JAMES P. LAVIN By:  James P. Lavin

EX-10

                             SEVERANCE AGREEMENT



     This Agreement is made the       day of                , by and between Potomac Electric Power Company (the "Company") and              (the "Executive").

     WHEREAS, the Company recognizes the need to avoid the loss or serious distraction of the Executive to the detriment of the Company and its stockholders during periods surrounding a Change in Control, when the Executive's undivided attention and commitment to the needs of the Company are particularly important; and

     WHEREAS, the Executive desires to devote his or her time and energy for the benefit of the Company and its stockholders and not to be distracted during the period surrounding Change in Control; and

     WHEREAS, the Company and the Executive wish to achieve the foregoing objectives by entering into this Severance Agreement (or, if the Executive previously entered into a Severance Agreement with the Company, wish to better achieve the foregoing objectives by amending and restating such prior Severance Agreement which amended and restated Agreement shall, as of the date first above written, supersede the prior Severance Agreement).

     NOW, THEREFORE, the parties agree as follows:

1.   Definitions

     1.1     Change in Control.  Change in Control shall be deemed to have occurred as of the first day that any one or more of the following conditions shall have been satisfied:

             (a)      Any "Person" (other than (i) those Persons in control of the Company as of the Effective Date, (ii) any person or persons acting on behalf of the Company in a distribution of stock to the public, (iii) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or (iv) a corporation owned directly or indirectly by the stockholders (immediately prior to such transaction) of the Company in substantially the same proportions as their ownership of stock of the Company) becomes a Beneficial Owner, directly, or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or

            (b)     (i)     a complete or substantial liquidation of the Company; or (ii) the sale or disposition of all or substantially all the Company's assets; or (iii) a merger, consolidation, or reorganization of the Company with or involving any other corporation or entity, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least seventy percent (70%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation or reorganization.

     In no event shall a Change in Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change in Control transaction. The Executive shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Executive is an equity Executive in the purchasing company or group (except for: (i) passive ownership of less than one percent (1%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change in Control by a majority of the nonemployee continuing directors of the Company).

     1.2     Qualifying Termination

             (a)     The occurrence of any one or more of the following events within twenty-four (24) calendar months after a Change in Control of the Company shall constitute a "Qualifying Termination."

                    (i)     The Company's involuntary termination of the Executive's employment without Cause (as defined in Section 1.4);

                    (ii)     The Executive's voluntary employment termination for Good Reason (as defined in Section 1.3);

                    (iii)     Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or

                    (iv)     Commission by the Company, or any successor company, of a material breach of any of the provisions of this Agreement.

            (b)     A Qualifying Termination also shall include an involuntary termination of the Executive, without Cause, "in contemplation of," but prior to, a Change in Control of the Company. An involuntary termination shall be deemed to be "in contemplation of," a Change in Control if it occurs at any time subsequent to (but in no event after) an actual Change in Control):

                   (i)     The Board of Directors accepting, or recommending to the Company's shareholders the acceptance of, an offer from any Person (other than those Persons in control of the Company as of the Effective Date, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a corporation owned directly or indirectly by the stockholders of the Company (immediately prior to such transaction) in substantially the same proportions as their ownership of stock of the Company) to become the beneficial owner, directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; or

                  (ii)     The Board of Directors approving, or recommending to the Company's shareholders for approval: (a) a plan of complete or substantial liquidation of the Company, or (b) an agreement for the sale or disposition of all or substantially all of the Company's assets; or (c) a merger, consolidation, or reorganization of the Company with or involving any other corporation or entity, other than a merger, consolidation or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted to voting securities of the surviving entity), at least seventy percent (70%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization.

             (c)     A Qualifying Termination shall not include a termination of employment by reason of death, disability, or voluntary normal retirement (as such term is defined under the then established rules of the company's tax-qualified retirement plan), the Executive's voluntary termination without Good Reason, or the Company's involuntary termination of the Executive's employment for Cause.

     1.3     Good Reason. Good Reason means, without the Executive's express written consent, the occurrence after or in contemplation of a Change in Control of the company, of any one or more of the following:

             (a)     The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety (90) days prior to the Change in Control (or, in the case of a termination in contemplation of a Change in Control, 90 days prior to the occurrence described in Section 1.2(b)(i) or (ii) above), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive;

             (b)     A reduction by the Company of the Executive's base salary in effect on the effective date of a Change in Control, or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and is either (i) replaced by an incentive opportunity equal in value; or (ii) is consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent to a reduction imposed on other executives of the Company);

             (c)     The relocation of the Executive's office more than 50 miles from the Executive's office on the effective date of the Change in Control.

                     The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein.

     1.4.     Cause. Cause shall mean the occurrence of any one or more of the following:

             (a)     The Executive is convicted of a felony involving moral turpitude; or

             (b)     The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or

             (c)     The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.3(a); or

             (d)     The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company.

     1.5     Annual Bonus Amount. The average of the annual target bonuses applicable to the Executive during the three calendar years preceding the calendar year in which the Qualifying Termination occurs.

     2.     Severance Payment. Upon the occurrence of a Qualifying Termination with respect to the Executive, the Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.3(b) above) and two times the Annual Bonus Amount. The payment shall be made in twenty-four (24) equal monthly installments beginning on the first day of the month following Qualifying Termination.

     3.     Severance Health Benefits. Upon the occurrence of a Qualifying Termination, and for the thirty-six (36) month period thereafter, the Company shall provide to the Executive and Executive's family medical, accidental death and dismemberment, disability and death benefits as provided to other executive officers who remain employed by the Company (or a surviving entity other than the Company). The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company or a successor.

     4.     Code Section 280G.

     4.1     Reduction to Avoid Excise Tax. Notwithstanding Sections 2 and 3 hereof, if the independent public accountants for the Company (the "Accountants") determine that if the payment and/or benefits to be provided under such sections (and/or any other payments and/or benefits provided or to be provided to the Executive under any applicable plan, program, agreement or arrangement maintained, contributed to or entered into by the Company or any group or entity whose actions result in a change of ownership or effective control (as those terms are defined in Code Section 280G and regulations promulgated thereunder) or any affiliate of the Company) (a "Payment" or collectively "Payments") were provided to the Executive (x) the Executive would incur an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Ex cise Tax"), and (y) the net after tax benefits to the Executive attributable to the Payments would not be at least $10,000 greater than the net after tax benefits that would accrue to the Executive if the Payments that which would otherwise cause the Executive to be subject to the Excise Tax were not provided, the Payments shall be reduced so that the Payments provided to the Executive are the greatest (as determined by the accountants) that may be provided without any such Payment being subject to the Excise Tax.

             (a)     If the Payments are to be reduced under Section 4.1, the Executive shall be given the opportunity to designate which Payments shall be reduced and in what order of priority.

                    (i)     If the Executive receives reduced Payments pursuant to this Section 4.1, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 4.1, the aggregate Payments to the Executive would result in any Payment being subject to the Excise Tax, and that a reduction pursuant to Section 4.1 should have occurred, then the Executive shall be deemed for all purposes to have received a loan made on the date of the receipt of the Payments in an amount such that, after taking into consideration such loan, no portion of the aggregate Payments would be subject to the Excise Tax. The Executive shall have an obligation to repay such loan to th e Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such loan until the date of such repayment.

                    (ii)     If the Executive's Payments are reduced or are to be reduced pursuant to this Section 4.1 above, and it is determined that the Executive's Payments were or are to be reduced pursuant to this Section 4.1 to a greater extent than was or is necessary to avoid the Excise Tax or it is determined that the Executive's Payments should not be or should not have been reduced pursuant to Section 4.1, then the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of the Payments being subject to the Excise Tax, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code).

     4.2     Gross-Up Payment.

             (a)     Anything in this Agreement to the contrary notwithstanding, if it shall be determined that any Payments would be subject to the Excise Tax or any interest or penalties are incurred and it is determined that the Payments should not be reduced pursuant to Section 4.1, then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

             (b)     All determinations required to be made under this Section 4.2, including whether and when a Gross-Up Payment is required and the amount of such Gross-up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's Accountants, who shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accountants shall be borne solely by the Company. Any Gross-Up Payment as determined pursuant to this Section 4.2 shall be paid by the Company to the Executive within five days of the receipt of the Accountants' determination. Any determination by the Accountants shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Sections 280G and 4999 of the Code, at the time of the initial determination by the Accountants hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 4.2(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

             (c)     The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

                    (i)       give the Company any information reasonably requested by the Company relating to such claim,

                    (ii)      take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

                    (iii)     cooperate with the Company in good faith in order effectively to contest such claim, and

                    (iv)      permit the Company to participate in any proceedings relating to such claim;

          Provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4.2, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before a ny administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be ent itled to settle or contest, as the case may be any other issue raised by the Internal Revenue Service or any other taxing authority.

             (d)     If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4.2(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's compliance with the requirements of Section 4.2) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4.2, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, t o the extent thereof, the amount of Gross-Up Payment required to be paid.

     5.      Termination of Agreement. This Agreement shall continue until and terminate three (3) years from the date first set forth above; provided, however, that this Agreement shall be renewed automatically for subsequent three-year periods unless notified by the Chief Executive Officer at least six (6) months prior to the end of the first three-year period or of any subsequent three-year period, that this Agreement shall not be renewed. Further, if a Change in Control occurs during the term of this Agreement, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible.

     6.      Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of such Executive. Notwithstanding the foregoing, upon the occurrence of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive.

     7.      Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply.

     8.      Governing Law. This Agreement shall be governed by the laws of the District of Columbia.

     9.      Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company.

    10.      Dispute Resolution and Notice.

    10.1     Dispute Resolution.

                 (a)     Any good faith dispute or controversy arising under or in connection with this Agreement shall be settled by binding arbitration. Such proceeding shall be conducted by final and binding arbitration before a single arbitrator mutually acceptable to both the Company and the Executive, in accordance with the rules of, and under the administration of the Center for Public Resources, in New York.

                 (b)     All reasonable costs and expenses arising out of such arbitration proceedings shall be borne by the Company. The Company shall in all events also pay its own costs (including its attorneys' fees) incurred in connection with such arbitration and, if Executive shall prevail on any issue that is material to the resolution of the dispute before the arbitrator, the Company shall also pay or reimburse Executive for his expenses incurred in connection with the arbitration (including, without limitation, his reasonable attorneys' fees).

    10.2     Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices.

                                         POTOMAC ELECTRIC POWER COMPANY

                                      By:                              

                                              Its                      
                                                        "COMPANY"


                                                                       
                                                  "EXECUTIVE"

EX-10

PEPCO HOLDINGS, INC. STOCK COMPENSATION PLAN FOR DIRECTORS
The Stock Compensation Plan for Board of Directors of Potomac Electric Power Company (the "Pepco plan") was adopted effective July 1, 1994, to permit directors and advisory directors of Pepco, at their election to receive all or a portion of the annual Board retainer fee, as established from time to time by the Board, in the form of restricted or unrestricted shares of Pepco common stock. The Pepco plan was thereafter amended (i) to provide that Directors must and Advisory Directors may take at least 50% of their annual retainer in Pepco common stock, (ii) to provide for the elective deferral of receipt of Pepco common stock in payment for all or any portion of the annual retainer and any portion of any other director fees, and (iii) to eliminate the option of receiving restricted stock. On March 28, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the "Merger") by which Pepco and Conectiv would become wholly owned subsidiaries of Pepco Holdings, Inc. (the "Company or "Pepco Holdings"); Pepco Holdings would become the sponsor of the Pepco plan; the name of the Pepco plan would be changed to reflect the change in plan sponsorship and Pepco Holdings, Inc. common stock would be substituted for Pepco Common Stock. The Pepco plan, as amended, is restated herein and is now known as the Pepco Holdings, Inc. Stock Compensation Plan for Directors. A.            Definitions
		1.	"Board of Directors" means the Board of Directors of Pepco Holdings, Inc.
		2.	"Company" means Pepco Holdings, Inc., or its successor.
		3.	"Director" means a member of the Pepco Holdings, Inc. Board of Directors.
		4.	"Plan" means the Pepco Holdings, Inc. Stock Compensation Plan for Directors.
		5.	"Stock" means the common stock par value $.01, of Pepco Holdings, Inc.
B.            Annual Retainer/Fees Paid in Stock             Each Director of the Company shall receive one-half of the annual retainer which would otherwise be paid in cash for each fiscal year in the form of Stock of the Company. Further, Directors may elect, as provided herein, to receive all or any portion of the remaining one-half of the annual retainer and any portion of any other director or committee chairman retainers and/or fees in the form of Stock. The first day of the fiscal year of the Plan is July 1. C.            Form of Payment             Each Director may, prior to the first day of a fiscal year, elect to have any or all of the shares of Stock which would be otherwise paid in cash to such Director as a Board retainer or as other director or committee chairman retainers and/or fees with respect to such fiscal year, either (i) delivered as unrestricted shares of Stock on the first business day of each quarter within the fiscal year, or (ii) deferred as to receipt for the period elected by the Director under the terms of the Pepco Holdings Inc. Executive and Director Deferred Compensation Plan ("Deferred Compensation Plan"). In the case of receipt of unrestricted shares of Stock, Certificates of Stock representing the applicable component of the retainer payable with respect to a fiscal quarter will be delivered to the Director as soon as practicable after the beginning of the quarter. In the case of an election to defer the receipt of the value of the shares of Stock , the Director shall be entitled to receive at the end of the deferral period under the Deferred Compensation Plan, a cash amount equal to the value of the number of shares (and fractional shares) of Stock credited to the Director's account under the Deferred Compensation Plan, including any shares credited as a result of the application of constructive dividend payments under the terms of the Deferred Compensation Plan, valued as the average of the high and low sale prices of Stock on the New York Stock Exchange on the second business day prior to the end of the deferral period.             Any portion of the retainer fee to be paid in cash rather than in the form of shares of Stock may also be deferred pursuant to the terms and conditions of the Deferred Compensation Plan. D.            Value of Stock             In computing the number of shares of Stock to be issued pursuant to the Plan (or to be credited to the Director under the Deferred Compensation Plan, in the case of an election to defer), the applicable value of the Stock will be the average of the high and low sale prices of the Stock on the New York Stock Exchange, Inc. on the second business day prior to the date of issuance or the date of credit, as the case may be. Fractional shares will not be issued. E.            Other             The Plan, which is not subject to the Employee Retirement Income Security Act of 1974, is administered by the Board, which acts as manager of the Plan. The Board is responsible for determining eligibility for participation. The Board reserves the right to modify or terminate the Plan at any time. F.            Additional Information             Additional information about the Plan and its administration may be obtained by contacting the following:
				Mr. Dennis R. Wraase President and Chief Operating Officer Pepco Holdings, Inc. 701 Ninth Street, N.W. Washington, D.C. 20068 (202) 872-2695
A copy of the following documents filed by the Company, Pepco and Conectiv with the Securities and Exchange Commission, which are incorporated by reference in the Registration Statement related to the Plan, may be obtained without charge, by written or oral request directed to the Secretary, Pepco Holdings, Inc., 701 Ninth Street, N.W., Washington, D.C. 20068 (Telephone (202) 872-2900):
	(a)            Annual Report on Form 10-K of the Company for the period From Inception (February 9, 2001) through December 31, 2001;             (b)            The description of the Common Stock included in the Company's registration statement on Form 8-A, filed on August 7, 2001, registering the Common Stock under Section 12(g) of the Securities and Exchange Act of 1934 (the "1934 Act"), and any amendment or report subsequently filed for the purpose of updating such description;             (c)            The Quarterly Report on Form 10-Q of the Company for the quarter ending March 31, 2002;             (d)            The Current Reports on Form 8-K of the Company filed on May 31, 2002 and June 7, 2002;             (e)            The Annual Report on Form 10-K of Pepco for the year ended December 31, 2001;             (f)            The Quarterly Report on Form 10-Q of Pepco for the quarter ending March 31, 2002;             (g)            The Current Reports on Form 8-K of Pepco filed on April 25, 2002 and May 31, 2002;             (h)            The Annual Report on Form 10-K of Conectiv for the year ended December 31, 2001;             (i)             The Quarterly Report on Form 10-Q of Conectiv for the quarter ending March 31, 2002; and              (j)            The Current Reports on Form 8-K of Conectiv filed on April 2, 2002.
All documents (i) filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this document and prior to the termination of this offering and (ii) filed by Pepco and Conectiv pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this document and prior to the consummation of the Merger shall be deemed to be incorporated by reference in this document and to be a part hereof from the date of the filing of such documents. Any statement contained in an incorporated document shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other incorporated document subsequently filed or in an accompanying prospectus supplement modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this documen t.             IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed this 1st day of August, 2002 which restated version reflects all modifications made to the Plan through such date of execution.
ATTEST By  /s/  Ellen Sheriff Rogers                  Ellen Sheriff Rogers					Pepco Holdings, Inc. By  /s/  John M. Derrick, Jr.                      Chief Executive Officer

EX-10

PEPCO HOLDINGS, INC. EXECUTIVE PERFORMANCE SUPPLEMENTAL RETIREMENT PLAN
The Potomac Electric Power Company Executive Performance Supplemental Retirement Plan (the "Pepco plan") was established, effective January 27, 1994 to provide supplemental retirement benefits to key executives of the Company, based on awards received by such executives under the Executive Incentive Compensation Plan. The Plan was amended from time to time thereafter. On March 28, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the "Merger") by which Pepco and Conectiv would become wholly owned subsidiaries of Pepco Holdings, Inc. (the "Company or "Pepco Holdings") and, for the near term future, to maintain for the benefit of the executives of Pepco Holdings and its subsidiaries, the level of benefits provided to such executives by their respective employers prior to the merger. Such amendments include the authorization to name Pepco Holdings as the sponso r of the plan; to change the name of the Pepco plan to reflect the change in plan sponsorship; to amend the section of the plan relating to eligibility to participate; and to delete all references to Pepco's General Retirement Plan, and to replace all such references to Pepco's General Retirement Plan with "the principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the employee participates. The Pepco plan, as amended, is restated herein and is now known as the Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan. I.            Definitions             1.1            Applicable Executive Incentive Compensation Plan. The principal annual incentive compensation plan in which the Participant participates.             1.2            Applicable Form of Benefit - The type of life annuity which will be provided to a Participant receiving benefits under this Plan. The Plan benefit to be paid to a participant under this Plan shall be in the annuity form elected by the Participant with respect to the Participant's benefit under the Applicable Defined Benefit Pension Plan, except that the variable annuity option under the Pepco General Retirement Plan is not an annuity form available for payment of benefits under this Plan. If a Participant does elect the variable annuity option under the Pepco General Retirement Plan, benefits under this Plan will be paid in the form applicable to the component of the Participant's accrued benefit under the General Retirement Plan which is not payable in variable annuity form. No other benefit options are provided under this Plan.             1.3            Applicable Defined Benefit Pension Plan - The principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Participant participates. In the case of Participants who participate in Pepco's General Retirement Plan, such term shall also include participation in the Pepco Exempt Surviving Spouse Welfare Plan.             1.4            Committee - The Human Resources Committee of the Board of Directors of the Company.             1.5            Company - Pepco Holdings, Inc. or its successor.             1.6            Eligible Executive - An executive who is described in Section 2.1 of this Plan.             1.7            Exempt Surviving Spouse's Welfare Plan - the welfare plan by the same name which was sponsored by Pepco prior to the Merger.             1.8            General Retirement Plan - the defined benefit pension plan by the same name which was sponsored by Pepco prior to the Merger.             1.9            Participant - An Eligible Executive who has satisfied the conditions described in Section 2.1 and to whom the provisions of Section 2.2 are not applicable.             1.10            Plan - The Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan.             1.11            SERP - The Pepco Holdings, Inc. Supplemental Executive Retirement Plan.             1.12            Supplemental Benefit Plan - The Pepco Holdings, Inc. Supplemental Benefit Plan.             Any term which is not defined in this section or any other section of the Plan shall have the same meaning as that term has under the Applicable Defined Benefit Pension Plan. II.            Eligibility and Participation             2.1            Any employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of the Company (the Chief Executive Officer to be designated by the Board) shall be eligible to participate in this Plan; however, no employee shall be designated a Participant in this Plan if the compensation used to determine benefits under the Applicable Defined Benefit Pension Pan in which the employee participates includes remuneration in excess of such employee's basic rate of compensation..             2.2            An employee shall cease to be a Participant in this Plan and shall not be entitled to any benefits hereunder if the employment of such employee is terminated for any reason, other than death, before the later of (i) the date the employee attains age 59, or (ii) the date the employee first attains either his Early Retirement Date or his Normal Retirement Date under the Applicable Defined Benefit Pension Plan.             2.3            In order to receive benefits under the Plan, a Participant (i) must not have incurred a forfeiture of benefits under Section 2.2 and (ii) must have been an Eligible Executive within the twelve (12) months immediately preceding his actual retirement under the Applicable Defined Benefit Pension Plan, and either (a) have held such position for at least a five year period, or (b) have attained age 65. III.            Retirement Benefits             3.1            This Section 3.1 defines the amount of retirement income which will be paid to a Participant under this Plan to supplement other pension benefits. The amount of retirement benefits payable from this Plan in the Applicable Form of Benefit shall be the difference, if any, between (i) the aggregate amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the SERP and the provisions of the Supplemental Benefit Plan (expressed in the Applicable Form of Benefit) (a) had the amount of compensation used under the Applicable Defined Benefit Pension Plan to calculate benefits (expressed on an annual basis) been increased by the average of the three highest Awards made to such Participant (or such number of Awards actually made to such Participant if less than three) unde r the Applicable Executive Incentive Compensation Plan (without regard to any deferral of receipt of an Award elected by such Participant) within the five consecutive years immediately preceding the Participant's retirement under the Applicable Defined Benefit Pension Plan and (b)(1) had the amount of the benefits under such plans not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such plans not been imposed, and (3) had the deferred compensation earned by such Participant which was excluded from the Participant's compensation base used in determining retirement benefits under such plans been included in such compensation base, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan, the SERP and the Supplemental Benefit Plan. To the extent that a cost of living adjustment is made to benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportional adjustment will be made to the benefits payable herein.             3.2            The monthly benefit provided to a Participant under Section 3.1 shall commence as of the first day of the month on which such Participant begins receipt of retirement benefits under the Applicable Defined Benefit Pension Plan and shall continue for so long as benefits are payable to such Participant (or his surviving spouse) under such Applicable Defined Benefit Pension Plan.             3.3            Death Benefits - This Section 3.3 defines the amount of death benefits, if any, which will be paid to the surviving spouse of a Participant who dies while employed by the Company. In order to receive death benefits hereunder, a surviving spouse must have been legally married to the Participant for at least one (1) year prior to the Participant's death and the sum of the Participant's actual years of Benefit Service and constructive years of Benefit Service granted under the Supplemental Executive Retirement Plan must equal at least ten (10) years. The amount of death benefits payable from this Plan shall be the difference, if any, between (i) the amount of the death benefits to which such surviving spouse would have been entitled under the provisions of the Applicable Defined Benefit Pension Plan, the SERP, the Supplemental Benefit Plan (expressed as a sing le life annuity) (a) had the amount of the Participant's compensation used under the Applicable Defined Benefit Pension Plan to calculate benefits (expressed on an annual basis) under such plans been increased by the average of the three highest Awards made to such Participant (or such number of Awards actually made to such Participant if less than three) under the Executive Incentive Compensation Plan (without regard to any deferral of receipt of an Award elected by such Participant) within the five consecutive years immediately preceding the Participant's retirement under the Applicable Defined Benefit Pension Plan or death, as the case may be, and (b)(1) had the amount of the benefits under such plans not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such plans not been imposed, and (3) had the deferred compens ation earned by the Participant which was excluded from the Participant's compensation base used in determining retirement benefits under such plans been included in such compensation base, and (ii) the amount of the benefits, if any, to which the surviving spouse would otherwise be entitled under the Applicable Defined Benefit Pension Plan, the SERP, and the Supplemental Benefit Plan.             3.4            The monthly death benefit provided to a surviving spouse under Section 3.3 shall commence as of the first day of the month on which such surviving spouse begins receipt of death benefits under the Applicable Defined Benefit Pension Plan and shall continue for so long as benefits are payable to such surviving spouse under either such Plan.             3.5            Loss of Benefits                   (a)      Notwithstanding any other section of this Plan, if a Participant is discharged by the Company because of misfeasance, malfeasance, dishonesty, fraud, misappropriation of funds, or commission of a felony, such Participant's rights to any benefit under this Plan shall be forfeited.                   (b)      If during his employment with the Company or after the Participant has ceased to be employed by the Company, and after providing him an opportunity to be heard, following 30 days written notice, sent by registered mail, return receipt requested, the Committee finds that such Participant has used or is using trade secrets or other confidential, secret or proprietary information gained while in the employ of the Company in a manner which is, or is likely to be detrimental to the best interests of the Company, the Committee shall notify such Participant of such findings and stop all current and future distributions of his interest hereunder. If, within one year of the date or such notice, it is determined by the Committee upon proof submitted by such Participant that he has ceased to so use such information and the Company's loss from such Participant's past and futu re improper use of such information is likely to be insubstantial in proportion to the future loss of his benefit hereunder, the Committee may reinstate him; and, if payment of his retirement income has stopped, it shall be resumed. If he is not reinstated within one year of such notice, the Committee shall cancel his interest hereunder.             3.6            Facility of Payment - If the Committee shall find that any person to whom a benefit is payable is unable to care for his affairs because of illness or accident, any payment due hereunder (unless a prior claim therefore shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to the spouse, a child, children, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expense for such person otherwise entitled to payment. Any such payment shall be a complete discharge of all liability under the Plan therefore.             3.7            Payment of Benefits Upon Change in Control                   (a)      Notwithstanding any other provisions of the Plan except Section 3.5, if a Participant terminates employment before the later of (i) the date the employee attains age 59, or (ii) the date the employee first attains either his Early Retirement Date or his Normal Retirement Date under the Applicable Defined Benefit Pension Plan for any reason other than death following the occurrence of an event described in subsection (b) of this Section 3.7, the entitlements of such Participant under the Plan shall be paid to him in a lump sum within thirty (30) days of the date of his termination of employment. The amount of such lump sum payment shall be computed in two steps. Under the first step, a calculation will be made of the monthly annuity payments to which such Participant would otherwise have been entitled under the provisions of Sections 3.1 and 3.2 of the Plan bas ed upon the service performed by the Participant through the date of such termination of employment, plus any constructive years of Benefit Service granted under the Supplemental Executive Retirement Plan (hereinafter collectively referred to as "Aggregate Service") under the assumptions that (i) the Participant was scheduled to commence receipt of benefits under this Plan as of the earliest date on which the Participant could receive benefits under the Applicable Defined Benefit Pension Plan that were not subject to any early retirement reduction factor described in Section 3.02(a) of the Applicable Defined Benefit Pension Plan determined as if such Participant's years of Vesting Service under the Applicable Defined Benefit Pension Plan equaled his Aggregate Service and (ii) this Plan did not contain any minimum age requirement as to eligibility for receipt of benefits. Under the second step, such monthly annuity payments will be discounted to their present value as of the date of the Participant's t ermination of employment using the Pension Benefit Guaranty Corporation's immediate payment interest rate in effect on the date of the Participant's termination of employment plus one-half of one percent (1/2%).                      (b)      The provisions of subsection (a) of this Section 3.7 shall apply in the event that (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of twenty-four (24) consecutive months (not including any period prior to the adoption of this Plan), individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this subsection (b)) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securiti es of the surviving entity) at least 70% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, the stockholders of the Company approve a plan of complete liquidation of the Company, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. IV.            Administration of the Plan             4.1            Administration - The Human Resources Committee of the Board of Directors shall administer the Plan.                   (a)      The Committee shall have the sole, exclusive authority to interpret and construe the provisions of this Plan, to decide any disputes which may arise with regard to the rights of employees under the terms of this Plan, to give instructions and directions necessary hereunder and, in general, to direct the administration of the Plan. All fees, salaries, and other costs incurred in connection therewith shall be paid by the Company.                   (b)      The Committee shall keep or cause to be kept, records containing all relevant data pertaining to Participants and their rights under this Plan, and is charged with the primary duty of seeing that each Participant receives the benefits to which he may be entitled under this Plan.             4.2            Accounts and Reports - The Company and its officers, employees and directors or designees and the Committee shall be entitled to rely upon all tables, valuations, certificates, and reports furnished by any actuary selected by the Committee; upon all certificates and reports made by any accountant selected by the Committee; and upon all opinions given by any legal counsel selected by the Committee; and the Company and its officers and directors or designees and the Committee shall be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any tables, valuations, certificates, reports, opinions, or other advice furnished by any such actuary, accountant, or counsel; and all action so taken or suffered shall be conclusive upon each of them and upon all Participants of the Plan.             4.3            Expenses of Administration - All expenses shall be paid by the Company.             4.4            Liability - The Company, the Board of Directors, the Committee, officers, and employees shall incur no liability for any action taken in good faith in connection with the administration of this Plan. The Company may provide all appropriate and necessary insurance to render the aforesaid harmless from any and all liability incurred in the discharge of their duties. V.            Funding             5.1            Company Contributions - The Company has established a grantor trust (Trust 2 originally executed on May 1, 1995) to hold assets to secure the Company's obligations to the Participant under this Plan in such a manner that the establishment of such a trust does not result in the Plan being "funded" for purposes of the Internal Revenue Code of 1986, as amended. Such trust initially received a transfer of a Ten Thousand Dollars ($ 10,000). However, such trust provides that the full present value of the benefits of the benefits payable hereunder shall subsequently be contributed to the trust in the event the Company fails to pay such benefits due hereunder in a timely manner. Except to the extent provided through a grantor trust established under the provisions of this Section, all payments under this Plan shall be made out of the Company's general re venue, a Participant's right to payment shall be solely that of an unsecured general creditor of the Company, and no assets of the Company shall be set aside, earmarked or placed in trust or escrow for the benefit of any Participant to fund the Company's obligations which may exist under the Plan.             5.2            Employee Contributions - No Participant shall be required or permitted to make any contribution to the Plan. VI.            Miscellaneous             6.1            Limitation of Responsibility - Neither the establishment of the Plan, any modifications thereof, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company (the Board of Directors, the Committee, or any officer or employee) except as herein provided, and in no event shall the other terms of employment of any employee be modified or in any way affected thereby.             6.2            Restrictions on Alienation and Assignment - Except as any of the following provisions may be contrary to the law of any state having jurisdiction in the premises, no Participant, or beneficiary shall have the right to assign transfer, hypothecate, encumber, commute or anticipate his interest in any payments under this Plan, and such payments shall not in any way be subject to any legal process to levy upon or attach the same for payment of any claim against any Participant, or beneficiary.             6.3            Failure to Claim Amounts Payable under the Plan - In the event that any amount shall become payable hereunder to any person or, upon his death, to his surviving spouse and if after written notice from the Committee mailed to such person's last known address as shown in the Company's records, such person or his personal representative shall not have presented himself to the Committee within six months after mailing of such notice, the Committee may, but it is not required to, determine that such person's interest in the Plan has terminated, which determination shall be conclusive upon all persons provided, however, in lieu of the foregoing, the Committee may in its sole discretion apply to a court of competent jurisdiction for direction as to the distribution of such amount.             6.4            Right of the Company to Dismiss or Demote Employees - Neither the action of the Company in establishing this Plan nor any action taken by it under any provisions of this Plan shall be construed as giving to any employee of the Company the right to be retained in any specific position or in its employ in general or any right to any retirement income or benefit or to any payment whatsoever, except to the extent of the benefits which may be provided for by the express provisions of this Plan. The Company expressly reserves the right at any time, to dismiss, demote or reduce the compensation of any employee without incurring any liability for any claim against itself for any payment whatsoever.             6.5            Amendment and Termination - Nothing in this Plan shall be deemed to limit the Company's right, by resolution of the Board of Directors of the Company, to amend, modify or terminate the Plan at any time and for any reason except that no such amendment, modification or termination shall serve to decrease the Participants' benefits accrued under this Plan, other than by operation of Section 3.5 or by operation of an involuntary termination of employment under the rights reserved to the Company in Section 6.4.             6.6            Laws to Govern - The provisions of this Plan shall be construed, administered, and enforced according to the laws of the District of Columbia.             IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed effective this 1st day of August, 2002, which restated version reflects all modifications made to the Plan through such date of execution.
ATTEST By:  /s/  Ellen Sheriff Rogers                                                Secretary	PEPCO HOLDINGS, INC. By:  /s/  John M. Derrick, Jr.                                             Chief Executive Officer

EX-10

PEPCO HOLDINGS, INC.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

            The Potomac Electric Power Company Supplemental Executive Retirement Plan (the "Pepco plan") was established, effective July 1, 1986, to provide supplemental retirement benefits to key executives of Pepco. The Pepco plan was amended from time to time thereafter. On March 28, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the "Merger") by which Pepco and Conectiv would become wholly owned subsidiaries of Pepco Holdings, Inc. (the "Company" or "Pepco Holdings") and, for the near term future, to maintain for the benefit of the executives of Pepco Holdings and its subsidiaries, the level of benefits provided to such executives by their respective employers prior to the merger. Such amendments include authorization to name Pepco Holdings as the sponsor of the Pepco plan; to change the name of the Pepco plan to reflect the change in plan sponsorship; to amend the section of the plan relating to eligibility to participate; and to delete all references to the Pepco General Retirement Plan, and to replace all such references to Pepco's General Retirement Plan with "the principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the employee participates". The Pepco plan, as amended, is restated herein and is now known as the Pepco Holdings, Inc. Supplemental Executive Retirement Plan.

I.             Definitions

            1.1            Applicable Form of Benefit - The type of life annuity which will be provided to a Participant receiving benefits under this Plan. The Plan benefit to be paid to a Participant under this Plan shall be paid in the annuity form elected by the Participant with respect to the Participant's benefits under the Applicable Defined Benefit Pension Plan, except that the variable annuity option under the General Retirement Plan is not an annuity form available for payments of benefits under this Plan. If a Participant does elect the variable annuity option under the General Retirement Plan, benefits under this Plan will be paid in the form applicable to the component of the Participant's accrued benefit under the General Retirement Plan which is not payable in the variable annuity form.

            1.2            Applicable Defined Benefit Pension Plan - The principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Participant participates. In the case of Participants who participate in the General Retirement Plan, such term shall also include participation in the Exempt Surviving Spouse Welfare Plan.

            1.3            Committee - The Human Resources Committee of the Board of Directors of the Company.

            1.4            Company - Pepco Holdings, Inc. or its successor.

            1.5            Eligible Executive -- An executive who is described in Section 2.1 of this Plan.

            1.6            Executive Performance Supplemental Retirement Plan - the Pepco Holdings Inc. Executive Performance Supplemental Retirement Plan.

            1.7            Exempt Surviving Spouse's Welfare Plan - the welfare plan by the same name which was sponsored by Pepco prior to the Merger.

            1.8            General Retirement Plan - the defined benefit pension plan by the same name which was sponsored by Pepco prior to the Merger.

            1.9            Participant - An Eligible Executive who has satisfied the conditions described in Section 2.1 and to whom the provisions of Section 2.2 are not applicable.

            1.10            Participation Agreement - The separate agreement with a designated Participant which sets forth the constructive years of Benefit Service which will be credited to the Participant for purposes of determining benefits under the Plan.

            1.11            Plan - The Pepco Holdings, Inc. Supplemental Executive Retirement Plan.

            1.12            Supplemental Benefit Plan - The Pepco Holdings, Inc. Supplemental Benefit Plan.

            Any term which is not defined in this section or any other section of the Plan will have the same meaning as that term has under the Applicable Defined Benefit Pension Plan.

II.             Eligibility and Participation

            2.1            Any employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of the Company (the Chief Executive Officer to be designated by the Board) shall be eligible to participate in this Plan.

            2.2          An employee shall cease to be a Participant in this Plan and shall not be entitled to any benefits hereunder if the employment of such employee is terminated for any reason, other than death, before the later of (i) the date the employee attains age 59, or (ii) the date the employee first attains either his Early Retirement Date of his Normal Retirement Date under the Applicable Defined Benefit Pension Plan.

III.            Retirement Benefits

             3.1             This Section 3.1 defines the amount of retirement income which will be paid to a Participant (who terminated employment on or after attaining age 59 for any reason other than death) to supplement other pension benefits. The amount of retirement benefits payable from this Plan in the Applicable Form of Benefit shall be the difference, if any, between (i) the amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the Executive Performance Supplemental Retirement Plan and the provisions of the Supplemental Benefit Plan (expressed in the Applicable Form of Benefit) had the number of such Participant's years of service used to calculate the benefits under such plans been increased by the additional years of constructive service set forth in such Participant's Participation Agreement, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan, the Executive Performance Supplemental Retirement Plan and the Supplemental Benefit Plan. Notwithstanding the above, in no event will a Participant be granted constructive years of service hereunder which would cause the combination of his actual years of service credited under the Applicable Defined Benefit Pension Plan and his constructive years of service granted hereunder to exceed the lesser of (i) forty (40), or (ii) the number by which the Participant's then current age exceeds twenty-five (25). To the extent that a cost of living adjustment is made to the benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportionate adjustment will be made to the benefits payable hereunder.

3.2            The monthly benefit provided to a Participant under Section 3.1 shall commence as of the first day of the month on which such Participant begins receipt of retirement benefits under the Applicable Defined Benefit Pension Plan and shall continue for so long as benefits are payable to such Participant (or his surviving spouse) under such Applicable Defined Benefit Pension Plan.
3.3             Death Benefits - This Section 3.3 defines the amount of death benefits, if any, which will be paid to the surviving spouse of a Participant who dies while employed by the Company. In order to receive death benefits hereunder, a surviving spouse must have been legally married to the Participant for at least one (1) year prior to the Participant's death and the sum of the Participant's actual years of service used to calculate the benefits under the Applicable Defined Benefit Pension Plan and constructive years of service granted herein must equal at least ten (10) years. The amount of death benefits payable from this Plan shall be the difference, if any, between (i) (a) the amount of the death benefits to which such surviving spouse would have been entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the Executive Performance Supplemental Retirement Plan and the Supplemental Benefit Plan (expressed as a single life annuity) had the number of years of service used to calculate the benefits under the Applicable Defined Benefit Pension Plan been increased by the additional constructive years of service set forth in such Participant's Participation Agreement, and (b) the amount of the benefits to which such surviving spouse would otherwise be entitled under such plans.
3.4            The monthly death benefit provided to a surviving spouse under Section 3.3 shall commence as of the first day of the month on which such surviving spouse begins receipt of death benefits under the Applicable Defined Benefit Pension Plan and shall continue for so long as benefits are payable to such surviving spouse under such plan.
3.5            Loss of Benefits                   (a)            Notwithstanding any other section of this Plan, if a Participant is discharged by the Company because of misfeasance, malfeasance, dishonesty, fraud, misappropriation of funds, or commission of a felony, or if the Committee determines that the Participant has made a material misrepresentation regarding the amount or nature of any pension, retirement or deferred compensation benefits resulting from Participant's prior employment, such Participant's rights to any benefit under this Plan shall be forfeited.
(b)            If during his employment with the Company or after the Participant has ceased to be employed by the Company, and after providing him an opportunity to be heard, following 30 days written notice, sent by registered mail, return receipt requested, the Committee finds that such Participant has used or is using trade secrets or other confidential, secret or proprietary information gained while in the employ of the Company in a manner which is, or is likely to be detrimental to the best interests of the Company, the Committee shall notify such Participant of such findings and stop all current and future distributions of his interest hereunder. If within one year of the date or such notice, it is determined by the Committee upon proof submitted by such Participant that he has ceased to so use such information and the Company's los s from such Participant's past and future improper use of such information is likely to be insubstantial in proportion to the future loss of his benefit hereunder, the Committee may reinstate him; and, if payment of his retirement income has stopped, it shall be resumed. If he is not reinstated within one year of such notice, the Committee shall cancel his interest hereunder.
3.6            Facility of Payment - If the Committee shall find that any person to whom a benefit is payable is unable to care for his affairs because of illness or accident, any payment due hereunder (unless a prior claim therefor shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to the spouse, a child, children, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expense for such person otherwise entitled to payment. Any such payment shall be a complete discharge of all liability under the Plan therefor.
3.7            Payment of Benefits Upon Change in Control                    (a)             Notwithstanding any other provisions of the Plan except Section 3.5, if a Participant terminates employment before the later of (i) the date the employee attains age 59, or (ii) the date the employee first attains either his Early Retirement Date or his Normal Retirement Date under the Applicable Defined Benefit Pension for any reason other than death following the occurrence of an event described in subsection (b) of this Section 3.7, the entitlements of such Participant under the Plan shall be paid to him in a lump sum within thirty (30) days of the date of his termination of employment. The amount of such lump sum payment shall be computed in two steps. Under the first step, a calculation will be made of the monthly annuity payments to which such Participant would otherwise have been entitled under the provisions of Sectio ns 3.1 and 3.2 of the Plan based upon (a) the service performed by the Participant through the date of such termination of employment, plus (b) the additional years of constructive service set forth in such Participant's Participation Agreement (hereinafter collectively referred to as "Aggregate Service") under the assumptions that (i) the Participant was scheduled to commence receipt of benefits under this Plan as of the earliest date on which the Participant could receive benefits under the Applicable Defined Benefit Pension Plan that were not subject to the early retirement reduction factor described in such plan determined as if such Participant's years of Vesting Service under the Applicable Defined Benefit Pension Plan equaled his Aggregate Service and (ii) this Plan did not contain any minimum age requirement as to eligibility for receipt of benefits. Under the second step, such monthly annuity payments will be discounted to their present value as of the date of the Participant's termination of employ ment using the Pension Benefit Guaranty Corporation's immediate payment interest rate in effect on the date of the Participant's termination of employment plus one-half of one percent (1/2%).
(b)             The provisions of subsection (a) of this Section 3.7 shall apply in the event that (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of twenty-four (24) consecutive months (not including any period prior to t he adoption of this Plan), individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this subsection (b)) whose election by the Board of Directors of the Company or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 70% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, the stockholders of the Company approve a plan of complete liquidation of the Company, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets.
IV.             Administration of the Plan             4.1            Administration - The Human Resources Committee of the Board of Directors shall administer the Plan.                   (a)             The Committee shall have the sole, exclusive authority to interpret and construe the provisions of this Plan, to decide any disputes which may arise with regard to the rights of employees under the terms of this Plan, to give instructions and directions necessary hereunder and, in general, to direct the administration of the Plan. All fees, salaries, and other costs incurred in connection therewith shall be paid by the Company.
(b)             The Committee shall keep or cause to be kept, records containing all relevant data pertaining to Participants and their rights under this Plan, and is charged with the primary duty of seeing that each Participant receives the benefits to which he may be entitled under this Plan.             4.2            Accounts and Reports - The Company and its officers, employees and directors or designees and the Committee shall be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary selected by the Committee; upon all certificates and reports made by any accountant selected by the Committee; and upon all opinions given by any legal counsel selected by the Committee; and the Company and its officers and directors or designees and the Committee shall be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any tables, valuations, certificates, reports, opinions, or other advice furnished by any such actuary, accountant, or counsel; and all action so taken or suffered shall be conclusive upon each of them and upon all Participants of the Plan.
4.3            Expenses of Administration - All expenses shall be paid by the Company.             4.4            Liability - The Company, the Board of Directors, the Committee, officers and employees shall incur no liability for any action taken in good faith in connection with the administration of this Plan. The Company may provide all appropriate and necessary insurance to render the aforesaid harmless from any and all liability incurred in their duties. V.             Funding             5.1            Company Contributions - No assets of the Company shall be set aside or earmarked or placed in trust or escrow for the benefit of any Participant to fund the Company's obligations which may exist under the Plan; provided, however, that the Company may establish a grantor trust to hold assets to secure the Company's obligations to the Participants under this Plan if the establishment of such a trust does not result in the Plan being 'funded' for purposes of the Internal Revenue Code of 1986, as amended. Except to the extent provided through a grantor trust established under the provisions of the preceding sentence, all payments under this Plan shall be made out of the Company's general revenue and a Participant's right to payments shall be solely that of an unsecured general creditor of the Company.
5.2            Employee Contributions - No Participant shall be required or permitted to make any contribution to the Plan. VI.             Miscellaneous             6.1            Limitation of Responsibility - Neither the establishment of the Plan, any modifications thereof, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company, (the Board of Directors, the Committee, or any officer or employee) except as herein provided; and in no event shall the other terms of employment of any employee be modified or in any way affected thereby.
6.2            Restrictions on Alienation and Assignment - Except as any of the following provisions may be contrary to the law of any state having jurisdiction in the premises, no Participant, or beneficiary shall have the right to assign transfer, hypothecate, encumber, commute or anticipate his interest in any payments under this Plan, and such payments shall not in any way be subject to any legal process to levy upon or attach the same for payment of any claim against any Participant, or beneficiary.
6.3            Failure to Claim Amounts Payable under the Plan - In the event that any amount shall become payable hereunder to any person or, upon his death, to his surviving spouse and if after written notice from the Committee mailed to such person's last known address as shown in the Company's records, such person or his personal representative shall not have presented himself to the Committee within six months after mailing of such notice, the Committee may, but it is not required to, determine that such person's interest in the Plan has terminated, which determination shall be conclusive upon all persons provided, however, in lieu of the foregoing, the Committee may in its sole discretion apply to a court of competent jurisdiction for direction as to the distribution of such amount.
6.4            Right of the Company to Dismiss or Demote Employees - Neither the action of the Company in establishing this Plan nor any action taken by it under any provisions of this Plan shall be construed as giving to any employee of the Company the right to be retained in any specific position or in its employ in general or any right to any retirement income or benefit or to any payment whatsoever, except to the extent of the benefits which may be provided for by the express provisions of this Plan. The Company expressly reserves the right at any time, to dismiss, demote or reduce the compensation of any employee without incurring any liability for any claim against itself for any payment whatsoever.
6.5            Amendment and Termination - Nothing in this Plan shall be deemed to limit the Company's right, by resolution of the Board of Directors of the Company, to amend, modify or terminate the Plan at any time and for any reason except that no such amendment, modification or termination shall serve to decrease the benefits set forth in a Participant's Participation Agreement, other than by operation of Section 3.5 or by operation of an involuntary termination of employment under the rights reserved to the Company in Section 6.4.             6.6            Laws to Govern - The provisions of this Plan shall be construed, administered, and enforced according to the laws of the District of Columbia.
IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed effective this 1st day of August, 2002, which restated version reflects all modifications made to the Plan through the date of execution, and supersedes the Plan document signed June 2, l995.
ATTEST By  /s/  Ellen Sheriff Rogers	POTOMAC ELECTRIC POWER COMPANY By  /s/  John M. Derrick, Jr.

EX-10

PEPCO HOLDINGS, INC. SUPPLEMENTAL BENEFIT PLAN
Introduction             On February 17, 1983, the Potomac Electric Power Company ("Pepco") established the Supplemental Benefit Plan (the "Pepco plan")to provide for the payment of a retirement supplement to executives eligible to participate in the plan or their beneficiaries in amounts equal to any reduction of total retirement benefits that otherwise would be payable under the Pepco General Retirement Plan to the extent such reduction is attributable to A) the benefit limitation provisions of federal law and regulations; or B) the exclusion of deferred compensation from the compensation base used in determining retirement benefits under the General Retirement Plan, as required under applicable law. The Pepco plan was amended from time to time thereafter. On March 28, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the "Merger") by which Pepco and Conectiv would become wholly owned subsidiaries of Pepco Holdings, Inc. (the "Company" or "Pepco Holdings") and, for the near term future, to maintain for the benefit of the executives of Pepco Holdings and its subsidiaries, the level of benefits provided to such executives by their respective employers prior to the Merger. Such amendments include authorization to name Pepco Holdings as the sponsor of the Pepco plan; to change the name of the Pepco plan to reflect the change in plan sponsorship; to amend the section of the plan relating to eligibility to participate; and to delete all references to Pepco's General Retirement Plan, and to replace all such references to the Pepco General Retirement Plan with "the principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the employee participates". Therefore, the Pepco plan has been amended and is restated herein and is now known as the Pepco Holdings, Inc. Supplemental Benefit Plan. (the "Plan"). I.            Definitions:             1.1            Applicable Form of Benefit - The type of life annuity which will be provided to a Participant receiving benefits under this Plan. The Plan benefit to be paid to a Participant under this Plan shall be paid in the annuity form elected by the Participant with respect to the Participant's benefits under the Applicable Defined Benefit Pension Plan, except that the variable annuity option under the Pepco General Retirement Plan is not an annuity form available for payment of benefits under this Plan. If a Participant does elect the variable annuity option under the Pepco General Retirement Plan, benefits under this Plan will be paid in the form applicable to the component of the Participant's accrued benefit under the General Retirement Plan which is not payable in the variable annuity form.             1.2            Applicable Defined Benefit Pension Plan - The principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Participant participates. In the case of Participants who participate in Pepco's General Retirement Plan, such term shall also include participation in the Pepco Exempt Surviving Spouse Welfare Plan.             1.3            Code - The Internal Revenue Code of 1986, as amended from time to time.             1.4            Committee - The Human Resources Committee of the Board of Directors of the Company.             1.5            Company - Pepco Holdings, Inc., or its successor.             1.6            Participant - An employee who has been so designated as described in Section II.             1.7            Plan - shall mean the Pepco Holdings. Inc. Supplemental Benefit Plan.             Any term which is not defined in this section or any other section of the Plan shall have the same meaning as that term has under the Applicable Defined Benefit Pension Plan. II.            Eligibility and Participation             Any employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of Pepco Holdings (the Chief Executive Officer to be designated by the Board) shall be eligible to participate in this Plan. III.            Supplemental Benefit             3.1 - This Section defines the amount of retirement income (the "Supplemental Benefit") which will be paid to a Participant under this Plan. The amount of retirement benefits payable from this Plan in the Applicable Form of Benefit shall be the difference, if any, between (i) the amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan and the Conectiv Supplemental Executive Retirement Plan, if applicable (expressed in the Applicable Form of Benefit) (1) had the amount of the benefits under such plan not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such plan not been imposed, and (3) had the deferred compensation earned by such Participant which was excluded from the Participant's compensation base used in determining retirement benefits under such plan been included in such compensation base, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan. To the extent that a cost of living adjustment is made to the benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportionate adjustment will be made to the benefits payable hereunder.             3.2            Vesting
	a)	The Supplemental Benefit shall vest when the Participant otherwise would be vested under the terms and conditions of the Applicable Defined Benefit Pension Plan.
	b)	A Participant whose employment with the Company is terminated prior to the attainment of a vested retirement benefit under the Applicable Defined Benefit Pension Plan shall not be entitled to receive a benefit from the Supplemental Benefit Plan.

3.3            Supplemental Benefit Account
	a)	For bookkeeping purposes only, the Company will establish and maintain a Supplemental Benefit Account for each Participant which reflects the Participant's currently accrued Supplemental Benefit, expressed in the form of straight life annuity.
	b)	The Company shall furnish each Participant with an annual statement, as of December 31 of each year, showing the Supplemental Benefit which the Participant is eligible to receive.
3.4            Time and Form of Payment of Supplemental Retirement Benefit
	a)	The Supplemental Benefit shall be payable to the Participant in the Applicable Form of Benefit elected by the Participant under the terms and conditions of the Applicable Defined Benefit Pension Plan.
	b)	The Supplemental Benefit shall be payable to the Participant beginning on the first of the month in which such Participant begins receipt of retirement benefits under the Applicable Defined Benefit Pension Plan and shall continue for as long as benefits are payable to such Participant (or his surviving spouse) under the Applicable Defined Benefit Pension Plan.
	c)	In the event that a Participant ceases to be an employee of the Company and becomes a proprietor, officer, partner, employee or otherwise becomes employed by a governmental agency having jurisdiction over the affairs of the Company, the Company reserves the right in its sole discretion to make an immediate lump sum payment of the Actuarial Equivalent value of the Participant's Supplemental Benefit.
	d)	Notwithstanding anything in the foregoing to the contrary, in the event benefits under the Applicable Defined Benefit Pension Plan are paid to a Participant prior to his Normal Retirement Date, the Supplemental Benefit payable hereunder shall be adjusted by use of the same methodology as is then in effect to adjust the benefit payable under the Applicable Defined Benefit Pension Plan to reflect commencement of benefits prior to a Participant's Normal Retirement Date.
3.5            Death Benefits             Except as provided in Section 1.1, above, the terms of the Applicable Defined Benefit Pension Plan shall govern the timing and form of payment of the Participant's Supplemental Benefit to the surviving spouse upon the Participant's death. Payment of the Supplemental Benefit, if any, to a Participant's surviving spouse (as that term is used under the Applicable Defined Benefit Pension Plan shall begin when benefits commence to such surviving spouse under such plan and shall continue for so long as benefits are payable to such surviving spouse under such plan. IV.            General Provisions             4.1            Rights of Participants, Joint Annuitants and Beneficiaries
	a)	The Company has established a grantor trust (Trust No. 2 originally executed on May 1, 1995) to hold assets to secure the Company's obligations to the Participant under this Plan in such a manner that the establishment of such a trust does not result in the Plan being "funded" for purposes of the Internal Revenue Code of 1986, as amended. Such trust initially received a transfer of Ten Thousand Dollars ($10,000). However such trust provides that the full present value of the benefits payable hereunder shall subsequently be contributed to the trust in the event the Company fails to pay any benefits due hereunder in a timely manner. Except to the extent provided under the provisions of this Section, all payments under this Plan shall be made out of the Company's general revenue, a Participant's right to payment shall be solely that of an unsecured general creditor of the Company, and no assets of the Company shall be set aside, earmarked or placed in trust or escrow for the benefit of any Pa rticipant to fund the Company's obligations which exist under the Plan.
	b)	Except as any of the following provisions may be contrary to the law of any state having jurisdiction in the premises, no Participant, or beneficiary shall have the right to assign, transfer, hypothecate, encumber, commute or anticipate his interest in any payments under this Plan, and such payments shall not in any way be subject to any legal process to levy upon or attach the same for payment of any claim against any Participant, or beneficiary.
	c)	If the Company finds that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expenses for the person who is otherwise entitled to payment, in such manner and proportions as the Company may determine. Any such payment will serve to discharge the liability of the Company under this Plan to make payment to the person who is otherwise entitled to payment.
	d)	To the extent it deems required by law, the Company shall withhold applicable taxes from benefit payments hereunder and shall furnish the recipient and the applicable governmental agency or agencies with such reports, statements, or information as may be legally required in connection with such benefit payments.
	e)	Neither the action of the Company in establishing this Plan nor any action taken by it under any provisions of this Plan shall be construed as giving to any employee of the Company the right to be retained in any specific position or in its employ in general or any right to any retirement income or benefit or to any payment whatsoever, except to the extent of the benefits which may be provided for by the express provisions of this Plan. The Company expressly reserves the right at any time, to dismiss, demote or reduce the compensation of any employee without incurring any liability for any claim against itself for any payment whatsoever.
	f)	In the event that any amount shall become payable hereunder to any person or, upon his death, to his surviving spouse and if after written notice from the Committee mailed to such person's last known address as shown in the Company's records, such person or his personal representative shall not have presented himself to the Committee within six months after mailing of such notice, the Committee may, but it is not required to, determine that such person's interest in the Plan has terminated, which determination shall be conclusive upon all persons provided, however, in lieu of the foregoing, the Committee may in its sole discretion apply to a court of competent jurisdiction for direction as to the distribution of such amount.
4.2            Amendment and Termination             The Plan may be amended, suspended or terminated at any time by the Company; provided, however, that no amendment, suspension or termination shall have the effect of impairing the rights of Participants or Beneficiaries with respect to the amount reflected in their Supplemental Benefit Account on or before the date of the amendment, suspension or termination.
4.3            Interpretation             This Plan shall be construed in accordance with and governed by the laws of the District of Columbia.
4.4            Limitation of Responsibility             Neither the establishment of the Plan, any modifications thereof nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company (the Board of Directors, the Committee, or any officer or employee) except as herein provided, and in no event shall the other terms of employment of any employee be modified or in any way affected thereby.
IN WITNESS WHEREOF, the Company has caused this Plan to be signed effective this 1st day of August, 2002.
ATTEST By:  /s/  Ellen Sheriff Rogers                                 Secretary			Pepco Holdings, Inc. By:  /s/  John M. Derrick, Jr.                             Chief Executive Officer

EX-10

PEPCO HOLDINGS, INC. REVISED AND RESTATED EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN
I.      INTRODUCTION       Potomac Electric Power Company ("Pepco") established the Potomac Electric Power Company Executive Deferred Compensation Plan (the "Pepco plan"), effective November 18, 1982, to enable certain executives to supplement their retirement income by deferring the receipt of compensation for services performed while the Pepco plan was in effect. The Pepco plan was amended from time to time thereafter. On March 28, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the "Merger") by which Pepco and Conectiv would become wholly owned subsidiaries of Pepco Holdings, Inc. (the "Company" or "Pepco Holdings") and, for the near term future, to maintain for the benefit of the executives of Pepco Holdings and its subsidiaries, the level of benefits provided to such executives by their respective employers prior to the merger. Such amendments include authorization to name Pepco Holdings as the sponsor of the plan; to change the name of the Pepco plan to reflect the change in plan sponsorship; to amend the definition of "executive" as eligible to participate in the plan; to add an in-service withdrawal feature to the Pepco plan; and to provide an investment option which credits a participant's account with increases or decreases in value attributable to phantom units of Pepco Holdings common stock, together with any dividends or stock reinvestment rights associated with the designated phantom units. Therefore, the Pepco plan has been amended and is restated herein and is now known as the Pepco Holdings, Inc. Executive and Director Deferred Compensation Plan. (the "Plan").
II.      DEFINITIONS       2.01      "Account" means the bookkeeping account maintained by the Company (i) for each participating Executive and (ii) for each participating Director, which is credited with the Executive's or the Director's Deferred Compensation, as the case may be. and with additional amounts in the nature of interest and which is debited to reflect benefit distributions.       2.02      "Agreement" means the Participation Agreement executed by the Company and an Executive or a Director, as the case may be, which designates the amount of the Executive's or the Director's Deferred Compensation, the time and manner of benefit distributions, and the Executive's or the Director's Beneficiary.       2.03      "Beneficiary" means any person designated by a participating Executive or a participating Director to receive benefits under the Plan in the event of the Executive's or the Director's death prior to the completion of all benefit payments under the Plan. An Executive's or a Director's Agreement, as the case may be. may designate more than one Beneficiary or may designate primary and contingent Beneficiaries.       2.04      "Board of Directors" means the Board of Directors of Pepco Holdings, Inc.       2.05      "Deferred Compensation" means any remuneration which would otherwise be currently payable to the Executive or the Director, but which the Executive or the Director irrevocably agrees to receive on a deferred basis in accordance with the terms of the Plan.       2.06      "Director" means a member of the Board of Directors, including an Advisory Director.       2.07      "Executive" means such employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of Pepco Holdings (the Chief Executive Officer to be designated by the Board).
2.08      "Human Resources Committee" shall mean that Committee, comprised of members of the Board of Directors, which governs the development of personnel policies for the Company.       2.09      "Normal Compensation" with respect to an Executive means the amount of salary that would be payable to an Executive for the twelve (12) month period commencing on the first day of any Plan Year if the Executive were not participating hereunder. "Normal Compensation" with respect to a Director means the amount of retainer/fees that would be payable to a Director for the twelve (12) month period commencing on the first day of any Plan Year if the Director were not participating hereunder.       2.10      "Plan Year" means the twelve-month period commencing on July 1 of each calendar year and ending on June 30 of the following calendar year.2.11 "Retirement" with respect to an Executive means the date following an Executive's Separation from Service on which the payment of benefits to the Executive commences under the principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Executive participates (the "Applicable Defined Benefit Pension Plan") by reason of the Executive having attained normal or early retirement age under that plan. In the event that an Executive is not entitled to receive benefits under the Applicable Defined Benefit Pension Plan following Separation from Service, "Retirement" means Separation from Service and attainment of age sixty-five (65). "Retirement" with respect to a Director means Separation from Service and attainment of age sixty-five (65).       2.11      "Retirement" with respect to an Executive means the date following an Executive's Separation from Service on which the payment of benefits to the Executive commences under the principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Executive participates (the "Applicable Defined Benefit Pension Plan") by reason of the Executive hearing attained normal or early retirement age under that plan. In the event that an Executive is not entitled to receive benefits under the Applicable Defined Benefit Pension Plan following Separation from Service, "Retirement" means Separation from Service and attainment of age sixty-five (65). "Retirement" with respect to a Director means Separation from Service and attainment of age sixty-five (65).
2.12      "Separation from Service" means an Executive's termination of employment with the Company and any of its subsidiaries or a Director's cessation of participation on the Board of Directors. An Executive who terminates regular employment or a Director who discontinues participation on the Board of Directors and who thereafter performs consulting services for the Company on a part-time basis will nonetheless be deemed to have had a Separation from Service at the date of termination of regular employment or the date of discontinuance of participation on the Board of Directors, as the case may be.
III.      PARTICIPATION       3.01      An Executive or a Director may execute an Agreement and become a participant in the Plan prior to the first day of any Plan Year. Except as set forth in Section 5.02, an Executive's or a Director's Agreement for a Plan Year may not be amended or revoked once that Plan Year has commenced, provided that a participating Executive or a participating Director may at any time change his Beneficiary designation by providing written notice of such change to the Company.       3.02      An Executive's or a Director's Agreement shall relate to (i) compensation for services performed during the Plan Year to which it relates, (ii) benefit entitlements otherwise payable in connection with prior deferrals pursuant to Section 5.01 of the Potomac Electric Power Company Director and Executive Deferred Compensation Plan, (iii) other remuneration approved by the Board of Directors as eligible to be deferred under the Plan, provided that such Agreement shall be entered into prior to payment of such compensation to the Executive or the Director, as the case may be, or (iv)other remuneration approved by the Board of Directors as eligible to be credited under the Plan by way of a transfer of a deferred compensation entitlement to this Plan from any other nonqualified deferred compensation program maintained by the Company. IV.      DEFERRAL OF COMPENSATION - EXECUTIVE AND DIRECTOR RULES       4.01      The deferral of compensation for an Executive shall be made in accordance with the following provisions.
	A.      Each Plan Year, the Executive may elect any or all of the following four options for deferring compensation, to the extent applicable: Option 1 - the Executive may elect to defer an amount of Normal Compensation. The Agreement may specify that the Executive's salary will be reduced by the amount of the Deferred Compensation on a ratable basis throughout the Plan Year or that the Executive's salary will be reduced by a specified amount or amounts in a specified month or months of the Plan Year. Option 2 - the Executive may elect to defer the difference between (i) six percent (6%) of his compensation. as defined in the principal defined contribution savings plan of Pepco Holdings or one of its subsidiaries in which the Executive participates (the "Applicable Savings Plan"), and (ii) the amount of pre-tax contributions he is permitted to make under the Applicable Savings Plan. Under this Option 2, the Executive's salary will be reduced by the amount of Deferred Compensation at the same time and in the same amounts as if' such reduction was governed by the election then in effect for the Executive under the Applicable Savings Plan. Option 3 - the Executive may elect to defer such other compensation which would otherwise be paid to the Executive during the Plan Year provided such compensation has been approved by the Board of Directors in its sole discretion as eligible to be deferred under the Plan. Option 4 - subject to the prior approval of the Board of Directors, which approval may be granted or withheld in the sole discretion of the Board of the Directors, the Executive may elect to have the Executive's Account under this Plan credited with a deferred compensation entitlement attributable to any other nonqualified deferred compensation program maintained by the Company, provided that such transfer will be accompanied by a corresponding elimination of the Company's obligation under such other deferred compensation arrangement and provided further that no such transfer will be permitted with respect to any deferred compensation entitlement which would otherwise become payable to the Executive under the terms of such other nonqualified deferred compensation program within the same calendar year as the year of the proposed transfer.       Each Executive who elects Deferred Compensation with respect to a Plan Year shall specify in his Agreement for such Plan Year the Option or Options which shall apply for such Plan Year.       B.      The Company will credit the Deferred Compensation to the Account of each participating Executive as of the day such amount would have been paid to the Executive if the Executive's Agreement had not been in effect. The Executive may elect to have the Company credit, on a monthly basis, all Deferred Compensation into the Executive's Account with an amount in the nature of interest at either (i) the prime interest rate quoted by the Chase Manhattan Bank, N.A., (the "Prime Rate"), as of the last day of the month, (ii) a rate equal to the rate of return with respect to any one or a combination of the investment funds selected by the Human Resources Committee (an "Investment Fund Rate"), or (iii) a combination of the Prime Rate and an Investment Fund Rate. The Prime Rate or the appropriate Investment Fund Rate(s) shall be credited to the Executive's Account as of the last day of each calendar month based on the daily balances in the Account which are to be adjusted with respect to the Prime Rate or each designated Investment Fund Rate, as the case may be. The crediting of such interest on a monthly basis shall continue until such balance in the Executive's Account has been reduced to zero by reason of benefit payments under the Plan.       The Executive may also elect to have the investment return applicable to all or part of any Deferred Compensation credited to the Executive's Account determined by reference to phantom shares of Pepco Holdings Common Stock. In Order to initially determine the number of phantom shares of Pepco Holdings Common Stock which will serve as the basis for adjusting the value of an Executive's Account, the full amount of Deferred Compensation to be credited with an investment return based upon phantom shares shall be divided by the average of the high and low sale prices of the Stock on the New York Stock Exchange, Inc. on the second business day prior to the date upon which the Executive's Account is to be credited with such Deferred Compensation. The resulting number will represent the number of phantom shares to be credited to such Executive's Account. For purposes of determining the value of the Executive's Account which is attributable to phantom shares, each phantom share shall be deemed to have a value of one share of Common Stock of the Company and any time a dividend payment is made with respect to a share of common stock of the Company, an equivalent amount shall be added to the account of the Director with respect to each phantom share then credited to the Account. All such dividend equivalent amounts added to the Director's Account shall be expressed in the form of phantom shares or fractions thereof.       C.      If the Executive elects Option 2, the Company shall credit the Executive's Account with a Matching Company Credit equal in value to the percentage of Deferred Compensation elected by the Executive under Option 2 which would have been matched by the Company if the Executive had contributed such Deferred Compensation to the applicable savings plan. The Matching Company Credit shall be made to the Executive's Account at the same time as the corresponding Deferred Compensation is credited to the Executive's Account pursuant to Option 2.       D.      The Company shall furnish each participating Executive with an annual report showing the balance in the Executive's Account as of June 30 of each year.
4.02      The deferral of Normal Compensation for a Director shall be made in accordance with the following provisions.
	A.      Each Plan Year or until the Director provides written notification of cancellation of a previous election, each Director may elect to defer an amount of retainer/fees constituting such Director's Normal Compensation. The Agreement may specify that the Director's retainer/fees will be reduced by the elected amount of the Deferred Compensation on a ratable basis throughout the Plan Year or that the Director's retainer/fees will be reduced by a specified amount or amounts in a specified month or months of the Plan Year. In addition, subject to the prior approval of the Board of Directors. which approval may be granted or withheld in the sole discretion of the Board of Directors, a Director may elect to have the Director's Account under this Plan credited with a deferred compensation entitlement attributable to any other nonqualified deferred compensation program maintained by the Company, provided that such transfer will b e accompanied by a corresponding elimination of the Company's obligation under such other deferred compensation arrangement and provided further that no such transfer will be permitted with respect to an deferred compensation entitlement which would otherwise become payable to the Director under the terms of such other nonqualified deferred compensation program within the same calendar year as the year of the proposed transfer.       B.      The Company will credit the Deferred Compensation to the Account of each participating Director as of the day such amount would have been paid to the Director if the Director's Agreement had not been in effect. All retainer fees and other Director fees which would have been paid to the Director in the form of shares of Company Stock had no deferral election been made will be credited to the Director's Account in the form of phantom shares. In addition, a Director may elect to have any Deferred Compensation which would otherwise have been paid to the Director in the form of cash had no deferral election been made also expressed in the form of phantom shares by so advising the Human Resources Committee as part of the Director's Agreement. The full amount of Deferred Compensation to be credited in the form of phantom shares shall be divided by the average of the high and low sale prices of the Stock on the New York Stock Exchange. Inc. on the second business day prior to the date upon which the Director's Account is to be credited with such Deferred Compensation. The resulting number will represent the number of phantom shares to be credited to such Director's Account. For purposes of determining the value of the Director's Account which is attributable to phantom shares, each phantom share shall be deemed to have a value of one share of Common Stock of the Company and any time a dividend payment is made with respect to a share of Common Stock of the Company, an equivalent amount shall be added to the account of the Director with respect to each phantom share then credited to the Account. All such dividend equivalent amounts added to the Director's Account shall be expressed in the form of phantom shares or fractions thereof.       With respect to any Deferred Compensation credited to the Account of a Director which is not credited in the form of phantom shares, the Director may elect to have the Company credit the Director's Account, on a monthly basis, with an amount in the nature of interest at either (i) the prime rate quoted by the Chase Manhattan Bank, N. A. (the "Prime Rate") as of the last day of the month, (ii) a rate equal to the rate of return with respect to any one or a combination of the investment funds selected by the Human Resources Committee (an Investment Fund Rate") or (iii) a combination of the Prime Rate and an Investment Fund Rate. The Prime Rate or the appropriate Investment Fund Rate(s) rate or rates of interest shall be credited to the Director's Account as of the last day of each calendar month based on the daily balances in the Account which are to be adjusted with respect to the Prime Rate or each designated investment fund rate, as the case may be, and the crediting of such interest on a monthly basis shall continue until such balance in the Director's Account has been reduced to zero by reason of benefit payments under the Plan.       C.      The Company shall furnish each participating Director with an annual report showing the balance in the Director's Account as of June 30 of each year.

V.       PAYMENT OF BENEFITS       5.01      Except as otherwise provided in this Article V. the payment of benefits to a participating Executive shall commence as of the date specified by the Executive in the Executive's Agreement under one of the following options: (i) on the date of commencement of benefits under the Applicable Defined Benefit Pension Plan in which the Executive participates (ii) on January 31 of the calendar year following the year of the Executive's Retirement: (iii) on the first day of the month following the Executive's Separation from Service; (iv) on January 31 of calendar year following Separation from Service; (v) on January 31 of the calendar year following the later of the year of the Executive's Separation from Service or attainment of an age specified in the Agreement; or (vi) on January 31 of the calendar year specified in the Agreement, which may not be earlier than the second calendar year following the calendar year which includes the first d ay of the Plan Year for which the Agreement is made. Except as otherwise provided in this Article V. the payment of benefits to a participating Director shall commence as of the date specified by the Director in the Director's Agreement under one of the following options: (i) on the first day of the month following the Director's Separation from Service: (ii) on January 31 of the calendar year following the year of the Director's Separation from Service: (iii) on January 31 of the calendar year following the later of the year of the Director's Separation from Service or attainment of an age specified in the Agreement; or (iv) on January 31 of the calendar year specified in the Agreement, which may not be earlier than the second calendar year following the calendar year which includes the first day of the Plan Year for which the Agreement is made.       5.02      As specified in the Executive's or the Director's Agreement, as the case may be, benefits shall be paid (i) in a lump sum amount equal to the Executive's or the Director's Account balance as of the benefit commencement date, or (ii) in a series of approximately equal monthly or annual installments, as computed by the Company, over a period of between two (2) and fifteen (15) years with the final payment equaling the then remaining balance in the Executive's or the Director's Account. If annual installments are elected by the Executive or the Director, such annual installments shall be payable on the benefit commencement date and each succeeding January 31 during the payment period. Notwithstanding a specification of installment payments in an Executive's or Director's Agreement, as the case may be, if the balance in the Executive's or the Director's Account as of the benefit commencement date is less than one thousand dollars ($1,000.00), the Company shall instead make a lump sum payment of that amount on that date. The time for payment of benefits to an Executive or a Director may be modified by the Executive or Director by the filing of a written election prior to the beginning of the calendar year in which benefits would otherwise become payable under the existing Agreement. Any election to accelerate benefits may not provide for a commencement date earlier than the calendar year following the date of such election.
5.03      An Executive may apply to the Human Resources Committee for early distribution of all or any part of his Account. Any such early distribution shall be made in a single lump sum, provided that ten percent (10%) of the amount withdrawn in such early distribution shall be forfeited prior to payment of the remainder to the Executive. An Executive may not elect an early distribution hereunder if he has received an early distribution or a distribution under Section 5.05 within the previous twelve (12) months. In the event an Executive's early distribution is submitted within sixty (60) days after a Change in Control (as may be defined in an agreement between the Executive and the Company or in a plan in which the Executive participates) or an elimination of an investment alternative under the Plan that the Human Resources Committee determines is a substantial detriment to Executives, the forfeiture penalty shall be reduced to five percent (5%).       5.04      In the event that a participating Executive or a participating Director dies before the benefit commencement date, the Company shall make benefit payments to the Executive's or the Director's Beneficiary or Beneficiaries in an aggregate amount equal to twice the balance credited to the Account of the participating Executive or participating Director, as the case may be, immediately prior to such individual's death. An amount equal to Account balance will be paid on the first of the month following the Executive's or the Director's death and the remaining amount of the death benefit will commence as of January 31 of the calendar year following the Executive's or the Director's death in accordance with the method of payment under Section 5.02 specified in the Executive's or the Director's Agreement. In the event that a participating Executive or a participating Director dies after the benefit commencement date, any remaining benefit pa yments shall be paid to the Executive's or the Director's Beneficiary or Beneficiaries. In the event that no Beneficiary survives the Executive or the Director, an amount equal to the remaining balance in the Executive's or Director's Account (or two times the Account balance if death occurs prior to the benefit commencement date) shall be paid to the estate of the Executive or the Director, as the case may be, in a lump sum within thirty (30) days following the date on which the Company is notified of the Beneficiary's death.
5.05      The Company may at any time make a lump sum payment to an Executive or Director (or surviving Beneficiary) equal to part or all of the balance in the Executive's or Director's Account, as the case may be, upon a showing of a financial emergency caused by circumstances beyond the control of the Executive or Director (or surviving Beneficiary) which would result in serious financial hardship if such payment were not made. The determination whether such emergency exists shall be made in the sole discretion of the Board of Directors of the Company, the amount of the payment shall be limited to the amount necessary to meet the financial emergency, and any remaining balance in the Executive's or Director's Account shall be paid at the time and in the manner otherwise set forth in the Executive's or Director's Agreement, as the case may be.
5.06      In the event that a participating Executive or Director ceases to be an employee or Director of the Company and becomes a proprietor, officer, partner, employee, or otherwise becomes affiliated with any business or entity that is in competition with the Company, or becomes employed by any governmental agency' having jurisdiction over the affairs of the Company, the Company reserves the right in the sole discretion of its Board of Directors to make an immediate lump sum payment to the Executive or the Director in an amount equal to the balance in the Executive's or the Director's Account at that time.
5.07      If an Executive or a Director has entered into two (2) or more Agreements with respect to different Plan Years which specify different benefit commencement dates under Section 5.01 or different methods of payment under Section 5.02, the Company will separately account for the Deferred Compensation attributable to each such Agreement and distribute the amounts covered by each Agreement in accordance with the terms thereof.
VI.       RIGHTS OF PARTICIPATING OFFICERS AND BENEFICIARIES       6.01      Nothing contained in this Plan or any Agreement and no action taken hereunder shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Executive, any Director, any Beneficiary or any other person; provided, however, the Company has established a grantor trust (Trust No. 3 originally executed on November 28, 2001) to hold assets to secure the Company's obligations to participants under the Plan if the establishment of such a trust does not result in the Plan being "funded" for purposes of the Internal Revenue Code. Except to the extent provided through a grantor trust established under the provisions of the preceding sentence, any compensation deferred under the Plan shall continue for all purposes to be a part of the general funds of the Company and to the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no gre ater than the right of any unsecured general creditor of the Company.
6.02      The right of any Executive, Director, Beneficiary, or other person to receive benefits under the Plan may not be assigned, transferred, pledged or encumbered except by will or the laws of descent and distribution, nor shall it be subject to attachment or other legal process of whatever nature.       6.03      If the Company finds that an person to whom any payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expense for the person who is otherwise entitled to payment.
VII.      MISCELLANEOUS       7.01      This Plan may be amended, suspended or terminated at any time by the Company provided, however, that no amendment, suspension or termination shall have the effect of impairing the rights of (i) participating Executives or their Beneficiaries or (ii) participating Directors or their Beneficiaries with respect to amounts credited to their Accounts before the date of the amendments, suspension or termination.       7.02      To the extent required by law, the Company' shall withhold federal or state income or payroll taxes from benefit payments hereunder and shall furnish the recipient and the applicable governmental agency or agencies with such reports, statements, or information as may be legally required in connection with such benefit payments.
7.03      This Plan and all Agreements hereunder shall be construed in accordance with and governed by the laws of the District of Columbia.       IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed effective this 1st day of August, 2002, which restated version reflects all modifications made to the Plan through such date of execution.
ATTEST: By:  /s/ Ellen Sheriff Rogers                     Secretary	Pepco Holdings, Inc. By:  /s/ John M.Derrick, Jr.                 Chief Executive Officer

EX-10

POTOMAC ELECTRIC POWER COMPANY DIRECTOR AND EXECUTIVE DEFERRED COMPENSATION PLAN
I.      Introduction             Potomac Electric Power Company (the "Company") has established the Potomac Electric Power Company Director and Executive Deferred Compensation Plan (the "Plan"), effective September 1, 1985 to serve as a successor program regarding certain deferred compensation of certain of its senior officers and members of its Board of Directors. The Plan was amended by action of the Board of Directors on May 22, 1986, September 25, 1986, December 15, 1986, April 24, 1991 and October 22, 1992 and is restated herein. Except as provided hereinafter, the rights which had accrued prior to September 1, 1985 under the Potomac Electric Power Company Executive Deferred Compensation Plan, as amended through July 1, 1984, (the "Prior Executive Plan") on behalf of senior executives who were eligible to participate in the Potomac Electric Power Company Executive Incentive Compensation Plan (the "Incentive Plan"), and the rights of members of the Board of Dire ctors of the Company which had accrued prior to September 1, 1985 under the Nonqualified Deferred Compensation Plan for Members of the Board of Directors (the "Prior Directors Plan"), shall continue to be governed under the terms and conditions of the Prior Executive Plan and the Prior Directors Plan. This Plan has been established to permit the deferral of certain remuneration to be earned between September 1, 1985 through August 31, 1989. II.       Definitions             2.01. "Agreement" means the Participation Agreement executed by the Company and a Member which designates the amount of the Member's Deferred Compensation in respect of a Plan Year, the projected stream of future benefit payments attributable to such Deferred Compensation, and the Member's Beneficiary.             2.02. "Beneficiary" means any person designated by a Member to receive benefits under the Plan in the event of the- Member's death prior to the completion of all benefit payments under the Plan. Each Agreement established by a Member may designate more than one Beneficiary or may designate primary and contingent Beneficiaries.             2.03. "Board of Directors" means the Board of Directors of Potomac Electric Power Company.             2.04. "Committee" shall mean the Human Resources Committee of the Board of Directors.             2.05. "Deferred Compensation" in the case of an Executive means that portion of the Executive's Normal Compensation which the Executive irrevocably agrees to defer in accordance with the terms of the Plan. "Deferred Compensation" in the case of a Director means that portion of his Director's Fee which such Director irrevocably agrees to defer in accordance with the terms of the Plan.             2.06. "Director" means a member of the Board of Directors, an Advisory Director, or a member of the board of directors of any subsidiary of the Company who is not a full time employee of the Company.             2.07. "Director's Fee" means the annual retainer payable to a Director for serving on the Board of Directors of the Company or on the board of directors of a subsidiary of the Company and fees payable to a Director for attending meetings of the Board of Directors of the Company or on the board of directors of a subsidiary of the Company.             2.08. "Early Retirement Adjustment Factor" means the interest rate, discount factor or other formula set forth in an Executive's Agreement which describes the present value adjustments to be made to such Executive's entitlement in the event the payment of such benefits commences prior to the Executive's 65th birthday due to early retirement.             2.09. "Executive" means a key executive of the Company selected by the Chairman of the Board of Directors of the Company, recommended by the Committee and approved by the Board of Directors to participate in the Plan.             2.10. "Lump Sum Adjustment Factor" means the interest rate, discount factor or other formula set forth in a Member's Agreement which describes the present value adjustments to be made to such Member's entitlements in the event such entitlements become payable in the form of a present single payment.             2.11. "Member" means an Executive or a Director who elects to participate in the Plan.             2.12. "Normal Compensation" means the amount of salary that would be payable to an Executive for the 12-month period commencing on the first day of any Plan Year if (i) the Executive were not participating in this Plan, and (ii) the Executive made no salary reduction contribution to any Section 401(k) program maintained by the Company.             2.13. "Pre-Retirement Death Adjustment Factor" means the interest rate, discount factor or other formula set forth in a Member's Agreement which describes the present value adjustments to be made to such Member's entitlement in the event the payment of such benefits commences prior to the normal benefit commencement date established for such Member under Section 5.03 or Section 5.04 herein due to the death of such Member.             2.14. "Plan Year" means the 12-month period commencing on September 1 of each calendar year and ending on August 31 of the following calendar year.             2.15. "Prime Rate" shall be determined on a monthly basis and shall mean interest at a rate equal to the prime interest rate quoted by the Chase Manhattan Bank, N.A. as of the last day of each month.             2.16. "Separation from Service" in the case of an Executive shall mean the Executive's termination of employment with the Company. An Executive who terminates regular employment with the Company and thereafter performs consulting services for the Company on a part time basis will nonetheless be deemed to have had a Separation from Service as of the date of his termination of regular employment. "Separation from Service" in the case of a Director shall mean such Director's cessation of status as a member of the Board of Directors of the Company or the board of directors of a subsidiary of the Company or as an Advisory Director. A Director who terminates his status as a member of the Board of Directors of the Company or the board of directors of a subsidiary of the Company or as an Advisory Director but who thereafter performs consulting services for the Company or a subsidiary of the Company on a part time basis will nonetheless be deeme d to have had a Separation from Service as of the date of the termination of his status as a member of the Board of Directors of the Company or the board of directors of a subsidiary of the Company. III.       Participation             The initial set of Agreements established in respect of the Plan Year beginning September 1, 1985 shall relate to a Member's Normal Compensation or Director's Fee, as the case may be, and shall apply either (i) to the period beginning September 1, 1985 and ending August 31, 1986 or (ii) to the period beginning September 1, 1985 and ending August 31, 1989. No additional compensation deferrals shall be permitted under this Plan without the express prior authorization of the Board of Directors. An Agreement may not be amended or revoked after the beginning of the time period covered under the Agreement. However, a Member may at any time change his Beneficiary designation by providing written notice of such change to the Committee. IV.       Deferral of Compensation             4.01. The amount of Deferred Compensation specified in an Executive's Agreement may not exceed 15 percent of Normal Compensation. A Director may defer all or any portion of his Director's Fee. Each Agreement relating to the deferral of Normal Compensation or the deferral of a Director's Fee shall specify that the remuneration in question will be reduced on a ratable basis throughout the Plan year except that Normal Compensation which would otherwise be payable to an Executive during the months of September through December of 1985 may be deferred at a rate greater than 15% provided that appropriate adjustments are made to the amount of Normal Compensation deferred in respect of January, 1986 so that the total amount of Normal Compensation which is deferred in respect of the period beginning September 1, 1985 and ending January 31, 1986 does not exceed 15%.             4.02. The Company will provide each Member with a projection of future benefit payments attributable to such Member's Deferred Compensation. In the case of a Director, the projected benefits attributable to Deferred Compensation shall be nonforfeitable at all times. In the case of an Executive, the amount of the projected benefits shall be conditioned upon such Executive's continued employment by the Company until the earlier of (i) attainment of age 62, (ii) death or (iii) the incurrence of a Total and Permanent Disability. In the event that an Executive incurs a Separation from Service prior to age 62 for reasons other than death or Total and Permanent Disability, the Executive's entitlement under the Plan shall be recomputed by compounding the amount of Deferred Compensation outstanding as of each calendar month, through the date of payment, on the basis of the Prime Rate and shall be paid in a lump sum.             4.03. The Company shall furnish each member with an annual report showing the Member's projected entitlement under the Plan as of August 31 of each Plan Year. V.       Payments of Benefits             5.01. Eight Year Return of Deferred Compensation.       In the case of each Member whose age on his birthday nearest September 1, 1985 is less than 54, Deferred Compensation which is credited to such Member in respect of a Plan year beginning on or after September 1, 1985 shall be paid out to such Member in a lump sum on the first day of eighth (8th) Plan Year commencing on or after the date such Deferred Compensation was credited to such Member under the Plan.             5.02. Separation from Service by Executive Prior to Age 62.                    (a) In the event an Executive incurs a Separation from Service prior to attaining age 62 for any reason other than death or Total and Permanent Disability, such Executive's entitlement under the Plan shall be recomputed by compounding such Executive's total Deferred Compensation outstanding as of each month from the date of the initial deferral on the basis of the Prime Rate and such recomputed amount shall be paid to the Executive in a lump sum within sixty days after the end of the Plan Year within which such Executive incurs a Separation from Service.                    (b) Notwithstanding the foregoing, if, following the occurrence of an event set forth in subsection (c), an Executive incurs a Separation from Service prior to attaining age 62, such Executive's entitlements under the Plan shall be paid to him in a lump sum within thirty (30) days of his Separation from Service. The amount of such lump sum payment shall be computed by calculating the monthly annuity payments to which such Executive would otherwise be entitled under the provisions of Section 5.03 of the Plan had he incurred a Separation from Service on his 65th birthday and discounting each such monthly annuity payment to its present value as of the date of the Executive's Separation from Service using the Pension Benefit Guaranty Corporation's immediate payment interest rate in effect on the date of the Executive's Separation from Service plus one-half of one percent (1/2%).                    (c) The provisions of subsection (b) shall apply in the event that (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of twenty-four (24) consecutive months (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (i) or (iii) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in 4t the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 70% of the combined voting power of the voting securities of the Comp any or such surviving entity outstanding immediately after such merger or consolidation, the stockholders of the Company approve a plan of complete liquidation of the Company, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets.             5.03. Payment of Normal Benefits to Executive.       The payment of any Deferred Compensation earned on or after September 1, 1985 by an Executive who does not incur a Separation from Service prior to age 65, shall commence on the first day of the month following such Executive's 65th birthday and shall be paid in substantially equal monthly installments over a 15-year period. If an Executive incurs a Separation from Service after attaining age 62 and prior to attaining age 65 such Executive's entitlement shall be recomputed on the basis of the Early Retirement Adjustment Factor set forth in the Executive's Agreement and shall be paid in substantially equal monthly amounts over a 15-year period beginning as of the month following the date of such Executive's Separation from Service. The Board of Directors shall have the discretion to adjust the normal benefit commencement date and the benefit payout period applicable to an Executive in such cases as it deems appropriate.             5.04. Payment of Normal Benefits to Director.       The payment of any Deferred Compensation earned on or after September 1, 1985 by a Director who was under age 55 on September 1, 1985 shall commence on the first day of the month following such Director's 65th birthday. The payment of any Deferred Compensation earned on or after September 1, 1985 by a Director who was age 55 or older but under age 60 on September It 1985 shall commence on the first day of the month following such Director's 68th birthday. The payment of any Deferred Compensation earned on or after September 1, 1985 by a Director who was age 60 or older on September It 1985t shall commence on the first day of the month following such Director's 70th birthday. In each of the above cases, the amount of such Director's projected benefits shall be paid in substantially equal monthly installments through the calendar month in which such D irector attains age 80.             5.05. Small Payments.       Notwithstanding any provisions of this Article V to the contrary if the present value of a Member's entitlement as of his benefit commencement date is less than $1000, determined on the basis of the Lump Sum Adjustment Factor set forth in such Member's Agreement, the Company shall make a lump sum payment of such entitlement as of such date.             5.06. Total and Permanent Disability.       In the event an Executive incurs a Separation from Service due to a Total and Permanent Disability benefit payments shall commence on the first day of the month following such Executive's 65th birthday and shall be based upon the total Deferred Compensation elected by the Executive through the date of his incurrence of a Total and Permanent Disability (including any Deferred Compensation which is then subject to a current Agreement determined on the assumption that such Executive would not have received any increases in his Normal Compensation).             5.07. Death.        In the event that a Member dies prior to commencement of receipt of benefits under any other Section of this Article V payment of an adjusted death benefit reflecting the Pre-Retirement Death Adjustment Factor specified in the Member's Agreement [based upon the total Deferred Compensation elected by such Member through the date of his death, including any future Deferred Compensation which is then subject to a current Agreement, determined on the assumption that such Member would not have received any increases in his Normal Compensation or Director's Fee, as the case may be) shall be made in substantially equal monthly installments over a 15-year period to such deceased Member's Beneficiary or Beneficiaries, commencing as of the first day of the month following such Member's death.             5.08 Death After Commencement of Benefits.       In the event that a Member dies after commencing receipt of benefit payments, any remaining benefit payments shall be paid to the Member's Beneficiary or Beneficiaries over the remaining term that benefits would otherwise have been paid to the Member had he survived. In the event that no Beneficiary survives the Member, any remaining benefit payments shall be paid to the estate of the deceased Member over such remaining term. In the event a Beneficiary dies after the death of a Member but before the completion of benefit payments, any remaining payments shall be paid to the estate of the deceased Beneficiary over the remaining term that benefits would have been paid to the Beneficiary had he survived.             5.09. Hardship Distribution.       Notwithstanding the foregoing, the Board of Directors, acting on the recommendation of the Committee, may at any time authorize a lump sum payment to a Member (or surviving Beneficiary) equal to part or all of the present value of the Member's entitlement, determined on the basis of the Lump Sum Adjustment Factor set forth in such Member's Agreement, upon a showing of a financial emergency caused by circumstances beyond the control of the Member (or surviving Beneficiary) which would result in serious financial hardship if such payment were not made. The determination of whether such emergency exists shall be made in the sole discretion of the Board of Directors, the amount of the payment shall be limited to the amount necessary to meet the financial emergency, and any remaining component of the Member's entitlements as it appropriately adjusted, shall be paid at th e time and in the manner otherwise set forth herein.             5.10. Payments Due to Conflict of Interest.       In the event that a participating Member ceases to be an Executive or Director of the Company or subsidiary of the Company and becomes a proprietor, officer, partner, employee, or otherwise becomes affiliated with any business or entity that is in competition with the Company, or becomes employed by any governmental agency having jurisdiction over the affairs of the Company, the Company reserves the right in the sole discretion of the Board of Directors to make an immediate lump sum payment to the Member in an amount equal to the present value of the Member's entitlement at that time, based upon the Lump Sum Adjustment Factor set forth in such Member's Agreement. If the Member in question is an Executive who is then under age 62, the entitlement shall be recomputed on the basis of the Prime Rate, as per the provision of Section 5.02. VI.       Rights of Participating Members and Beneficiaries.             6.01. Nothing contained in this Plan or any Agreement and no action taken hereunder shall create or be construed to create a fiduciary relationship between the Company and any Member, any Beneficiary or any other person. Any compensation deferred under the Plan shall for all purposes be an unfunded general obligation of the Company, and, to the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company. Notwithstanding the preceding sentence, the Company may establish a grantor trust to hold assets to secure the entitlements of Members and their Beneficiaries under this Plan, provided that the establishment of such a trust does not result in the Plan being 'funded' for purposes of the Internal Revenue Code of 1986, as amended.             6.02. The right of any Member, Beneficiary, or other person to receive benefits under the Plan may not be assigned, transferred, pledged or encumbered except by will or the laws of descent and distribution, nor shall it be subject to attachment or other legal process of whatever nature.             6.03. If the Committee finds that any person to whom any payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a parent, or a brother or sister, or to any person deemed by the Committee to have incurred expense for the person who is otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment will serve to discharge the liability of the Company under this Plan to make payment to the person who is otherwise entitled to payment. VII.       Reduction of Benefits.       The Board of Directors may, in its sole discretion, amend, suspend or terminate the Plan (including, without limitation, the making of an amendment to retroactively reduced the projected benefits set forth in any and all outstanding Agreements to a level not less than the Minimum Accrued Benefit, as defined below) if, in the opinion of the Board of Directors, there is a projected material net after-tax cost of the Plan to the Company due to: (i) modifications made to the Internal Revenue Code of 1954, as amended, (ii) a significant reduction in the marginal Federal income tax bracket of the Company or (iii) a significant reduction in the investment returns available to the Company as evidenced by reductions in long term interest rates. Notwithstanding the foregoing, no amendment, suspension or termination shall have the effect of impairing the rights of participating Members or their Beneficiaries to re ceive the Minimum Accrued Benefit, as defined below, earned by such Member or Beneficiary before the date of such amendment, suspension or termination. For these purposes, the term Minimum Accrued Benefit shall mean the greater of (i) a benefit computed by crediting all Deferred Compensation with the Prime Rate, or (ii) the projected benefit otherwise payable to a Member or Beneficiary under the original terms of such Member's Agreement multiplied by a fraction (a) the numerator of which is the number of calendar months between the date of the Agreement and the date on which such amendment, suspension or termination is adopted and (b) the denominator of which is the number of calendar months between the date of the Agreement and the date on which Normal Benefits would otherwise be payable to such Member under the provisions of Sections 5.03 or 5.04 of this Plan, as the case may be. VIII.       Other Deferred Compensation             8.01. The Board of Directors may, in its sole discretion, enter into a separate Memorandum of Agreement with any Executive to increase the benefits attributable to all or any portion of the remuneration which was deferred by such Executive under the Prior Executive Plan. Such increase in benefits shall be effectuated by increasing the rate of interest used to determine the Executive's entitlement with regard to such deferred compensation beyond the Prime Rate interest level presently set forth in the Prior Executive Plan. The timing and method of benefit payments elected by such Executive under any agreement made pursuant to the Prior Executive Plan which relates to remuneration earned prior to September 1, 1985 shall not be modified in any respect.             8.02. The Board of Directors may, in its sole discretion, authorize Members to enter into Agreements subsequent to September 1, 1985 in respect of Normal Compensation, Director Fees or incentive compensation granted under the Incentive Plan, pursuant to such terms and conditions as the Board of Directors may determine. Any such additional Agreements will be subject to the limitations set forth in Section 4.01 and shall apply only to remuneration earned subject to the date of such Agreement and prior to August 31, 1989. IX.       Miscellaneous             9.01. The adoption and maintenance of the Plan and the Agreements thereunder shall not be deemed to constitute a contract for future employment between the Company and any Executive. Nothing herein contained shall be deemed (i) to give to any Executive the right to be retained in the employ of the Company; (ii) to affect the right of the Company to discipline or discharge any Executive at any time; (iii) to give the Company the right to require any Executive to remain in its employ; or (iv) to affect any Executive's right to terminate his employment at any time.             9.02. To the extent required by law, the Company shall withhold federal or state income or payroll taxes from benefit payments hereunder and shall furnish the recipient and the applicable governmental agency or agencies with such reports, statements, or information as may be legally required in connection with such benefit payments.             9.03. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice versa.             IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed on 1st day of April, 1993, which restated version reflects all modifications made to the Plan through the date of execution, and supersedes the Plan document signed December 15, 1986.
	POTOMAC ELECTRIC POWER COMPANY By:  /s/  E. F. Mitchell                                                    Chairman of the Board
ATTEST By:  /s/  Betty K. Cauley                                             Secretary

EX-10

CONECTIV

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Revised as of
January 1, 1999

CONECTIV

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

PREAMBLE

                  The principal objective of this Supplemental Executive Retirement Plan is to ensure the payment of a competitive level of Retirement income in order to attract, retain and motivate selected executives. The Plan is designed to provide a benefit which, when added to other Retirement income of the executive, will meet the objective described above. Eligibility for participation in the plan shall be limited to executives who are classified as directors or above, who are participants in the Conectiv Deferred Income Plan, and other managers or executive who are selected by the Chief Executive Officer and approved by the Personnel and Compensation Committee of the Board of Directors. In order to be eligible for benefits under this Plan on account of Service prior to employment by an Employer, an executive must be (or have been) recruited into the position (or for the position) as determined by the Committee. This Plan is a successor to the Delmarva Power & Light Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplemental Executive Retirement Plan, Supplemental Executive Retirement Plan - II, and Excess Benefit Retirement Income Program. This Plan is effective January 1, 1999, and is effective as to each Participant on the date he or she is designated as such hereunder.

SECTION I

DEFINITIONS

                  1.1.        "Actuarial Equivalent" or "Actuarial Equivalence" shall mean the method and amount by which a single life annuity benefit is converted to any other form of benefit, or by which a single sum benefit is converted to any form of annuity benefit, and shall be determined by using the appropriate factors and methods as set forth in the Basic Plan as of the date of determination.

                  1.2.        "Affiliate" means any corporation, partnership or other organization which, during any period of employment of a Participant, was at least 50% controlled by the Company or an affiliate of the Company.

                  1.3.        "Basic Plan" means the Conectiv Retirement Plan as set forth in the Base Plan and the Cash Balance Sub-Plan.

                  1.4.        "Basic Plan Benefit" means the amount of benefit payable from the Basic Plan to a Participant (a) in the form of an unreduced straight life annuity, where the Participant's benefit from this Plan is payable in the form of an annuity; or (b) in the form of a single lump sum, where the Participant's benefit from this Plan is payable in the form of a lump sum.

                  1.5.        "Beneficiary" means the person or persons designated as the Participant's beneficiary for purposes of the Basic Plan or, for a Participant who is not a participant in the Basic Plan, the person or persons designated as the Participant's beneficiary for purposes of this Plan on a form provided for such purpose and filed with the Agent designated in Section VII.

                  1.6.        "Change in Control" shall mean the first to occur, after the effective date, of any of the following:

                   (a)       If any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of Conectiv (not including in the securities beneficially owned by such Person any securities acquired directly from Conectiv or its subsidiaries) representing 25% or more of either the then-outstanding shares of common stock of Conectiv or the combined voting power of Conectiv's then outstanding securities; or

                   (b)       If during any period of 24 consecutive months during the existence of the Plan commencing on or after the effective date, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-third of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 1.6; or

                   (c)       The consummation of a merger or consolidation of Conectiv with any other corporation other than (i) a merger or consolidation which would result in the voting securities of Conectiv outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Conectiv or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of Conectiv (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in Section 1.6(a), directly or indirectly, of securities of Conectiv (not including in the securities beneficially ow ned by such Person any securities acquired directly from Conectiv or its subsidiaries) representing 40% or more of either the then-outstanding shares of common stock of Conectiv or the combined voting power of Conectiv's then-outstanding securities; or

                   (d)       The stockholders of Conectiv approve a plan of complete liquidation or dissolution of Conectiv, or there is consummated an agreement for the sale or disposition by Conectiv of all or substantially all of Conectiv's assets, other than a sale or disposition by Conectiv of all or substantially all of Conectiv's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of Conectiv immediately prior to such sale.

Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of the Plan, with the result that there can be no more than one Change in Control hereunder.

For purposes of this Section, the term "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include: (i) Conectiv or any of its subsidiaries; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Conectiv or any of its subsidiaries; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities; (iv) a corporation owned directly or indirectly by the stockholders of Conectiv in substantially the same proportions as their ownership of stock of Conectiv; or (v) with respect to any particular Participant, such Participant or any "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes such Participant).

                  1.7.        "Committee" means the Personnel and Compensation Committee of the Board of Directors of the Company, which has been given authority by the Board of Directors to administer this Plan.

                  1.8.        "Code" means the Internal Revenue Code of 1986, as amended.

                  1.9.        "Company" means Conectiv and any successor thereto.

                  1.10.        "Compensation" means any amount paid to a Participant as salary or bonus, including pre-tax contributions and elective contributions that are not includible in gross income under sections 125, 402(a)(8) or 402(h) of the Code, and all amounts deferred pursuant to the Conectiv Deferred Income Plan in the year deferred (up to 50% of Compensation as calculated prior to such deferral), but excluding (a) contributions the Company makes to any other benefit plan; (b) any amounts paid in the form of fringe benefits (cash or non-cash), moving expenses, or welfare benefits, even though such amounts may be taxable for federal income tax purposes; (c) any amounts paid from the Conectiv Deferred Income Plan; and (d) any amounts paid or deferred in connection with stock grants, stock options, or payments based on stock performance such as stock appreciation rights or phanto m stock awards.

                  1.11.        "Disabled" means a mental or physical condition which qualifies a Participant for benefits under the Employer's long-term disability plan.

                  1.12.        "Effective Date" means January 1, 1999.

                  1.13.        "Employee" means any individual employed by an Employer, provided, however, that to qualify as an Employee for purposes of the Plan, the individual must be a member of a group of "key management or other highly compensated employees" within the meaning of Sections 201, 301 and 401 of ERISA; and provided further than an individual shall not be eligible to become or remain a Participant if (a) he or she is not on an employee payroll of an Employer; (b) he or she has entered into a written agreement with an Employer which provides that he or she shall not participate in the Plan; or (c) he or she is in a group of employees that is excluded from the Plan pursuant to a declaration by the Employer with respect to the Employer's adoption of the Plan or any amendment thereto.

                  1.14.        "Employer" means the Company or an Affiliate that has adopted this Plan for its Employees.

                  1.15.        "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.

                  1.16.        "Other Retirement Income" means, as determined by the Committee in its discretion, retirement income payable from any other retirement plan whether or not such plan was maintained by, or contributed to, by the Company.

                  1.17.        "Participant" means an Employee of an Employer who is (a) employed at a level of director or above, (b) a participant in the Conectiv Deferred Income Plan who defers income pursuant thereto, or (c) recommended by the Chief Executive Officer and designated as a Participant by the Committee. An Employee shall become a Participant in the Plan as of the later of (a) the Effective Date of this Plan, (b) the date he or she becomes an Employee, or (c) in the case of a person who becomes an Employee pursuant to a resolution of the Committee, the date his or her designation is individually approved by, and is specifically named in the resolutions of, the Committee for inclusion in the Plan.

                  1.18.        "Plan" means the Conectiv Supplemental Executive Retirement Plan.

                  1.19.        "Prior Plan" means the Delmarva Power & Light Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplemental Executive Retirement Plan - II, and the Atlantic City Electric Company Excess Benefit Retirement Income Program. Each such Prior Plan is hereby terminated with respect to any person employed by the Company or an Affiliate on or after the Effective Date, and any such person shall receive supplemental retirement benefits only under this Plan or under the Supplemental Executive Retirement Plan sponsored by Delmarva Capital Investments, Inc.

                  1.20.        "Retirement" means the termination of a Participant's employment with an Employer on one of the Retirement dates specified in Paragraph 2.2.

                  1.21.        "SERP Payable Cash Balance" means the lump sum benefit payable from the Plan as defined in Section III, Sub-section 3.1, and may include an Initial SERP Payable Cash Balance credited pursuant to Section 1.22.

                  1.22.        "Service" means a Participant's credited years of Service as defined in the Basic Plan, plus any other years of service credited to such Participant prior to age 65 pursuant to an employment agreement with an Employer or pursuant to a resolution of the Committee. For a Participant who is not a participant in the Basic Plan, "Service" shall mean the actual years and months of employment of such Participant by an Employer, plus any additional years and months of Service credited to such Participant prior to age 65 pursuant to an employment agreement with an Employer or pursuant to a resolution of the Committee. Effective with the Effective Date, the Committee may grant such Participant an Initial SERP Payable Cash Balance in lieu of such prior Service, and grants of prior Service made prior to the Effective Date may be converted to an Initial SERP Payable Cash Balance.

                  1.23.        "Surviving Spouse" means the spouse of a Participant who is legally married to the Participant at the time of the Participant's Retirement, or death if still employed by an Employer or an Affiliate.

                  1.24.        "Termination" means the termination of the Participant's employment with an Employer or an Affiliate, and shall occur at the commencement of any severance pay unless otherwise specified in a written agreement relating to such severance pay.

SECTION II

ELIGIBILITY FOR BENEFITS

                  2.1.       A Participant will be eligible for benefits under the Plan if

                         (a)       the Participant's Basic Plan Benefit is reduced by reason of the limitation on the maximum benefit payable under Section415, or successor provisions, of the Code, or

                         (b)       the Participant's Basic Plan Benefit is reduced by reason of the limitation on compensation under Section 401(a)(17), or successor provisions, of the Internal Revenue Code of 1986, as amended; or

                         (c)       the Participant has deferred Compensation pursuant to the Conectiv Deferred Income Plan; or

                         (d)       The Participant has received a grant of Service prior to employment with an Employer or an Initial SERP Payable Cash Balance pursuant to the terms of Section 1.22.

                  2.2.       Each Participant is eligible to retire and receive a benefit under this Plan beginning on one of the following dates:

                         (a)        "Normal Retirement Date," which is the first of the month coincident with or next following the Participant's sixty-fifth (65th) birthday after attaining five (5) years of Service with an Employer (not including pre-employment service granted pursuant to Section 1.22).

                         (b)        "Early Retirement Date," which is the date the Participant elects to retire after attaining age fifty-five (55) with fifteen (15) years of service or attaining age sixty (60) with twenty (20) years of service.

                         (c)        "Deferred Retirement Date," which is the date the Participant elects to retire after his or her normal retirement date if he or she does not meet the policy-making executive standard causing his or her mandatory retirement at age sixty-five (65) or is requested by the Board of Directors to work beyond his or her 65th birthday.

                         (d)        "Disability Retirement Date," which is the date the Participant elects to retire by reason of Disability after completion of fifteen (15) years of Service. In order to retire on a Disability Retirement Date, in accordance with Section VI, the Participant must provide the Committee satisfactory evidence of Disability.

                  2.3.       A Participant who has a SERP Payable Cash Balance and who Terminates employment before an applicable Retirement Date may receive a lump sum or annuity benefit pursuant to Section III if and only if the benefit is vested pursuant to Section VI, provided that a lump sum payable hereunder shall be paid no earlier than twelve months after such Termination if the Participant is restricted by the terms of Section 2.4.

                  2.4.       If any Participant entitled to a benefit under this Plan on account of a grant of service prior to employment with an Employer or an Initial SERP Payable Cash Balance pursuant to Section 1.22 is discharged for cause, or enters into competition with the Company or an Affiliate, or interferes with the relations between the Company or an Affiliate and any customer, or engages in any activity that would result in any decrease or loss in sales by the Company or an Affiliate, the rights of such Participant to a benefit under this Plan based on such Service, including the rights of a Surviving Spouse to a benefit, will be forfeited, unless the Committee determines that such activity is not detrimental to the best interests of the Company or its Affiliates. However, if the individual ceases such activity and notifies the Committee of this action, then the Participant's right to receive a benefit, and any right of a Surviving Spouse to a benefit, may be restored if the Committee in its sole discretion determines that the prior activity has not caused serious injury to the Company or its Affiliates and that the restoration of the benefit would be in the best interest of the Company and its Affiliates. All determinations by the Committee with respect to forfeiture and restoration of benefits shall be final and conclusive.

SECTION III

AMOUNT AND FORM OF RETIREMENT BENEFIT

                  3.1.        Cash Balance Benefit. As of any determination date, the Participant shall be credited with a SERP Payable Cash Balance equal to the Payable Cash Balance that would have been payable under the Basic Plan as if the following assumptions were correct, reduced by the Participant's Payable Cash Balance actually payable under the Basic Plan as of such determination date:

                         (a)       as if the provisions of the Basic Plan were administered without regard to the benefit limitations set forth in the Basic Plan as a result of section 415 of the Code;

                         (b)       as if the provisions of the Basic Plan were administered without regard to the compensation limitations set forth in the Basic Plan as a result of section 401(a)(17) of the Code;

                         (c)       as if all Compensation were taken into account under the Basic Plan for the year such amounts were earned by such Participant (and not in the year such amounts are actually paid);

                         (d)       as if such Participant's Payable Cash Balance under the Basic Plan as of his employment commencement date were equal to the Initial SERP Payable Cash Balance; and

                         (e)       as if such Participant had been employed by the Employer during the period for which prior service has been credited for purposes of this Plan pursuant to Section 1.22 (this sub-section (e) shall not be applicable to a Participant whose prior service has been converted to an Initial SERP Payable Cash Balance pursuant to Section 1.22).

In the event the Employer adopts or maintains any other qualified or non-qualified retirement plan that is deemed by the Committee in its sole discretion to constitute Other Retirement Income, the SERP Payable Cash Balance shall be reduced by the Actuarial Equivalent lump sum value of such Other Retirement Income.

                  3.2.       Minimum Benefit.

                         (a)       A Participant who was a participant in a Prior Plan as of December 31, 1998 shall be entitled to a minimum benefit equal to the annual retirement benefit payable at his actual Retirement or Termination Date as calculated under the Prior Plan as of December 31, 1998, reduced by the Basic Plan Benefit as of the Participant's actual Retirement or Termination Date, and further reduced by any Other Retirement Income to which the Participant has a vested right as of the actual Retirement or Termination Date. Notwithstanding the foregoing, no minimum benefit under this Section 3.2 shall be paid to a Participant if the Participant had received a distribution from a Prior Plan on account of the same Service.

                         (b)       If a Participant described in Section 3.2(a) also satisfies the requirements to be a Grandfathered Participant under the Basic Plan (whether or not such Participant is a participant in the Basic Plan), he or she shall be entitled to a minimum benefit under this Plan equal to the annual retirement benefit payable at his actual Retirement or Termination Date calculated in accordance with the Grandfathered Participant provisions of the Basic Plan, applying the presumptions set forth in Section 3.1, reduced by the Basic Plan Benefit, and further reduced by any Other Retirement Income to which the Participant has a vested right or which the Participant previously received.

                  3.3      The benefit payable at any Retirement Date or upon Termination of employment shall be paid in the same form and paid to the Participant (or on his behalf, to his Beneficiaries) in the same manner as payment of retirement benefits pursuant to the Basic Plan; provided, however, that

                         (a)       any benefit that has an Actuarial Equivalent Value of $50,000 or less (such amount to be increased by vote of the Committee to be applicable to any calendar year or the remainder of any calendar year after the date of such vote) shall be paid in the form of a lump sum;

                         (b)       if the Participant has elected a lump sum distribution from the Basic Plan and has submitted an election pursuant to sub-paragraph (d) below, the Participant's benefit shall be paid in the form of a 50% joint and survivor annuity (with the Participant's spouse as joint annuitant) unless the Participant elects a different annuity form prior to his Retirement Date or Termination Date; and

                         (c)       if the Participant has elected an annuity distribution from the Basic Plan and has submitted an election pursuant to sub-paragraph (d) below, the Participant's benefit shall be paid in the form of a lump sum; and

                         (d)       if the Participant has made a separate election during the calendar year ending prior to the calendar year containing his Retirement Date and at least six months prior to such Retirement Date, the Participant may receive a different form of benefit as set forth in such separate election. In the event the Participant's retirement was caused by the Participant's disability or involuntary termination of employment and was, in the judgment of the Committee, unanticipated, the Participant's separate election shall be given effect even if it was executed fewer than six months prior to his Retirement Date or in the same calendar year, so long as it was executed before the Participant reasonably could be deemed to have anticipated the timing of his retirement.

                         (e)       The benefit payable in the form of a lump sum shall be the greater of (i) the SERP Payable Cash Balance, or (ii) the Actuarial Equivalent of the minimum or grandfathered benefit as defined in Section 3.2. The benefit payable in the form of an annuity shall be the greater of (i) the SERP Payable Cash Balance converted to an annuity pursuant to the provisions of the Basic Plan, or (ii) the minimum or grandfathered benefit as defined in Section 3.2, subject to any adjustments or actuarial reductions as set forth in the Basic Plan for benefits payable prior to Normal Retirement Date or in any form other than a single life annuity.

                  3.4.       The Committee may make appropriate adjustments to the benefits payable under the Plan to reflect the timing and form of payments of any Other Retirement Income.

SECTION IV

VESTING OF RETIREMENT BENEFITS

                  4.1.       Participants benefits will vest upon Retirement or in accordance with Section VIII, Subsection 8.7. No benefits are payable under the Plan if a Participant's employment is Terminated voluntarily or involuntarily for any reason prior to completion of five (5) years of Service with an Employer (excluding any prior Service credited pursuant to Section 1.22), except as specifically voted by the Committee in its sole discretion.

SECTION V

DEATH BENEFITS PAYABLE

                  5.1.       If a Participant should die after completion of five (5) years of Service and before Retirement, the Surviving Spouse will receive a benefit in the form of an annuity equal to 50% of the amount of Participant's benefit determined in accordance with Section III as if the Participant had retired and commenced receiving a benefit on the first of the month following the date of his or her death. This survivor annuity will not be reduced on account of the age of the Participant or of the Surviving Spouse. Notwithstanding the foregoing, in no event shall the Surviving Spouse benefit be less than the Actuarial Equivalent of the SERP Payable Cash Balance.

                  5.2.       A Surviving Spouse's benefits will be payable monthly, and will commence on the first day of the month following the month in which the Participant dies. The last payment will be on the first day of the month in which the Surviving Spouse dies. Notwithstanding the foregoing, in the event the Surviving Spouse elects a lump sum distribution pursuant to the Basic Plan, the benefit payable hereunder shall be paid in a lump sum which is the Actuarial Equivalent of the benefit described in Section 5.1, unless the Participant has specifically directed that the benefit shall be payable in annuity form, in an election filed no later than the last day of the calendar year preceding the year of his or her death. If the Actuarial Equivalent value of the Surviving Spouse benefit is $50,000 or less (or such larger amount that may be applicable under Section 3.3(a)), the be nefit shall be paid in the form of a single lump sum.

                  5.3.       In the event the Participant dies without a Surviving Spouse after completing five (5) years of Service, the SERP Payable Cash Balance shall be paid to his or her Beneficiary, in a single lump sum.

                  5.4      Upon a Change in Control, a Participant who is not offered a comparable position, but is notified by the Company that his employment shall be terminated at the end of a transition period (at which point change-in-control severance benefits shall be payable) shall be covered by the special temporary death benefit provision set forth below, in lieu of all other death benefits payable hereunder.

                         (a)       Conditions to Payment of Special Temporary Death Benefit. In order for a Participant's Surviving Spouse to receive the Special Temporary Death Benefit set forth in sub-paragraph (b), each of the following conditions must be satisfied:

                               (i)       The Participant must be entitled to a Grandfather Benefit under the terms of the Basic Plan as of the date of death;

                               (ii)       The date of death must occur after the consummation of the Change in Control, after notification by the Company that the Participant's employment shall be terminated at the end of a limited transition period under circumstances entitling the Participant to change-in-control severance benefits, and before the termination of employment; and

                               (iii)       the Participant must have submitted to the Plan Administrator of the Basic Plan all necessary waivers and spousal consents electing a lump sum distribution from the Basic Plan as of the Participant's actual Retirement Date.

                         (b)       Calculation of Special Temporary Death Benefit. The Special Temporary Death Benefit shall be equal to the excess of

                               (i)       The lump sum distribution that would be payable under the Basic Plan and this supplemental Plan if the Participant had retired on the day before his death and received a lump sum distribution, over

                               (ii)       The Actuarial Equivalent (in the form of a lump sum distribution) of the pre-retirement death benefit payable to the Surviving Spouse under the Basic Plan.

SECTION VI

DISABILITY BENEFITS PAYABLE

                  6.1.       A Participant shall be entitled to retire on his or her Disability Retirement Date.

                  6.2.       The annual disability benefit will equal the Retirement benefit that would be payable under Section III of this Plan, based on years of Service to his or her Retirement Date and based on Earnings determined as of the last day of active employment with the Employer before commencement of Disability.

                  6.3.       The disability benefit determined in accordance with Paragraph 6.2 will be offset by any disability benefit payable under the Basic Plan, any long-term disability benefits payable by the Employer or by any insurance policy provided by or through the Employer, and any Other Retirement Income.

                  6.4.       Disability benefits will be payable monthly and will commence on the Participant's Disability Retirement Date. The last payment will be as of the first of the month during which the disabled Participant dies.

                  6.5.       In the event a disabled Participant dies before attaining Normal Retirement Age, death benefits will be payable pursuant to Section V. In the event a disabled Participant attains Normal Retirement Age while disabled, the Participant's benefit shall be converted to a Normal Retirement benefit pursuant to Section III and paid in accordance with the provisions thereof.

                  6.6.       The Committee may require, no more frequently than once in any calendar year, that a disabled Participant submit medical evidence of Disability satisfactory to the Committee. The Committee will have sole discretion to discontinue a disability benefit based on a consideration of such evidence or lack thereof.

SECTION VII

ADMINISTRATION OF PLAN

                  7.1.       The Committee, as plan administrator, shall have full power and authority to interpret the Plan, to prescribe, amend, and rescind any rules, forms, procedures, and regulations as it deems necessary or appropriate for the proper administration of the Plan, and to make any other determinations and to take any other such actions as it deems necessary or advisable in carrying out its duties under the Plan. All action taken by the Committee arising out of, or in connection with, the administration of the Plan or any rules adopted thereunder, shall, in each case, lie within its sole discretion, and shall be final, conclusive and binding upon the Employer, all Employees, and all Beneficiaries of Employees and all persons and entities having an interest therein. The Committee may, however, delegate to any person or entity any of its powers or duties un der the Plan. To the extent of such delegation, the delegate shall become invested with the same discretionary authority as the Committee. Any decisions, actions or interpretations to be made under the Plan by the Committee, an Employer, or a delegate of any of them shall be made in their respective sole discretion, not as a fiduciary, and need not be uniformly applied to similarly situated individuals.

                  7.2.       The Company shall indemnify and hold harmless the Committee and any delegate of the Committee's functions from any and all claims, losses, damages, expenses (including counsel fees) and liability (including any amounts paid in settlement of any claim or any other matter with the consent of the Board) arising from any act or omission of such member, except when the same is due to gross negligence or willful misconduct.

                  7.3.       Claims Procedure.

                         (a)       Agent. The Committee shall designate a person or executive to whom claims for benefits shall be submitted. If the person claiming a benefit is such designated Agent or a relative or survivor of such Agent, the Chief Executive Officer of the Company shall serve as the Agent with respect to such claim. If the person claiming a benefit is the current or former Chief Executive Officer, the chairperson of the Committee shall serve as the Agent with respect to such claim.

                         (b)       Claim. A person who believes that he is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Agent, setting forth the claim.

                         (c)       Claim Decision. Upon receipt of a claim, the Agent may (but shall not be required to) consult with the Committee, and shall advise the Claimant within ninety (90) days of receipt of the claim whether the claim is denied. If special circumstances require more than ninety (90) days for processing, the Claimant will be notified in writing within ninety (90) days of filing the claim that the Agent requires up to an additional ninety (90) days to reply. The notice will explain what special circumstances make an extension necessary and indicate the date a final decision is expected to be made.

                  If the Claimant does not receive a written denial notice or notice of an extension within ninety (90) days, the Claimant may consider the claim denied and may then request a review of denial of the claim, as described below.

                  If the claim is denied in whole or in part, the Claimant shall be provided a written opinion, using language calculated to be understood by the Claimant, setting forth:

                               (i)       The specific reason or reasons for such denial;

                               (ii)       The specific reference to pertinent provisions of this Plan on which such denial is based;

                               (iii)       A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary;

                               (iv)       Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and

                               (v)       The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof.

                   (d)       Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review the initial determination. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review of the initial determination within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination.

                   (e)       Review of Decision. Within sixty (60) days after the Committee's receipt of a request for review, it will review the initial determination. After considering all materials presented by the Claimant, the Committee will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review.

                  7.4.       Each Participant may receive a copy of this Plan on request, and the Committee will make available for inspection by any Participant a copy of the rules and regulations used by the Committee in administering the Plan.

SECTION VIII

MISCELLANEOUS

                  8.1.       Amendment and Termination of Plan. The Committee may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part. However, no amendment or suspension of the Plan will affect a retired Participant's right or the right of a Surviving Spouse to continue to receive a benefit in accordance with this Plan as in effect on the date such Participant commenced to receive a benefit under this Plan.

                  8.2.       Limitation of Participant's Right. Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Employer, nor shall it interfere with the rights of the Employer or any Affiliate to terminate the employment of any Participant and/or to take any personnel action affecting any Participant without regard to the effect which such action may have upon such Participant as a recipient or prospective recipient of benefits under the Plan. Any amounts payable hereunder shall not be deemed salary or other compensation to a Participant for the purposes of computing benefits to which the Participant may be entitled under any other arrangement established by the Employer for the benefit of its employees. Nothing contained in the Plan shall be construed to prevent the Company or any Affiliate from taking any action which is deemed by it to be appropriate or in its best interest. No Participant, Beneficiary, or other person shall have any claim against the Company or any Affiliate as a result of such action.

                  8.3.       Individually Negotiated Benefits. Any agreement entered into by the Employer and an employee who is from a select group of management or highly compensated employees which provides individually negotiated benefits to such employee which are not otherwise described in the Plan shall be deemed to be incorporated by reference hereunder.

                  8.4.       Taxes. The Company may make such provisions and take such action as it may deem appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with any benefits under the Plan, including, but not limited to, the withholding of appropriate sums from any amount otherwise payable to the Participant (or his Beneficiary). Each Participant, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits.

                  8.5.       Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan of deferred compensation for Participants. Benefits payable hereunder shall be payable out of the general assets of the Company, and no segregation of any assets whatsoever for such benefits shall be made. Notwithstanding any segregation of assets or transfer to a grantor trust, with respect to any payments not yet made to a Participant, nothing contained herein shall give any such Participant any rights to assets that are greater than those of a general creditor of the Company.

                  8.6.       Obligations to Company. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company or any Employer or Affiliate, then the Company, Employer, or Affiliate may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Committee. To the maximum extent permitted by law, no benefit under this Plan otherwise shall be assignable or subject in any manner to alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind, other than a qualified domestic relations order that is otherwise enforceable against the Plan and not preempted by ERISA.

                  8.7.       Change of Control. At the Committee's discretion, after consultation with all affected Participants, in the event of a Change in Control and a termination of employment or service for any reason, each affected Participant's benefit shall either be distributed immediately to the Participant in one lump sum payment, or paid in accordance with the distribution options previously selected by the Participant, as determined by the Committee and made applicable to all affected Participants. In the event distribution continues to be deferred under the terms of the Plan, the affected Employer shall be required to contribute cash or equivalent assets to a grantor trust (maintained by an institutional trustee independent of the Employer) within 60 days after such Change in Control, in an amount not less than the then-current value of all Participant benefits relat ed to such Employer.

                  8.8.       Governing Law. This plan is established under and will be construed according to ERISA and, where not preempted, the laws of the State of Delaware.

                  8.9.       Headings, Gender, Singular and Plural. Headings are inserted in this Plan for convenience of reference only and are to be ignored in the construction of the provisions of the Plan. The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates the contrary.

EX-24

POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned directors of Pepco Holdings, Inc., a Delaware corporation, do hereby constitute and appoint ANDREW W. WILLIAMS, JAMES P. LAVIN, ANTHONY J. KAMERICK, and ELLEN SHERIFF ROGERS, and each of them, a true and lawful attorney in his or her name, place and stead, in any and all capacities, to sign his or her name to the Annual Report on Form 10-K for the year ended December 31, 2002, under the Securities Exchange Act of 1934, as amended, and to any and all amendments, of said Company, and to cause the same to be filed with the SEC, granting unto said attorneys and each of them full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully and to all intents and purposes as the undersigned could do if personally present, and the undersigned hereby ratifies and confirms all that said attorneys or any one of them shall lawfully do or cause to be done b y virtue hereof.
Dated:  February 27, 2003
/s/  Edmund B. Cronin, Jr.                 EDMUND B. CRONIN, JR.	/s/  Floretta D. McKenzie                   FLORETTA D. McKENZIE
/s/  John M. Derrick, Jr.                     JOHN M. DERRICK, JR.	/s/  Lawrence C. Nussdorf                  LAWRENCE C. NUSSDORF
/s/  T. C. Golden                               TERENCE C. GOLDEN	/s/  Peter F. O'Malley                         PETER F. O'MALLEY
/s/  George F. MacCormack                GEORGE F. MacCORMACK	/s/  Pauline A. Schneider                   PAULINE A. SCHNEIDER
/s/  Richard B. McGlynn                     RICHARD B. McGLYNN	/s/  Dennis R. Wraase                       DENNIS R. WRAASE
/s/  Judith A. McHale                         JUDITH A. McHALE	/s/  A. Thomas Young                        A. THOMAS YOUNG