UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DCD.C. 20549

FormFORM 10-Q

(Mark ~~one~~One)

|X| QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIESTHE EXCHANGESECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended: ~~June~~March 3031, ~~2004~~2005

~~|_|~~or ~~TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934~~

For|_| theTRANSITION transition periodREPORT fromPURSUANT TO toSECTION _13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

~~Commission~~For ~~file~~the ~~number:~~transition ~~0-16179~~period from ____________ to ____________

~~Gexa Corp.~~Commission ~~(Exact~~file ~~name~~number: ~~of registrant as specified in its charter)~~ 0-16179

Texas (State or other jurisdiction of incorporation or organization)	76-0670175 (IRS Employer Identification No.)
20 Greenway Plaza, Suite 600, Houston, TX (Address of principal executive offices)	77046 (Zip Code)

Gexa Corp.
(Exact name of registrant as specified in its charter)

(713) 470-0400 (Issuer’s telephone number)

Texas (State or other jurisdiction of incorporation or organization)	76-0670175 (IRS Employer Identification No.)

20 Greenway Plaza, Suite 600, Houston, TX (Address of principal executive offices)	77046 (Zip Code)

~~Indicate by check mark whether the registrant:~~ (1713) ~~has~~- ~~filed~~470 ~~all reports required to be filed by Section 13 or 15 (d) of the~~- ~~Securities Exchange Act of 1934 during the preceding 12 months~~ 0400(orRegistrant’s ~~for~~telephone ~~such shorter period that the registrant was required to file such reports)~~number, ~~and~~including ~~(2)~~area ~~has been subject to such filing requirements for the past 90 days. Yes |X|~~code) ~~No |_|~~

Indicate by check mark whether the registrant is(1) anhas ~~accelerated~~filed ~~filer~~all ~~(as~~reports ~~defined~~required into ~~Rule~~be ~~12b-2~~filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)., ~~Yes~~and (2) has been subject to such ~~|_|~~filing Norequirements ~~|X|~~ for the past 90 days.

~~APPLICABLE ONLY TO~~ Yes ~~CORPORATE~~|X| No ~~ISSUERS~~ |_|

Indicate ~~the~~by ~~number~~check ~~of shares~~mark ~~outstanding~~whether ~~of each of~~ the registrant ~~issuer’s~~is ~~classes~~an ofaccelerated ~~common~~filer ~~stock,~~ (as ~~of the~~defined ~~latest~~in ~~practicable~~Rule ~~date:~~12b-2 ~~Common~~of ~~Stock,~~the $Act).01 ~~par value 8,530,185 shares outstanding as of June 30th, 2004~~

1 Yes |_| No |X|

~~TABLE~~The OFnumber ~~CONTENTS~~of shares outstanding of Gexa Corp. common stock, $0.01 par value, at May 12, 2005 was 10,070,819.

PART I. FINANCIAL INFORMATION		Page
Item 1. Condensed Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		26
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		27
Item 3. Defaults Upon Senior Securities		27
Item 4. Submission of Matters to a Vote of Security Holders		27
Item 5. Other Information		27
Item 6. Exhibits and Reports on Form 8-K		27

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page

Item 1. Financial Statements	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures about Market Risk	29

Item 4. Controls and Procedures	29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3. Defaults Upon Senior Securities	32

Item 4. Submission of Matters to a Vote of Security Holders	32

Item 5. Other Information	32

Item 6. Exhibits	33

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

~~Set~~INDEX ~~forth below are the~~TO ~~condensed~~FINANCIAL ~~financial~~STATEMENTS ~~statements for the Company for the three and six month periods ended June 30, 2004 and 2003.~~

INDEX TO CONDENSED FINANCIAL STATEMENTS

	Page

Condensed Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004	4

Condensed Statements of Income for the three months ended March 31, 2005
(Unaudited) and for the three months ended March 31, 2004 (Unaudited)	5

Condensed Statements of Cash Flows for the three months ended March 31, 2005	6
(Unaudited) and for the three months ended March 31, 2004 (Unaudited)

Notes to Financial Statements (Unaudited)	8

	Page
Condensed Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003	4
Condensed Statements of Operations for the three and six months ended June 30, 2004 and 2003 (Unaudited)	5
Condensed Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)	6
Notes to Condensed Financial Statements (Unaudited)	8

	June 30, 2004			December 31, 2003
	March 31, 2005			December 31, 2004
Assets	(Unaudited)
Current Assets:
Cash and cash equivalents	$	2110,~~430~~709		$	108,~~829~~862
Cash - restricted		57,~~054~~161			36,~~613~~685
Accounts receivable, net of allowance for doubtful accounts		34,~~714~~503			2235,~~327~~486
Deferred tax asset		~~909~~1,265			~~458~~841
Other current assets		82436			82319
Total current assets		62,189			37,309
Total Current Assets		54,074			52,193
Property and equipment, net		~~680~~1,415			~~374~~1,195
Deferred tax asset		~~281~~—			~~292~~45
Other assets		~~453~~2,576			~~227~~2,822
Total Assets	$	6358,~~603~~065		$	3856,~~202~~255
Liabilities and Shareholders’ Equity
Current Liabilities:
Term loans - current portion	$	811		$	608
Accrued electricity costs	$	16,990		$	15,463
Accrued electricity costs		30,209			16,555
Accrued transmission and distribution costs		9,083			8,879
Accounts payable and other accrued expenses		102,~~243~~829			62,~~084~~524
Taxes payable		5,361			2,923
Sales tax payable		2,731			2,877
Customer deposits		4,863			3,376
Income tax payable		862			3,983
Total current liabilities		51,487			29,546
Customer deposits		6,657			6,119
Term loans: long-term portion, net of discount		2,040			2,382
Total Current Liabilities		39,152			39,845
Puttable warrant obligation		1,870			4,125
Deferred tax liability		195			—
Accrued interest payable - officer		24			20
Total Liabilities	$	39,347		$	39,845
Total Liabilities		55,421			36,073
Shareholders’ Equity:
Shareholders’ equity:
Common stock, $0.01 par value; 75,000,000 shares authorized;
8,544,032 shares issued and 8,530,185 shares outstanding at
10,077,007 shares issued and 10,063,160 shares outstanding at
June 30, 2004; 8,261,128 shares issued and 8,247,281 shares
March 31, 2005; 9,757,222 shares issued and 9,743,375 shares
outstanding at December 31, 2003		86			83
outstanding at December 31, 2004		101			98
Additional paid-in capital		814,~~245~~604			713,~~348~~727
Treasury stock, at cost; 13,847 shares		(14	)		(14	)
Unearned stock based compensation		(182	)		(295	)
Accumulated deficit		(135	)		(5,288	)
Treasury stock, at cost; 13,847 shares		(15	)		(15	)
Total shareholders’ equity		8,182			2,129
Retained earnings		4,210			2,895
Total liabilities and shareholders’ equity	$	63,603		$	38,202
Total Shareholders’ Equity		18,718			16,410
Total Liabilities and Shareholders’ Equity	$	58,065		$	56,255

See accompanying notes to condensed financial statements.

GexaGEXA CorpCORP. CONDENSED STATEMENTS OF OPERATIONSINCOME(In thousands, except per share data)

	Three Months Ended						~~Six Months Ended~~
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
	March 31, 2005			March 31, 2004
				As Restated (See Fn 11)						As Restated (See Fn 11)
	(Unaudited)			(Unaudited)
	(Unaudited)						(Unaudited)
Sales	$	78,261		$	50,513
Sales	$	62,025		$	21,448		$	112,538		$	34,368
Cost of goods sold		68,330			43,147
Cost of Goods Sold		55,436			19,517			99,895			31,701
Gross profit		9,931			7,366
Gross Profit		6,589			1,931			12,643			2,667
Selling general & administrative expenses		7,491			4,702
General and administrative expenses		4,180			1,962			7,569			3,084
Income from operations		2,440			2,664
Income (loss) from operations		2,409			(31	)		5,074			(417	)
Interest income		14			5
Interest income		2			8			7			10
interest expense		(382	)		(231	)
Interest expense		(188	)		(64	)		(419	)		(71	)
Other financing income		—			1,980
Other financing income (see Note 7)		275			—			2,255			—
Earnings before income taxes		2,072			4,418
Income before income tax expense (benefit)		2,498			(87	)		6,917			(478	)
Income tax expense		757			926
Income tax expense (benefit)		839			(32	)		1,765			(163	)
Net income	$	1,315		$	3,492
Net income (loss)		1,659			(55	)		5,152			(315	)
Weighted average shares outstanding
Preferred stock dividend		—			(25	)		—			(25	)
Basic		9,806			8,361
Net income (loss) available to common stockholders	$	1,659		$	(80	)	$	5,152		$	(340	)
Diluted		11,215			9,668
Basic net income (loss) per share	$	0.20		$	(0.01	)	$	0.61		$	(0.04	)
Earnings per share
Basic weighted average shares		8,481			7,605			8,413			7,605
Basic	$	0.13		$	0.42
Diluted net income (loss) per share	$	0.17		$	(0.01	)	$	0.54		$	(0.04	)
Diluted		0.12			0.36
Diluted weighted average shares outstanding		9,553			7,605			9,620			7,605

5See accompanying notes to condensed financial statements

Gexa Corp.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)

	Six months ended
	Three Months Ended
	June 30, 2004			June 30, 2003
	March 31, 2005			March 31, 2004
				As Restated (See Fn 11)
	(Unaudited)
Cash Flows from operating activities:
Cash flows from operating activities:
Net income (loss)	$	5,152		$	(315	)
Net income	$	1,315		$	3,492
Adjustments to reconcile net income (loss) to
Adjustments to reconcile net income to
net cash provided by operating activities:
net cash provided by (used in) operating activities:
Depreciation		75			50
Depreciation and amortization		142			59
Amortization of financing costs		15191			—7
Accretion of debt discount		~~(153~~—	)		—33
Stock issued to officers, directors
and consultants for services		~~100~~260			—95
Change in puttable warrant obligation		~~(2,255~~—	)		—(1,980	)
Deferred income tax benefit		(~~440~~433	)		38(269	)
Changes in operating assets and liabilities:
Accounts receivable		~~(12~~1,~~387~~070	)		(73,~~624~~193	)
Other current assets		—(117	)		(~~358~~101	)
Other long-term assets		~~(226~~18	)		—(76	)
Accrued electicity costs		13,654			—
Accrued electricity costs		1,527			(6,511	)
Accounts payable and other accrued expenses		4,159			7,224
Accrued TDSP costs		204			3,068
Taxes Payable		2,438			334
Accounts payable and other accrued expenses		305			268
Customer deposits		1,487			1,078
Sales tax payable		(146	)		18
Accrued interest payable		4			4
Income tax payable		(2,564	)		1,195
Net cash provided by operating activities		11,623			431
Customer deposits		538			853
Accrued interest payable		—			2
Net cash provided by (used in) operating activities		2,310			(3,040	)
Cash flows from investing activities:
Restricted cash		(1,441	)		—
Purchases of equipment		(412	)		(74	)
Purchases of equipment		(381	)		(125	)
Restricted cash		(476	)		(499	)
Net cash used in investing activities		(~~1,822~~888	)		(~~125~~573	)
Cash flows from financing activities:
Borrowings on credit facility		—			115
Proceeds from exercise of options		425			671
Borrowings on revolving credit line		—			322
Net cash provided by financing activities		425			671
Changes in treasury stock		—			(4	)
Net change in cash		1,847			(2,942	)
Proceeds from sale of common stock		800			—
Cash and cash equivalents at beginning of period		8,862			10,829
Net cash provided by financing activities		800			433
Cash and cash equivalents at end of period	$	10,709		$	7,887
Net change in cash		10,601			739
Cash paid for interest	$	58		$	114
Cash and cash equivalents at beginning of period		10,829			3,400
Cash paid for income taxes	$	3,750		$	—
Cash and cash equivalents at end of period	$	21,430		$	4,139

See accompanying notes to condensed financial statements

Supplemental Disclosure of Cash Flow Information

	Six months ended
	June 30, 2004		June 30, 2003
Cash paid for interest	$	211	$	69
Cash paid for income taxes	$	173	$	—

Supplemental Disclosure of Noncash Transactions

During the ~~six~~three months ended ~~June~~March 3031, ~~2004~~2005, ~~certain~~ ~~broker commissions were~~the ~~paid~~Company ~~with~~issued 719,~~400~~ 785 shares of common stock for ~~valued~~services provided. The services were provided by Continental Airlines for the One Pass® partner program where the Company provides mileage to customers in exchange for payment by the Company to Continental of cash and Company common stock. The common stock was issued in separate issues as follows: 4,250 shares issued at a market price onof ~~date~~$5.01 and 15,535 shares issued at a market price of ~~issue, averaging~~ $76.~~17 per share~~40.

During the ~~six~~three months ended ~~June~~March 3031, ~~2004~~ 2005, ~~employees~~ of the Company ~~were granted 6~~cancelled 15,~~750~~000 stock options and then ~~shares~~reissued these options at the market price on the date of ~~common stock, that~~issue. These options were employee ~~valued~~options issued in lieu of compensation. These options were reissued on March 17, 2005, at a market price of $6.30 and had an ~~average~~ exercise price of $4.56. The Company expensed the difference between the exercise price and the market price of $51.3374 per share, infor ~~lieu~~a total cost of ~~compensation~~$26,100.

~~GEXA~~Gexa ~~CORP~~Corp. Notes to ~~the~~ Condensed Financial Statements~~(unaudited)June 30, 2004~~

Note 1. – Basis of PresentationOrganization

Gexa ~~The accompanying unaudited condensed financial statements~~Corp. ~~have~~(“the ~~been~~Company”) ~~prepared~~was incorporated in ~~accordance~~ ~~with~~Texas ~~accounting principles generally accepted~~on inFebruary ~~the~~13, ~~United~~2001. ~~States~~On ofAugust ~~America~~2, ~~(“GAAP”)~~2001, ~~for interim financial information and with~~ the ~~instructions~~Company toreceived ~~Form 10-Q~~its ~~and~~license ~~Regulation~~from ~~S-K of~~ the ~~Securities~~Public ~~and~~Utility ~~Exchange~~ Commission~~. Accordingly, they~~ ~~do not include all~~ of ~~the~~Texas (“PUCT”) ~~information~~to ~~and~~serve ~~footnotes required~~as bya ~~GAAP~~retail ~~for~~provider ~~complete~~ of ~~financial statements~~electricity ~~and~~to ~~should~~residential ~~be read in conjunction with the audited financial~~and commercial ~~statements contained~~customers in ~~the~~deregulated ~~Company’s~~markets ~~Annual~~within ~~Report on Form 10-KSB for~~ the ~~fiscal~~state ~~year ended~~of ~~December 31, 2003~~Texas. InOn ~~the~~January ~~opinion of management~~1, ~~all~~ ~~adjustments (consisting of~~2002, ~~normal~~the ~~recurring~~Company ~~accruals) considered necessary~~began ~~for~~to aprovide ~~fair presentation~~retail ~~have~~electric ~~been included. Operating results~~services ~~for~~in the ~~interim~~State ~~periods presented are not necessarily indicative~~ of ~~the results that may be expected for the year ended December 31, 2004~~Texas.

As used2. inBasis thisof QuarterlyPresentation Report, the terms “we,” “us,” “our” and theSignificant “Company”Accounting mean Gexa Corp., a Texas corporation. Policies

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial results. These adjustments are of a normal recurring nature or are otherwise disclosed in the footnotes to the condensed financial statements.

Use of estimates

The preparation of financial statements in accordance with ~~GAAP~~accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. The significant estimates for the Company include: (a) estimation of volumes delivered to customers, including the effects of resettlements from the Electric Reliability Council of Texas (“ERCOT”) (b) estimation of rates for determination of revenues, and (c) bad debt expense.

~~Note~~• 2volumes –delivered ~~Revenue~~to ~~and~~customers, ~~Cost~~including ~~Recognition~~the effects of resettlements from the Energy Reliability Council of Texas (“ERCOT”);

~~The Company~~• ~~records electricity~~rates ~~sales~~for ~~under~~determination ~~the accrual method and these revenues are recognized upon delivery~~ of electricity to the customer’s meter. Electric services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by the Company’s average billing rate per kilowatt hour (“kWh”) in effect at the time. revenues;

~~In November~~• ~~2003,~~bad ~~the~~debt ~~Company~~expense; changed its revenue estimation technique to one referred to as the “flow” technique. In the latter half of 2003, the Company determined that the market was operating at a point of efficiency such that it would be appropriate for the Company to begin accruing revenue based on ERCOT settlements of power deliveries, and given the limitations of the billings technique, the Company chose to change to the flow technique. In addition, by the end of the fiscal year 2003, the Company had sufficient initial settlement and resettlement data from ERCOT to arrive at a reasonable estimate for 2003 revenues assuming that the flow method had been in place since January 1, 2003.

8• fair value of stock options and warrants issued.

The flow technique of revenue calculation relies upon ERCOT settlement statements to determine the estimated revenue for a given month. Supply delivered to our customers for the month, measured on a daily basis, provides the basis for revenues. ERCOT provides net electricity delivered data in three time frames. Initial daily settlements become available approximately 17 days after the day being settled. Approximately 45 days after the day being settled, a `resettlement’ is provided to adjust the initial settlement to the actual supply delivered based on subsequent comparison of prior forecasts to actual meter reads processed. A final resettlement is provided approximately 180 days after power is delivered, marking the last routine settlement adjustment to the power deliveries for that day. Reclassifications

The ~~Because flow~~Company ~~data~~reclassified ~~for~~certain ~~resettlements~~prior ~~and~~fiscal ~~final resettlements~~year ~~are~~amounts ~~not~~in ~~available~~the accompanying financial statements in ~~sufficient~~order ~~time~~ to be ~~booked~~consistent towith the ~~appropriate period~~current fiscal year presentation. During fiscal 2004, the ~~effect~~Company ofreclassified ~~such~~certain ~~resettlements~~costs ~~are~~associated ~~booked~~with insales commissions, ~~the~~marketing ~~month~~programs inand ~~which~~transaction ~~the~~processing fees from cost of goods sold ~~(“COGS”)~~to ~~effect~~selling, general ofand ~~those~~administrative ~~resettlements~~expenses ~~is realized.~~in ~~This~~the ~~allows~~Company’s ~~for~~statements aof ~~proper~~income. ~~matching~~The reclassified amounts decreased cost of ~~revenues~~goods ~~with~~sold ~~COGS~~and increased selling, general and administrative expenses but had no impact on net income.

~~Sales represent~~8 the total proceeds from energy sales, including pass through charges from the Transmission and Distribution Providers (“TDSPs”) billed to the customer at cost. COGS includes electric power purchased, sales commissions, and pass through charges from the TDSPs in the areas serviced by the Company. TDSP charges are costs for metering services and maintenance of the electric grid. TDSP charges are established by regulation by the Public Utility Commission of Texas (PUCT).

The energyNormal portionPurchases of the Company’s COGS is comprised of two components; bilateral wholesale costs and balancing/ancillary costs. TheseSales two cost components are incurred and recognized in different manners. Accounting

The ~~Bilateral~~Company uses a combination of long term contracts, short term contracts, month-ahead purchases, ~~wholesale~~and ~~costs~~day-ahead ~~are~~purchases ~~incurred through contractual arrangements~~ to match up with ~~wholesale power~~forecasted demand of commercial ~~suppliers~~customers ~~for~~on ~~firm~~long ~~delivery~~term ofsales ~~power~~contracts, atcommercial acustomer ~~fixed~~on ~~volume~~month-to-month contracts, and ~~fixed~~residential ~~price~~customers (which are all on month-to-month contracts). The Company isapplied ~~invoiced~~the ~~for~~normal ~~these~~purchase ~~wholesale volumes~~and atsales ~~the~~accounting ~~end~~treatment ofto ~~each~~its ~~calendar~~forward ~~month~~purchase ~~for~~supply contracts and its customer sales contracts. Accordingly, the ~~volumes~~Company records revenue generated ~~purchased~~from ~~for~~its ~~delivery~~sales ~~during~~contracts ~~the~~as ~~month~~energy is delivered to its retail customers, ~~with~~and direct ~~payment~~energy ~~due~~costs 30are ~~days~~recorded ~~after~~when the ~~end~~energy ofunder ~~the~~its long-term forward physical ~~month~~delivery contracts is delivered.

Balancing/ancillary Revenue costs are based on the customer load and areCost determined by ERCOT through a multiple step settlement process. Balancing costs/revenues are related to the differential between supply provided by the Company through its bilateral wholesale supply and the supply required to serve the Company’s customer load. The Company endeavors to minimize the amount of balancing/ancillary costs through its load forecasting and forward purchasing programs. Recognition

9 The Company records electricity sales under the accrual method, and these revenues are recognized upon delivery of electricity to the customer’s meter. Electric services not billed by month-end are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by the Company’s average billing rate per kilowatt hour (“kwh”) in effect at the time.

~~Note~~ The Company 3uses –a ~~Unbilled~~revenue ~~Revenue~~estimation ~~and~~method ~~Accounts~~referred ~~Receivable~~to as the “flow” technique. The flow technique of revenue calculation relies upon ERCOT settlement statements to determine the estimated revenue for a given month. Supply delivered to customers for the month, measured on a daily basis, provides the basis for revenues. ERCOT provides net electricity delivered data in three time frames. Initial daily settlements become available approximately 17 days after the day being settled. Approximately 45 days after the day being settled, a ‘resettlement’ is provided to adjust the initial settlement to the actual supply delivered based on subsequent comparison of prior forecasts to actual meter reads processed. A final resettlement is provided approximately 180 days after power is delivered, marking the last routine settlement adjustment to the power deliveries for that day.

Because ~~At the~~flow ~~end~~data offor ~~each calendar month, revenue~~resettlements isand ~~accrued~~final toresettlements ~~unbilled receivables based~~are onnot available in sufficient time ~~the estimated amount~~to ofbe ~~power delivered~~booked to ~~customers using~~the appropriate period, the ~~flow technique.~~effect of such resettlements are booked in the ~~Unbilled~~month ~~revenue~~in ~~also~~which ~~includes~~the ~~accruals~~cost ~~for~~of ~~estimated~~goods ~~TDSP~~sold ~~charges~~(“COGS”) ~~and~~effect ~~monthly~~of ~~service~~those resettlements is ~~charges~~realized. ~~applicable~~This toallows ~~the~~for ~~estimated~~a ~~electricity~~proper ~~usage~~matching ~~for~~of ~~the~~revenues ~~period~~with COGS.

Sales ~~All charges~~represents ~~that~~the ~~were~~total ~~physically~~proceeds ~~billed~~from toenergy ~~customers~~sales, inincluding ~~the~~pass ~~calendar~~through ~~month~~charges ~~are recorded~~ from the Transmission ~~unbilled~~and ~~account~~Distribution Providers (“TDSPs”) billed to the customer ~~receivables account. Accounts receivables~~ ~~are~~at ~~customer obligations~~cost. ~~billed~~COGS atincludes ~~the~~electric ~~conclusion~~power ofpurchased aand ~~month’s electricity~~pass ~~usage~~through ~~and~~charges ~~due~~from the TDSPs in ~~within~~the 16areas ~~days~~serviced ofby the ~~date~~Company. TDSP charges are costs for metering services and maintenance of the ~~invoice~~electric grid. ~~Balances~~ ~~past~~TDSP ~~due~~charges are ~~subject~~established toby aregulation ~~late~~by ~~fee~~the Public ~~that~~Utility isCommission ~~assessed~~of onTexas ~~that billing~~(“PUCT”).

The ~~large~~energy ~~number~~portion of ~~customers and significant volume of transactions in~~ the ~~commercial~~Company’s ~~and~~ COGS ~~residential retail~~is ~~energy~~comprised ~~business~~of ~~create~~two acomponents: ~~challenge to manage receivables as well as~~bilateral ~~estimate~~wholesale ~~the~~costs ~~account balances~~and ~~that ultimately~~balancing/ancillary ~~will not be paid by the customers (bad debt write-offs)~~costs. ~~The~~ ~~Company~~These ~~uses~~two acost ~~variety~~components ofare ~~tools~~incurred ~~to estimate~~ and ~~provide an~~ ~~accurate~~recognized ~~and~~in ~~adequate allowance~~different for doubtful accounts reserve; the allowance for doubtful accounts is expensed each month as a percentage of revenue based on the historical bad debt write-off trends that will result from that month’s gross revenuesmanners.

~~The Company follows~~9 a consistent process to determine which accounts should be written off and compares the total actual write-offs to the estimated percentage of total revenue accrued and expensed each month. Past due accounts are regularly reviewed based on aging for possible removal from service, in-house or external collections efforts or write-off. For residential customers, with some minor exceptions, the total balance for all accounts with any portion of their balance over 60 days past due is considered to be uncollectible and is written off, net of security deposits held for these accounts. Delinquent commercial accounts are reviewed individually by in-house collections and payment arrangements, removal from service and possible write-off of all or a portion of the receivable is determined on a case-by-case basis.

Bilateral ~~The~~wholesale costs are incurred through contractual arrangements with wholesale power ~~Company~~suppliers ~~has~~for ~~initiated~~firm delivery of power at a ~~variety~~fixed ofvolume ~~actions~~and ~~targeted~~fixed toprice. ~~reduce~~The Company is invoiced for these wholesale volumes at the ~~amount~~end of ~~bad~~each ~~debt~~calendar month for the volumes ~~incurred~~purchased byfor delivery during the ~~Company.~~month, ~~The~~with ~~principal~~payment ~~actions~~due ~~are~~30 asdays ~~follows:~~after the end of the month.

• Balancing/ancillary costs ~~Improved~~are ~~policies~~based ~~requiring~~on ~~credit~~the ~~reviews,~~customer ~~deposits,~~load and ~~late~~are ~~fees,~~determined by ERCOT through a multiple step settlement process. Balancing costs/revenues are related to the differential between supply provided by the Company through its bilateral wholesale supply and the supply required to serve the Company’s customer load. The Company endeavors to minimize the amount of balancing/ancillary costs through its load forecasting and forward purchasing programs.

•Unbilled ImplementingRevenue moreand aggressiveAccounts collection efforts.Receivable

At ~~Accounts Receivable~~the ~~contains~~end ~~billed~~of ~~receivables~~each calendar month, revenue is accrued to unbilled receivables, ~~other~~based ~~receivables, and~~on the ~~allowance~~estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for ~~doubtful~~estimated ~~accounts~~TDSP ascharges ~~follows:~~and monthly service charges applicable to the estimated electricity usage for the period.

(In thousands)	June 30, 2004			December 31, 2003
Billed receivables	$	19,311		$	13,126
Unbilled receivables		17,800			10,313
Other receivables		230			188
Allowance for doubtful accounts		(2,627	)		(1,300	)
Accounts receivable, net	$	34,714		$	22,327

All charges that were physically billed to customers in the calendar month are recorded from the unbilled account to the customer receivables account. Accounts receivables are customer obligations billed at the conclusion of a month’s electricity usage and due within 16 to 30 days of the date of the invoice depending on customer payment terms. Balances past due are subject to a late fee that is assessed on that billing.

10 The large number of customers and significant volume of transactions create a challenge to manage receivables as well as to estimate the account balances that ultimately will not be paid by the customers (“bad debt write-offs”). The Company uses a variety of tools to estimate and provide an accurate and adequate allowance for doubtful accounts reserve; the allowance for doubtful accounts is expensed each month as a percentage of revenue based on the historical bad debt write-off trends that will result from that month’s gross revenues. For the three months ended March 31, 2005, and the three months ended March 31, 2004, the Company’s bad debt expense was approximately $1.8 million, or 2.3% of sales and $1.3 million, or 2.6% of sales, respectively.

~~Note~~ The Company 4follows –a ~~Earnings~~consistent ~~Per~~process ~~Share~~to determine which accounts should be written off and compares the total actual write-offs to the estimated percentage of total revenue accrued and expensed each month. Past due accounts are regularly reviewed based on aging for possible removal from service, in-house or external collections efforts, or write-off. For residential customers and commercial customers with a balance under $700.00, with some minor exceptions, the total balance for all accounts with any portion of their balance over 60 days past due is considered to be uncollectible and is written off, net of security deposits held for these accounts. Delinquent commercial accounts with balances greater than $700.00 are reviewed individually by in-house collections, and payment arrangements, removal from service and possible write-off of all or a portion of the receivable is determined on a case-by-case basis.

~~The following~~10 ~~table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share that are presented on the condensed statements of operations.~~

	Three Months Ended					Six Months Ended
(In thousands)	June 30, 2004		June 30, 2003			June 30, 2004		June 30, 2003
Numerator:
Net Income (loss)	$	1,659	$	(55	)	$	5,152	$	(315	)
Preferred Stock dividend		—		(25	)		—		(25	)
Net Income (loss) available to common stockholders	$	1,659	$	(80	)	$	5,152	$	(340	)
Denominator
Denominator for basic earnings per share
Weighted average shares outstanding		8,481		7,605			8,413		7,605
Effect of dilutive securities:
Employee and director stock options		971		—			1,080		—
Warrants		101		—			127		—
Denominator for diluted earnings per share
Adjusted weighted average shares outstanding		9,553		7,605			9,620		7,605
Basic earnings per share	$	0.20	$	(0.01	)	$	0.61	$	(0.04	)
Diluted earnings per share		0.17		(0.01	)		0.54		(0.04	)

The Company has initiated a variety of actions targeted to reduce the amount of bad debt incurred by the Company. The principal actions are as follows:

11• improved policies requiring credit reviews, deposits, and late fees; and

~~Note~~• 5implemented –more ~~Stock-Based~~aggressive ~~Compensation~~collection efforts including customer disconnections.

The CompanyCash accountsand forCash its employees’ stock-based compensation plans under the intrinsic value method. The pro forma information below is based on a fair value approach. Equivalents

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Pro Forma impact of fair value method (FAS 148)
Reported net income available to common shareholders	$	1,659		$	(80	)	$	5,152		$	(340	)
Less: fair value impact of employee stock compensation		(127	)		(100	)		(254	)		(200	)
Pro forma net income available to common shareholders	$	1,532		$	(180	)	$	4,898		$	(540	)
Earnings per common share
Basic - as reported	$	0.20		$	(0.01	)	$	0.61		$	(0.04	)
Diluted - as reported		0.17			(0.01	)		0.54		$	(0.04	)
Basic - pro forma		0.18			(0.02	)		0.58			(0.07	)
Diluted - pro forma		0.16			—			0.51			—
Weighted average Black-Scholes fair value assumptions
Risk free interest rate		3	%		5	%		3	%		5	%
Expected life		3 yrs			3 yrs	.		3 yrs			3 yrs	.
Expected volatility		176	%		124	%		176	%		124	%
Expected dividend yield		0	%		0	%		0	%		0	%

The Company considers all highly liquid short-term investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents.

During theRestricted six months ended June 30, 2004, 6,750 shares of stock were granted to Company employees in lieu of compensation. Cash

The ~~During the~~Company ~~three~~has ~~months~~restricted ~~ended~~cash ~~June~~related ~~30,~~to ~~2004,~~customer deposits and certificates of deposit used to secure letters of credit for the ~~Board~~purchase of ~~Directors~~electricity, ~~subject~~the topayment ~~shareholder~~of TDSP pass ~~approval~~through charges, ~~adopted~~and ~~the~~operations. ~~2004~~Customer ~~Incentive~~deposit ~~Plan,~~cash ~~which~~must ~~provides~~be ~~for~~held by the ~~issuance~~Company ofand upmay not tobe 1directly spent on any operational or other expense.~~5 million~~ ~~shares~~Restricted cash securing letters of ~~common~~credit ~~stock~~may ~~pursuant~~not tobe ~~incentive~~used ~~awards~~for ~~under~~any purpose by the ~~plan.~~Company Asunless ofthe ~~June~~underlying ~~30,~~obligation ~~2004,~~being nosecured ~~incentive~~is ~~awards~~relieved ~~had~~or ~~been~~secured ~~issued~~with ~~under~~other ~~the plan~~collateral.

NoteFair 6Value –of SignificantFinancial EventsInstruments

The ~~On May 28, 2004, the~~ Company’s ~~announced~~financial itinstruments ~~had~~consist ~~entered~~primarily ~~into~~of acash ~~marketing~~and ~~agreement~~cash ~~with the~~equivalents, ~~American~~accounts ~~Airlines~~receivable, ~~Inc.~~and ~~AAdvantage~~accounts ~~® program~~payable. ~~Beginning~~The oncarrying ~~June~~amounts 1,of ~~2004,~~these ~~the Company~~financial ~~will~~instruments ~~market~~are ~~electricity~~reflected ~~services~~in tothe ~~AAdvantage~~accompanying ®balance ~~members,~~sheets ~~enabling~~at ~~them~~amounts toconsidered ~~save money~~by onmanagement to approximate their ~~electricity~~fair ~~bills~~values ~~while~~due ~~earning~~to ~~AAdvantage~~their ®short-term ~~miles~~nature.

12 Equipment

Equipment Onis stated at cost. Maintenance and repairs are expensed when incurred. The Company’s ~~June~~fixed 21assets are classified as furniture, ~~2004~~computer hardware, ~~the~~computer software, telephones, and leasehold improvements. The Company ~~announced~~considers leasehold improvements to be improvements that itcan ~~had~~not ~~relocated~~be ~~its~~removed ~~offices~~without ~~from~~substantially 24damaging or requiring ~~Greenway~~substantial ~~Plaza,~~repair ~~Houston,~~to ~~Texas,~~the ~~77046,~~leased toasset. 20The ~~Greenway~~Company ~~Plaza~~depreciates inthese ~~Houston~~items over the term of the lease or the service life of the improvement, ~~Texas~~whichever is shorter. Depreciation expense, including amortization expense on capitalized software for the three months ended ~~77046~~March 31, 2005 and ~~changed~~the ~~its~~three ~~telephone~~months ~~number~~ended toMarch ~~713-470-0400~~31, 2004, was $142,000, and $59,000, respectively.

On JulyIncome 15, 2004, a class action lawsuit captioned Frederick T. Pappey vs. Gexa Corp., Neil Leibman, Marcie Zlotnik and Sarah Veach, Civil Action No. H-04-2869, was filed in the United States District Court for the Southern District of Texas, Houston District. The complaint alleges that, among other things, the Company’s publicly filed reports and public statements contained false and misleading information, which resulted in damages to the plaintiff and members of the proposed class when they purchased securities of the Company. The complaint also alleges that the conduct of the Company and the other defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks unspecified damages. The Company believes that the lawsuit is without merit and intends to contest the matter vigorously. Taxes

The ~~On August~~Company 2,accounts ~~2004,~~for ~~the~~income ~~Company~~taxes ~~was~~pursuant ~~sued~~to in the ~~matter~~asset ofand ~~Capello~~liability ~~Capital~~method ~~Corp.~~which ~~vs.~~requires ~~Gexa~~deferred ~~Corp~~income intax ~~the~~assets ~~Los~~and ~~Angeles~~liabilities ~~Superior~~to ~~Court-West~~be ~~District.~~computed ~~The~~for ~~complaint~~temporary ~~alleges~~differences abetween ~~breach~~the offinancial ~~contract~~statement ~~regarding~~and ~~investment~~tax ~~banker~~bases ~~fees~~of ~~being~~assets ~~claimed~~and byliabilities that ~~Capello~~will ~~Capital~~result ~~Corp.~~ in ~~connection~~taxable ~~with~~or ~~the~~deductible ~~credit~~amounts ~~facility~~in ~~Highbridge/Zwirn Special~~the ~~Opportunities~~future ~~Fund,~~based ~~L.P.~~on ~~The~~enacted ~~Company~~tax ~~believes~~laws ~~that~~and rates applicable to the ~~lawsuit~~periods ~~is without~~in ~~merit~~which ~~and~~the ~~intends~~differences toare ~~contest~~expected ~~the~~to ~~matter~~affect ~~vigorously~~taxable income. Valuation allowances will be

~~Note~~11 ~~7 – Put Warrant Obligation~~

~~SFAS No.~~established ~~150,~~when ~~Accounting~~necessary ~~for~~to ~~Certain Financial Instruments with Characteristics of~~reduce ~~Both~~deferred ~~Liabilities~~tax ~~and~~assets ~~Equity, was issued in May 2003 and requires issuers~~ to ~~classify~~ asthe ~~liabilities~~amount ~~(or~~expected ~~assets under certain circumstances) free standing financial instruments which, at inception, require or may require an issuer~~ to ~~settle~~ anbe ~~obligation by transferring assets~~realized. ~~SFAS~~ No. ~~150~~allowances ishave ~~effective for~~been ~~financial~~established ~~instruments~~through ~~entered~~the ~~into~~three ormonths ~~modified~~ended ~~after~~March ~~May~~ 31, ~~2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003~~2005.

SFAS No.Deferred 150Financing requires warrants issued under a term loan agreement with The Catalyst Fund Ltd. to be classified as a liability. In January of 2005, the holders of the warrants could have exercised their rights to force the Company to repurchase the 550,000 common shares at the current market price on the common stock, less the warrant exercise price of $1.00. The put feature could have been accelerated by a change of control or a capital offering in excess of $10 million; therefore, the Company could have been forced to purchase up to 550,000 shares of its own common stock at the market price (less the $1 warrant exercise price) on the day the put option is exercised. Costs

The ~~As of~~Company ~~June~~defers ~~30,~~costs ~~2004,~~incurred ~~the~~in ~~Company’s~~connection ~~stock~~with ~~closed~~financing atand ~~$4.40~~amortizes ~~per~~the ~~share.~~costs ~~The~~over ~~decrease~~the inlife of the ~~market~~related ~~price~~debt ~~from~~in ~~$8.50~~accordance atwith ~~December~~the ~~31,~~effective ~~2003~~interest ~~to $4~~method.90 atDuring ~~March~~the three months ended March 31, ~~2004~~2005, ~~required~~ the Company toexpensed ~~record~~$191,000 ~~a decrease~~ in ~~the~~fees ~~value~~and ofother ~~the puttable~~costs ~~warrant~~related ~~obligation~~to ofits ~~approximately~~financing ~~$0.3~~obligation ~~million~~as ~~and~~compared with $~~2.3~~32,000 ~~million~~during ~~for~~ the three months ended March ~~June 30~~31, 2004. ~~and~~The ~~the~~Company ~~six~~had ~~months~~$1.7 ~~ended~~million ~~June~~in ~~30,~~deferred ~~2004~~financing ~~respectively,~~ costs classified as “Other ~~other~~long-term ~~financing~~assets” ~~income~~on inMarch ~~accordance~~31, 2005, compared with ~~SFAS~~approximately ~~No.~~$116,000 on ~~150~~March 31, 2004.

13 The Company presents “basic” net income per share and “diluted” net income per share. Basic net income per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during each period. The calculation of diluted net income available to common shareholders per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all of the potential common share equivalents were exercised. See Note 4 Earnings Per Share for more details.

NoteComprehensive 8 – Related Party Transactionsincome

Comprehensive ~~The Company~~income ~~had~~represents noany ~~related~~non-owner ~~party~~changes ~~transactions~~in ~~during~~equity ~~the~~besides ~~three~~income ~~months~~and ~~ended~~dividends. ~~June 30,~~The ~~2004.~~Company’s ~~Subsequent~~comprehensive toincome ~~June~~for ~~30, 2004,~~ the ~~Company~~three ~~repaid~~months ~~loans~~ended toMarch ~~its~~31, ~~officers~~2005, and the ~~directors.~~three ~~See~~months ~~Footnote~~ended 10March 31, ~~Subsequent~~2004, ~~Events~~was ~~for~~equal ~~further~~to ~~discussion~~net income as reported herein.

NoteRecent 9Accounting – Income taxesStandards

In ~~The effective~~October ~~income~~2004, ~~tax rate reflected in~~ the ~~‘Income~~FASB ~~tax~~concluded ~~expense (benefit)’~~that ~~item~~SFAS ofNo. ~~the~~123R, ~~Statement~~Share-Based ~~of Operations for the three and six months ended June 30~~Payment, ~~2004 is lower than the Company’s expected effective tax rate~~which ofwould ~~approximately~~require ~~37%.~~all ~~Included~~companies into ~~‘Income~~measure ~~before~~compensation ~~taxes’~~cost ~~is approximately~~for ~~$0.3~~all ~~and~~share-based ~~$2.3 million of ‘Other financing income’~~payments ~~related~~(including toemployee ~~puttable~~stock ~~warrants~~options) ~~(see~~at ~~Footnote~~fair 7value, ~~Puttable~~would ~~Warrant~~be ~~Obligations)~~effective for ~~the~~ ~~three and six months ended June 30, 2004, respectively;~~ the ~~income~~Company ~~related~~for tointerim ~~the~~or ~~puttable~~annual ~~warrants~~period isbeginning ~~not~~after ~~taxable.~~December ~~Therefore~~15, ~~‘Income~~2005. ~~before~~The ~~Income tax~~Company ~~expense~~will ~~(benefit)’~~adopt isSFAS No. ~~reduced~~123R byon ~~the~~January ~~amount~~1, of2006 ~~the~~and ~~‘Other financing~~does ~~income’~~not ~~prior~~believe tothe ~~calculating~~adoption ~~‘Income~~will ~~tax~~have ~~expense~~a ~~(benefit)’,~~material ~~thereby~~impact ~~lowering~~on ~~the~~its ~~effective~~financial ~~tax rate~~statements.

~~Note~~12 ~~10 – Subsequent Events~~

Credit3. FacilityAccounts andReceivable, WarrantsNet

Accounts ~~On July~~receivable 8,consisted ~~2004,~~of ~~the~~billed ~~Company entered into a $15.0 million revolving credit facility (the “Facility”) with Highbridge/Zwirn Special Opportunities Fund~~receivables, ~~L.P.~~ ~~The~~unbilled ~~Facility,~~receivables ~~which~~and ~~matures on July 8, 2007, may be used to provide working capital for~~ the ~~Company’s~~allowance ~~normal routine operations and~~ for ~~providing a~~ ~~cash~~doubtful ~~reserve~~accounts toas ~~collateralize~~follows: letters of credit that the Company is required to post. The Facility is collateralized by a lien on substantially all of the Company’s assets, subject to the liens already held on such assets by TXU and/or JPMorganChase. No advances were made under the Facility at closing.

Advances under the Facility bear interest at the rate of 14% per annum and the Company is permitted to prepay advances outstanding under the Facility at any time without penalty upon proper notice to the lenders thereunder. If at any time the Company has unrestricted cash or cash equivalents in excess of $1.2 million, the Company is required to make a prepayment on the advances then outstanding under the Facility in an amount equal to the amount of such cash or cash equivalents being held by the Company on the fifteenth and/or the last day of any month during the term of the Facility in excess of $1.2 million, within one business day of such occurrence.

(In thousands)	March 31, 2005			December 31, 2004


Billed receivables	$	19,735		$	20,259
Unbilled receivables		17,902			17,661
Allowance for doubtful accounts		(3,134	)		(2,434	)


Accounts receivable, net	$	34,503		$	35,486

14 The following table is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share that are presented on the statements of operations.

The Facility contains the following covenants that are considered important in operating the Company:

(In thousands)	Three Months Ended
(In thousands)	March 31, 2005		March 31, 2004

Numerator:
Net Income	$	1,315	$	3,492


Denominator
Denominator for basic earnings per share
Weighted average shares outstanding		9,806		8,361
Effect of dilutive securities:
Employee and director stock options and warrants		1,409		1,306

Denominator for diluted earnings per share
Adjusted weighted average shares outstanding		11,215		9,668


Basic earnings per share	$	0.13	$	0.42

Diluted earnings per share	$	0.12	$	0.36

• The Company may not permit the leverage ratio (as defined in the Facility), as of the last day of each fiscal quarter, to be greater than 1.5. Stock-Based Compensation

• The Company ~~may~~accounts ~~not~~for ~~permit~~stock ~~the~~based ~~fixed~~compensation ~~charge~~to ~~coverage~~employees ~~ratio~~using ~~(as~~the ~~defined~~intrinsic invalue method. ~~the~~Pro ~~Facility)~~forma asinformation ofregarding ~~the~~net ~~last~~income ~~day~~and ofnet ~~each~~income ~~fiscal~~per ~~quarter~~share available to common beshareholders ~~lower~~is ~~than~~required ~~(i)~~by 1SFAS No.5 ~~for~~148 ~~the~~and ~~quarter~~has ~~ending~~been ~~September~~determined ~~30,~~as ~~2004~~if ~~and~~the ~~(ii)~~Company had ~~1.3~~accounted for ~~each~~its ofstock options under the ~~quarters~~fair ~~thereafter;~~value method as provided therein.

• For purposes ~~The~~of ~~Company~~pro ~~may~~forma ~~not~~disclosures, ~~permit~~ the ~~interest~~estimated ~~coverage~~fair ~~ratio~~value ~~(as defined in the Facility) as~~ of the ~~last~~options ~~day~~is ofamortized over ~~each fiscal quarter to be lower than (i) 6.0 for~~ the ~~quarters~~options’ ~~ending~~graded ~~September~~vesting ~~30, 2004 and December 31, 2004 and (ii) 4~~period.~~7 for each of the quarters thereafter;~~

•13 The Company may not permit TTM EBITDA (as defined in the Facility) as of the last day of each fiscal quarter to be less than (i) $9.7 million for the quarter ending September 30, 2004, (ii) $11.0 million for each of the quarters between October 1, 2004 and June 30, 2005 and (iii) $12.0 million for each of the quarters thereafter;

• In December ~~The~~2002, ~~Company~~the ~~may~~Financial ~~not~~Accounting ~~permit~~Standards Board (“FASB”) amended the transition ~~current~~and ~~ratio~~disclosure ~~(as~~requirements ~~defined~~of inSFAS ~~the~~No. ~~Facility)~~123 asthrough the issuance of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. SFAS No. 148 amends the ~~last~~existing ~~day~~disclosures to make more frequent and prominent disclosure of ~~any~~stock-based compensation expense beginning with financial statements for fiscal ~~quarter~~years toending beafter ~~lower~~December ~~than~~15, 12002.1; The Company has adopted the disclosure provisions of SFAS No. 148.

• If the ~~The~~ Company ~~may~~had ~~not~~accounted ~~permit~~for ~~the~~its ~~amount~~stock-based ofemployee ~~general~~ and ~~administrative~~outside ~~costs~~director’s compensation ~~(as~~under ~~defined in~~ the ~~Facility),~~minimum ~~which~~fair ~~does~~value ~~not~~recognition ~~include~~and ~~bad~~measurement ~~debt~~principles, ~~for~~the Company’s ~~any~~reported ~~fiscal~~net ~~quarter~~income toamounts bewould ~~greater~~have ~~than~~been 6%adjusted ofto the ~~Company’s~~pro ~~sales;~~forma ~~and~~net income amounts presented below:

• The Company may not make any capital expenditures in the aggregate in an amount greater than the capital budget approved by the administrative agent under the Facility.

(In thousands)	Three Months Ended

	March 31, 2005			March 31, 2004


Pro Forma impact of fair value method (FAS 148)

Reported net income available to common shareholders	$	1,315		$	3,492

Less: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects		(173	)		(106	)

Pro forma net income available to common shareholders	$	1,142		$	3,386


Earnings per common share

Basic - as reported	$	0.13		$	0.42
Diluted - as reported		0.12			0.36
Basic - pro forma		0.12			0.40
Diluted - pro forma		0.10			0.35

Weighted average Black-Scholes value assumptions

Risk free interest rate		3	%		5	%
Expected life		3 yrs			3 yrs
Expected volatility		36% - 183	%		87% - 183	%
Expected dividend yield		0	%		0	%

During ~~In connection with~~ the ~~closing~~three ofmonths ~~the~~ended ~~Facility,~~March ~~the Company issued to Highbridge/Zwirn Special Opportunities Fund~~31, ~~L.P. warrants to acquire 150~~2005,~~000 shares~~ ~~of Company common stock for an exercise price of $4.00 per share. The warrants are currently exercisable, expire on July 9, 2009 and contain anti-dilution protection for~~ the ~~holder of the warrants. Specifically, if the~~ Company ~~issues~~had ~~additional~~no ~~shares~~related ofparty ~~common stock or other securities that are convertible into shares of the Company’s common stock, and the consideration for the shares is less than $4~~transactions.00 per share, the exercise price for the warrants immediately preceding such issuance will be reduced according to the formula specified in the warrants. The warrants will be valued using a Black-Scholes model and recorded as deferred financing costs and amortized accordingly in the third quarter.

1514

The Company also granted the holder of the warrants certain demand and piggyback registration rights pursuant to the terms of the warrants7. AfterPut JulyWarrant 8, 2005, the holder of the warrants may, on one occasion, request that the Company register the sale of all or part of the Company’s common stock underlying the warrants under the Securities Act of 1933, as amended (the “Securities Act”). With respect to the piggyback registration rights, the Company must promptly notify the holder of the warrants of any proposed filing of certain registration statements under the Securities Act before such filing is to be made. The Company must also cause the holder’s securities to be included in the registration statement unless the Company’s underwritten offering becomes too large (as determined by the underwriter) to accommodate the securities of the holder, in which case the accounts of all persons with shares to be included in the offering may be reduced pro rata. Obligation

SFAS ~~In connection~~No. ~~with~~150, ~~the~~Accounting ~~closing~~for ofCertain ~~the~~Financial ~~Credit~~Instruments ~~Facility,~~with ~~the~~Characteristics ~~Company~~of ~~paid~~Both Liabilities aand ~~broker $50~~Equity,~~000~~ inwas ~~cash~~issued ~~and~~in ~~issued~~May to2003 ~~the~~and ~~broker~~requires ~~warrants~~issuers to ~~acquire~~classify ~~25,000 shares of~~as ~~Company~~liabilities ~~common~~(or ~~stock~~assets ~~for~~under ancertain ~~exercise~~circumstances) ~~price~~free ofstanding ~~$4.00~~financial ~~per share as commission. The~~instruments ~~holder~~which, ofat ~~the~~inception, ~~warrants~~require ~~was~~or ~~also~~may ~~granted~~require ~~“piggyback”~~an ~~registration rights~~issuer ~~similar~~ to ~~the~~settle ~~“piggyback”~~an ~~registration~~obligation ~~rights discussed in the~~by ~~prior~~transferring ~~paragraph~~assets. ~~The~~SFAS ~~broker~~No. ~~fees~~150 ~~will~~is beeffective ~~recorded~~for asfinancial ~~deferred~~instruments ~~financing~~entered ~~costs~~into or ~~and~~modified ~~amortized~~after ~~accordingly.~~May ~~The~~31, ~~warrants~~2003, ~~will~~and beis ~~fair~~otherwise ~~valued~~effective ~~using~~at ~~a Black-Scholes~~the ~~model~~beginning ~~and~~of ~~recorded~~the asfirst interim ~~deferred~~period ~~financing~~beginning ~~costs~~after ~~and~~June ~~amortized accordingly~~15, 2003.

~~Repayment~~ At March 31, 2004, the Company’s stock closed at $4.90 per share. The decrease in the market price from the valuation at December 31, 2003, based on a December 31, 2003 close price of ~~Catalyst~~$8.50 ~~Term~~per ~~Loan~~share ~~and~~required ~~Purchase~~the Company to record a decrease in the value of ~~Catalyst~~the puttable ~~Warrants~~warrant obligation of $2.0 million for the three months ended March 31, 2004, as other financing income in accordance with SFAS No. 150.

On ~~In connection~~July ~~with the closing of the Facility and pursuant to a Termination Agreement~~8, ~~the Company repaid The Catalyst Fund~~2004, ~~Ltd. (“Catalyst”) approximately $2.5 million~~458,333 ~~which~~of ~~represented~~these ~~all~~warrants ~~amounts~~were ~~outstanding~~repurchased ~~under a Loan Agreement with Catalyst. The Company also repaid JTS Enterprises approximately $0.5 million~~ and ~~repaid~~the ~~Neil~~remaining ~~Leibman approximately $125~~91,~~000~~667 ~~for~~warrants ~~outstanding~~were ~~loans.~~amended ~~The~~to ~~Termination~~delete ~~Agreement also terminated~~ the ~~loan~~put ~~documents executed in connection with the Catalyst loan, including a Security Agreement, Consulting Agreement and Registration Rights Agreement~~option.

Catalyst ~~In addition,~~was ~~the~~granted ~~Company~~a ~~purchased~~“look ~~from~~back” ~~Catalyst~~right ~~for~~with ~~approximately~~respect ~~$1.6~~to ~~million,~~the exercise price of the warrants to acquire 458,333 shares of the Company’s common stock ~~that~~as ~~were~~follows. In the ~~granted~~event tothe ~~Catalyst~~Company inconsummates ~~connection~~within ~~with~~one year, the ~~Loan~~disposition, ~~Agreement~~by inway ~~order~~of toa ~~eliminate~~sale, business ~~the~~combination, ~~put~~merger ~~option~~or ~~contained~~other intransaction ~~such~~by ~~warrants~~a incorporation ~~favor~~or other business entity, of all or part of the ~~holder~~Company’s outstanding capital stock or all or substantially all of the Company’s assets (each such transaction being herein called a ~~warrants.~~“Transaction”), ~~The~~and the price per share of the Company’s ~~purchased~~common stock actually received by the ~~warrants~~Company’s toshareholders ~~eliminate~~or the ~~unfavorable~~Company pursuant to the terms ~~accounting~~of ~~treatment~~the Transaction is greater than $4.00, then, upon the consummation of the ~~warrants~~Transaction, the Company is required byto ~~SFAS~~pay ~~No.~~Catalyst an amount equal to the product of (a) ~~150~~458,333 ~~Accounting~~and ~~for~~(b) the ~~Certain~~difference ~~Financial~~between ~~Instruments~~(i) ~~with~~the ~~Characteristics~~price per share of ~~Both~~the Company’s common ~~Liabilities~~stock ~~and~~actually ~~Equity~~received ~~(“SFAS~~by ~~150”).~~the ~~See~~Company’s ~~footnote~~shareholders 7or the Company pursuant to the terms of the Transaction and (ii) $4.00.

As ~~Catalyst was granted a “look back” right with respect to the exercise price~~ of ~~the~~ ~~warrants to acquire 458,333 shares of~~ the ~~Company’s~~three ~~common~~months ~~stock~~ended ~~as follows.~~March ~~In the event the Company consummates within one year~~31, ~~the disposition~~2005, by ~~way of a sale, business combination, merger or other transaction by a corporation or other business entity, of all or part of~~ the Company~~’s outstanding~~ ~~capital~~has ~~stock~~no orputtable ~~all~~warrant or substantially all of the Company’s assets (each such transaction being herein called a “Transaction”), and the price per share of the Company’s common stock actually received by the Company’s shareholders or the Company pursuant to the terms of the Transaction is greater than $4obligations.~~00,~~ then, upon the consummation of the Transaction, the Company is required to pay Catalyst an amount equal to the product of (a) 458,333 and (b) the difference between (i) the price per share of the Company’s common stock actually received by the Company’s shareholders or the Company pursuant to the terms of the Transaction and (ii) $4.00.

168. Contingencies

During ~~In connection with their participation in the Catalyst loan~~2003, ~~warrants to acquire an aggregate of 91,667 shares of~~ the Company’s ~~common~~was ~~stock~~sued ~~had~~in ~~been~~the ~~issued~~matter ~~to Neil M. Leibman, an officer and director~~ of ~~the~~Kyle ~~Company,~~Holland ~~Robert C~~vs. ~~Orr,~~Gexa ~~a director~~Corp. ofet ~~the~~al. ~~Company,~~in ~~Don Aron, a director of~~ the ~~Company, and Gaylor~~ ~~Investment~~United ~~Trust~~States ~~Partnership~~District Court, ~~the~~Western ~~general~~District ~~partner~~ of ~~which is Stuart Gaylor, a director of the Company, (collectively, the “Company Related Parties”)~~Texas. Pursuant to the Termination Agreement, the Company Related Parties agreed to remove the put option provisions contained in their warrants in order to eliminate the previously discussed unfavorable accounting treatment of the warrants required by SFAS 150Mr. InHolland ~~addition,~~alleged ~~since~~damages ~~the Registration Rights Agreement executed~~ in connection with ~~the~~his ~~Catalyst~~acquisition ~~loan was terminated by the Termination Agreement, the Company Related Parties were granted lesser registration rights with respect to the shares~~ of ~~the~~its ~~Company’s~~ common stock. The ~~underlying~~complaint ~~the~~seeks ~~warrants~~unspecified damages. On ~~Under~~March ~~the Registration Rights Agreement~~15, ~~the Company Related Parties were entitled to both demand and piggyback registration rights~~2005, ~~and~~this ~~now~~case ~~under~~was ~~the~~dismissed ~~Termination~~without ~~Agreement,~~prejudice ~~they~~for ~~are~~failure ~~only entitled~~ to ~~piggyback~~state ~~registration~~a ~~rights~~claim. ~~With~~On ~~respect~~April ~~to such piggyback registration rights~~12, ~~the~~2005 ~~Company~~this ~~must~~case ~~notify~~was ~~the~~appealed. ~~holders~~While ofthis ~~the~~lawsuit ~~warrants of any proposed filing of certain registration statements under the Securities Act at least 20 days before such filing~~ is ~~to be made. The Company must also cause the~~being ~~holder’s~~appealed, ~~securities to be included in~~ the ~~registration statement unless the~~ Company’s ~~underwritten~~believes ~~offering becomes too large (as determined by~~ the ~~underwriter)~~ ~~to accommodate the securities of the holder, in which~~ case ~~the accounts~~has ofno ~~all~~merit ~~persons~~and ~~with~~will ~~shares~~continue to becontest ~~included in the offering may be~~this ~~reduced~~suit ~~pro rata~~vigorously.

On ~~Since the~~July ~~Consulting~~15, ~~Agreement~~2004, ~~executed~~a inclass ~~connection~~action ~~with~~lawsuit ~~the~~Frederick ~~Catalyst~~T. ~~loan~~Pappey, ~~was~~et ~~also terminated~~al. vs. Gexa Corp., Neil Leibman, ~~Orr,~~Marcie ~~Aron~~Zlotnik and ~~Gaylor~~Sarah ~~received~~Veach, ~~the~~Civil ~~amounts~~Action ~~due~~No. toH-04-2869, ~~them~~was ~~under the~~filed ~~Consulting~~in ~~Agreement,~~the United ~~which~~States ~~were~~District ~~one-time~~Court ~~cash~~for ~~payments~~the ~~equal~~Southern ~~to approximately~~District ~~$9,000,~~of $9Texas,~~000,~~ ~~$18,000,~~Houston ~~and $9,000 respectively~~District. The complaint alleged,

~~Note~~15 ~~11 – Restatement of Prior Periods~~

~~The Company~~among ~~determined~~other things, that ~~its~~the ~~revenue~~Company’s publicly ~~reported~~filed onreports ~~Form~~and ~~10-QSB~~public ~~for~~statements ~~the~~contained ~~three~~false ~~months~~ and ~~six~~misleading ~~months~~information, which ~~ended~~resulted ~~June~~in ~~30,~~damages ~~2003~~to the plaintiff and ~~the~~members ~~nine~~of ~~months~~the ~~ended~~proposed ~~September~~class ~~2003~~when they ~~(which~~purchased ~~were~~the ~~based~~Company’s onsecurities. Specifically, the ~~“billings”~~complaint ~~technique~~alleged ~~for~~that ~~estimating volumes~~the ~~delivered~~Company tooverstated ~~customers)~~revenue ~~did~~during ~~not~~the ~~reflect~~second ~~the~~and ~~consideration~~third quarters of ~~all~~2003 ~~the~~by ~~information~~$2.07 million ~~available~~and at$2.05 ~~the~~million, ~~time~~respectively, toby ~~calculate~~utilizing aan ~~reasonable~~improper ~~estimate~~accounting ofmethod ~~the Company’s~~for ~~revenue~~calculating insales ~~accordance~~of ~~with~~electric ~~GAAP~~power. AsThe ~~such,~~complaint alleged that the Company’s conduct ~~adjusted~~and the ~~operating results~~conduct ~~for~~of the ~~periods~~other ~~listed~~defendants ~~above~~violated Sections 10(b) and ~~included~~10b-5 and that the ~~adjusted~~individual ~~information~~defendants ~~in Note~~violated 11Section 20(a) of the ~~Company’s~~Securities ~~Annual~~Exchange ~~Report~~Act onof 1934. ~~Form~~The ~~10-KSB~~complaint ~~for~~sought ~~the~~unspecified ~~year~~damages. ~~ended~~ On December 3120, ~~2003~~2004, the lawsuit was dismissed without prejudice. ~~For~~While ~~further~~this ~~discussion,~~lawsuit ~~see~~could ~~Note~~be 11refiled ofat a later date, the Company’s ~~Annual~~believes ~~Report~~the onlawsuit ~~Form~~has ~~10-KSB~~no ~~for~~merit ~~the~~and ~~year~~will ~~ended~~vigorously ~~December~~defend ~~31,~~any such refiled ~~2003~~action.

17 On November 30, 2004, the Company entered into a settlement with Cappello Capital Corp., or Cappello, relating to the matter of Cappello Capital Corp. vs. Gexa Corp., originally filed in the Los Angeles Superior Court-West District. Cappello’s complaint alleged a breach of contract regarding investment banker fees being claimed by Cappello in connection with the credit facility with Highbridge/Zwirn Special Opportunities Fund, L.P. In exchange for Cappello’s agreement to dismiss the lawsuit and release its claims against the Company, the Company agreed to: (i) pay Cappello $275,000, (ii) issue to Cappello warrants dated November 1, 2004, to purchase 400,000 shares of Company common stock at an exercise price of $4.50 per share, and (iii) issue to Cappello an interest free unsecured promissory note in the principal amount of $500,000. The Company accrued $1.2 million in the third quarter of 2004 in investment banking charges to other assets as deferred financing cost to be amortized over the life of the Highbridge facility.

~~The~~ On December ~~following~~2, ~~represents~~2004, the Company was sued in the matter of Essential Utilities Corporation ~~adjusted~~v. ~~data~~Gexa ~~for~~Energy Corp., Cause No. 04-12056, in the ~~three~~191st ~~months~~District ~~and~~Court ~~six~~of ~~months~~Dallas ~~ended~~County, Texas. ~~June~~The 30petition alleges breach of contract, ~~2003~~quantum asmeruit, conversion and unjust ~~presented~~enrichment in connection with the ~~Company’s~~alleged ~~Annual~~nonpayment ~~Report~~of onconsultation ~~Form~~fees. ~~10-KSB~~The ~~for~~amount of the ~~fiscal~~claim ~~year ended~~is ~~December~~unknown. 31This case is in the preliminary stages, ~~2003:~~and the Company intends to contest this suit vigorously.

Three months ended June 30, 2003	As Reported Previously		As Adjusted
Sales	$	23,516	$	21,448
Income (loss) from operations		1,583		(31	)
Net Income (loss) available to common shareholders		937		(80	)
Basic net income (loss) per share		0.12		(0.01	)
Diluted net income (loss) per share	$	0.11	$	(0.01	)
Six months ended June 30, 2003	As Reported Previously		As Adjusted
Sales	$	36,436	$	34,368
Income (loss) from operations		1,197		(417	)
Net Income (loss) available to common shareholders		678		(340	)
Basic net income (loss) per share		0.09		(0.04	)
Diluted net income (loss) per share	$	0.09	$	(0.04	)

On January 31, 2005, a lawsuit styled Griffin/Juban Capital Management, L.L.C. d/b/a GC Realty Services v. Gexa Corporation was filed in the 11th Judicial District Court of Harris County, Texas. This lawsuit claims that the Company agreed to provide Continental frequent flyer miles to the plaintiff in turn for doing business with the Company. The plaintiff has sued the Company for breach of contract, fraud and negligent misrepresentation. The amount of damages sought in the lawsuit is unknown. This case is in the preliminary stages, and the Company intends to contest this suit vigorously.

~~Item~~ On or 2about February 11, 2005, the Company was made aware of a potential lawsuit that may be filed by Prenova, Inc. ~~Management’s~~and ~~Discussion~~24 Hour Fitness USA, Inc. against the Company and ~~Analysis~~XERS, ofInc. d/b/a ~~Financial~~XCEL ~~Condition~~Energy, Inc. The proposed complaint claims that the Company failed to timely provide electrical service to 24 Hour Fitness and, ~~Results~~as a result, they incurred substantial damages in the form of ~~Operations~~significantly higher rates for several months in 2004. The claimants have alleged damages in the amount of $150,000.00 plus interest and attorneys’ fees. If filed, the Company intends to contest this suit vigorously.

The Company is also involved in various receivable collections matters as a plaintiff. The Company believes that there are no pending matters that will have a significant impact on its financial position or results of operations.

9. Income taxes

The effective income tax rate reflected in the ‘Income tax expense’ item of the Statement of Income for the three months ended March 31, 2004 is lower than the Company’s expected effective tax rate of approximately 37%. Included in ‘Income before taxes’ is approximately $2.0 million ‘Other financing income’ related to puttable warrants; the income related to the puttable warrants is not taxable. Therefore, ‘Income before Income tax expense’ is reduced by the amount of the ‘Other financing income’ prior to calculating ‘Income tax expense’, lowering the effective tax rate. For the three months ended March 31, 2005, there was no puttable warrant income included in ‘Income before Income tax expense’.

10. Significant events

On March 28, 2005 the Company and FPL Group, Inc., a Florida corporation (“FPL Group”), announced the execution of an Agreement and Plan of Merger, dated as of March 28, 2005 (the “Merger Agreement”), by and among FRM Holdings, LLC, a Delaware limited liability company (“FRM Holdings”), WPRM Acquisition Subsidiary, Inc., a Texas corporation and a wholly owned subsidiary of Holdings (“Merger Sub”), FPL Group and the Company, pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”). As a result of the Merger, the Company will become an indirect wholly owned subsidiary of FPL Group. The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

At the effective time of the Merger (the “Effective Time”), each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than treasury shares) will be cancelled and automatically convert into the right to receive $6.88, payable in shares of validly issued, fully paid and non-assessable shares of FPL Group common stock, based on an exchange ratio equal to the quotient (rounded to four decimal points) obtained by dividing $6.88 by the average of the daily closing sale prices of FPL Group common stock for the 10 consecutive trading days ending on the third business day (including such third business day) immediately prior to the closing date. In addition, at the Effective Time, each option and warrant to purchase shares of Company common stock outstanding immediately prior to the Effective Time will be assumed by FPL Group and converted into the right to purchase shares of FPL Group common stock with corresponding adjustments to the exercise price based upon the foregoing exchange ratio, but otherwise will remain unchanged except that vesting of the options will be accelerated at the Effective Time.

Simultaneously with the execution of the Merger Agreement, certain directors and officers of the Company holding approximately 36% of the outstanding Company common stock, including its Chairman and CEO, entered into a Voting Agreement with FPL Group, pursuant to which, they agreed to vote their shares of Company common stock in favor of the Merger, the Merger Agreement and the transactions contemplated thereby. In the event that such

directors and officers fail to so vote, the Voting Agreement provides for the grant proxies to FPL Group to vote and otherwise act with respect to such shares of Company common stock at any meeting of shareholders or consent in lieu of any such meeting or otherwise, on the Merger, the Merger Agreement and the transactions contemplated thereby.

The Company has made customary representations and warranties and covenants in the Merger Agreement, including among others (i) to conduct its businesses in the ordinary course between the execution of the Merger Agreement and the consummation of the Merger, (ii) to cause a meeting of the Company’s shareholders to be held to consider the adoption of the Merger Agreement, (iii) subject to certain exceptions, for the Company’s board of directors to recommend that the Company’s shareholders adopt and approve the Merger Agreement, and (iv) subject to certain exceptions, not to (A) solicit proposals relating to alternative business combination transactions or (B) enter into discussions concerning or provide information in connection with alternative business combination transactions.

Consummation of the Merger is subject to customary conditions, including, among others, (i) approval of the Company’s shareholders, (ii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period, (iii) approval by the Public Utility Commission of Texas (the “PUCT”) of an amendment application regarding the change of ownership of the Company with respect to its retail electric provider license and, if required by the PUCT, of an application for recertification, (iv) absence of any order or injunction prohibiting the consummation of the Merger, (v) the Company having $13.5 million of Working Capital (as defined in the Merger Agreement) as of month end not ending more than 60 days prior to closing, (vi) subject to certain exceptions, the accuracy of representations and warranties with respect to the Company’s or FPL Group’s business, as applicable, and (vii) receipt of customary tax opinions. The Merger Agreement contains certain termination rights and provides that, upon the termination of the Merger Agreement under specified circumstances, the Company will be required to pay FPL Group a termination fee of $3.25 million.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, included as Exhibit 2.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on March 28, 2005.

The Company also amended the Amended and Restated Employment Agreement, dated as of October 28, 2004, between the Company and Neil M. Leibman, the Company’s Chairman and CEO (the “Employment Agreement”), to exclude the consummation of the Merger and the other transactions contemplated by the Merger Agreement from certain payments he would otherwise be entitled to receive in the event of a change in control transaction. The foregoing description of the amendment to the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the amendment to the Employment Agreement, included as Exhibit 10.1 to the Company’s current report on Form 8-K, as filed with the Securities and Exchange Commission on March 28, 2005.

At the Effective Time, Mr. Leibman will be employed by the Company as its President, and will be compensated pursuant to a new Employment Agreement with the Company, and the Employment Agreement, as amended by the amendment to the Employment Agreement, will automatically be terminated.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are the pending merger with the FPL Group Inc., our ~~estimates~~estimate of the sufficiency of existing capital sources, our ability to raise additional capital to fund cash requirements for future operations, our assumptions regarding the competitive restructuring and deregulation of the electricity market, ~~our~~ competition from utility companies, our dependence on the services of certain key personnel and our ability to manage our growth successfully. Although we believe that in making such forward-looking statements our expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements are based will prove to have been correct.

18 When used in this Form 10-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate”, “predicts”, “projects”, “targets”, “will likely result”, “may”, “could” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements.

You ~~When used~~should inread ~~this~~these ~~Form~~statements ~~10-Q,~~carefully ~~the~~because ~~words~~they ~~“expect”,~~discuss ~~“anticipate”,~~our expectations about our ~~“intend,”~~future ~~“plan~~performance,” ~~“believe,”~~contain ~~“seek,” “estimate”~~projections ~~and~~of ~~similar~~our ~~expressions~~future ~~are~~operating ~~intended~~results toor ~~identify~~our future ~~forward-looking~~financial ~~statements~~condition, ~~although~~or ~~not~~state ~~all~~other “forward-looking” ~~statements~~information. ~~contain~~Before you ~~these~~invest ~~identifying~~in ~~words.~~our ~~Because~~stock, ~~these~~you ~~forward-looking~~should ~~statements~~be ~~involve~~aware ~~risks and~~that ~~uncertainties,~~the ~~actual~~occurrence ~~results~~of ~~could~~any ~~differ~~of ~~materially~~the ~~from~~events described ~~those~~in ~~expressed or~~Item ~~implied~~3 byand ~~these~~elsewhere ~~forward~~in this Form 10-~~looking~~Q ~~statements~~could ~~for~~substantially aharm ~~number~~our business, results of ~~important reasons,~~operations ~~including~~and ~~those~~financial ~~discussed~~condition ~~under~~and ~~“Management’s~~that ~~Discussion~~upon ~~and Analysis~~the occurrence of ~~Financial~~any ~~Condition~~of ~~and~~these events, ~~Results~~the trading price of ~~Operations”~~our common stock could decline, and ~~elsewhere~~you incould lose all or ~~this~~part ~~Form~~of ~~10-Q~~your investment.

You should read these statements carefully because they discuss our expectations about our future performance, contain projections of our future operating results or our future financial condition, or state other “forward-looking” information. Before you invest in our stock, you should be aware that the occurrence of any of the events described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q could substantially harm our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline and you could lose all or part of your investment.

We cannot guarantee any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-Q after the date of this Form 10-Q.

~~Results~~19 ~~of Operations for the Three Months and Six Months ended June 30, 2004~~

RevenuesResults of Operations

We have continued our strong pattern of growth, as evidenced by revenue of approximately $62.0 million in the three months ended June 30, 2004 as compared with revenues of approximately $21.4 million for the three months ended June 30, 2003, representing an increase of 190%. As of June 30, 2004, we served approximately 82,000 meters as compared with approximately 45,000 meters as of June 30, 2003, an increase of 82%. Additionally, as of the three months ended June 30, 2004, our customers consumed approximately 747,000 megawatt hours (“mwh”) as compared to approximately 298,000 megawatt hours (“mwh”) consumed for the three months ended June 30, 2003. The volume increase of 151% during the three months ended June 30, 2004 as compared with the three months ended June 30, 2003 was driven by an increase in meters served as well as by an increase in the average size of the customer being served. To further highlight our growth, we reached a record peak customer demand of approximately 600 megawatts during the month of June 2004.

(In thousands)	Three Months Ended
	March 31, 2005			March 31, 2004

	(Unaudited)			(Unaudited)

Sales	$	78,261		$	50,513
Cost of goods sold		68,330			43,147


Gross profit		9,931			7,366

Selling, general & administrative expenses		7,491			4,702


Income from operations	$	2,440		$	2,664


Cost of goods sold %		87.3	%		85.4	%

Gross profit %		12.7	%		14.6	%

~~For the six months ended June 30, 2004, revenues were approximately $112.5 million as compared to revenues of approximately $34.4 million for the six months ended June 30, 2003, an increase of 227%.~~ Revenues

19 Operating revenue for the three months ended March 31, 2005 was $78.3 million compared with operating revenue of $50.5 million for the three months ended March 31, 2004, an increase of 55%. The increased revenues were driven by higher volumes and commodity prices. We believe the volume was favorably impacted by consumer confidence in the deregulated markets and the continued success of our marketing strategy. The majority of our revenues come from the flow of electricity to customers. However, we also generate revenues from “pass through of TDSP charges”, a standard base charge to each customer, contract cancellation fees, disconnection fees, and late fees. As of March 31, 2005, we had approximately 113,000 customer meters compared with approximately 70,000 customer meters as of March 31, 2004.

In ~~We have~~addition, ~~continued~~during tothe ~~grow~~three ~~our~~months ~~customers~~ended ~~based~~March in31, 2005, our ~~three~~marketing ~~customer~~department ~~target groups.~~continued ~~The~~to ~~first~~contract ~~group,~~with ~~single~~ multi-family ~~residential,~~communities ~~has~~to ~~been~~secure ~~growing~~their ~~due~~commercially topaid ~~recently~~meters and ~~launched~~gain ~~affinity~~access ~~partner~~to ~~programs,~~current ~~including~~and ~~Continental~~future ~~OnePass~~residents ~~®, American~~through ~~AAdvantage~~direct ®marketing ~~and~~at ~~Chase~~the ~~® credit cards~~leasing offices. ~~The~~These ~~second~~sales ~~group,~~provide ~~multi family~~us ~~residential,~~with ~~has~~a ~~continued~~large tonumber ~~grow~~of bycustomers ~~establishing~~at ~~our~~low ~~expanding~~costs of ~~marketing~~acquisition. ~~relationships~~As ~~with~~of ~~large~~March ~~property~~31, ~~management firms~~2005, ~~including~~we ~~Walden Management,~~had ~~Alliance~~marketing ~~Residential~~agreements ~~Management~~with ~~and~~approximately ~~Wells~~650 apartment ~~Management.~~communities ~~The~~as ~~third group,~~compared ~~commercial,~~with ~~has~~approximately ~~continued~~600 ~~its~~as ~~success~~of byDecember ~~recently~~31, ~~enrolling~~2004. ~~Texas-based facilities~~As of the ~~several~~date ~~Fortune~~of ~~500~~this ~~companies~~report, asthe ~~well~~Company ashas ~~continued~~800 ~~expansion~~apartment ~~of its~~communities ~~independent~~with ~~contractor network~~marketing agreements.

~~Cost~~ We have ofplans ~~goods~~to ~~sold~~expand our internal sales force during 2005, primarily to focus on our value added service offerings. This expansion will enable us to continue to penetrate new markets and to cost effectively expand our presence throughout Texas.

~~Cost of~~20 goods sold was approximately $55.4 million, or 89% of sales for the three months ended June 30, 2004 as compared to approximately $19.5 million or 91% of sales for the three months ended June 30, 2003. For the six months ended June 30, 2004, cost of goods sold was approximately $99.9 million, or 89% of sales as compared with approximately $31.7 million, or 92% of sales for the six months ended June 30, 2003.

~~We were~~Cost ~~able to manage cost~~ of ~~goods~~Goods sold more effectively through enhanced procurement capabilities and strategies and have been utilizing more sophisticated forecasting and scheduling software and methodologies to better match our supply purchases with customer demand. Sold

~~Gross~~ Cost of ~~profit~~goods sold, which is recognized concurrently with related energy sales, primarily includes the aggregated cost of purchased electric power and fees incurred from TDSP’s. Our cost of goods sold increased to $68.3 million for the three months ended March 31, 2005, an increase of $25.2 million, or 58%, from $43.1 million for the three months ended March 31, 2004. The significant increase in cost of goods sold is primarily a result of the following:

~~Gross profit~~• ~~showed~~increase ~~significant~~in ~~improvement~~our ~~over~~customer ~~2003,~~base; increasing to approximately $6.6 million or 11% of sales for the three months ended June 30, 2004, compared with approximately $1.9 million or 9% of sales for the three months ended June 30, 2003. For the six months ended June 30, 2004, gross profit was approximately $12.6 million or 11% of sales, compared to approximately $2.7 million or 8% of sales for the six months ended June 30, 2003. and

~~Our margins~~• ~~increased~~increase ~~between~~in ~~the comparison periods despite a higher overall commodity~~ cost ~~environment~~per ~~and~~retail ~~increased~~kwh ~~charges~~delivered, ~~from~~which ~~our~~occurred ~~transmission~~primarily ~~and distribution~~as ~~service~~a ~~utilities.~~result Weof ~~managed these~~ increased ~~costs~~natural bygas ~~increasing our sales prices to new and renewing customers to ensure margin preservation. As term commercial load is added~~costs, ~~term~~which ~~electricity purchases~~ are ~~executed~~a tosignificant ~~supply that~~factor ~~load.~~influencing ~~Our~~electricity residential customer pricing generally moves in conjunction with the movement in the price to beat (see Item 1. description of the business in our Annual Report on Form 10-KSB for the year ended December 31, 2003 for details of the “price to beat”) of the Affiliated REPs to compensate for the increase in commodity costs. ~~While we procure electricity with a shorter duration for residential customer load, we maintain more price flexibility for this class of customers.~~

~~General~~ Our gross ~~and~~profit for the quarter increased over the prior year quarter by $2.6 million. While ~~administrative~~larger ~~expenses~~sales volumes increased our gross profit over the prior year quarter, our gross profit percentage for the quarter decreased. The major factors that impacted our gross profit percentage for the three months ended March 31, 2005, compared with the three months ended March 31, 2004, were:

~~General and~~• ~~administrative~~Customer ~~expenses~~mix: ~~(including~~Due ~~bad~~to ~~debt~~competitive ~~expense)~~market forces, pricing for ~~the~~commercial ~~three~~contracts ~~months ended~~typically ~~June~~yield ~~30,~~lower ~~2004~~margins ~~were~~per ~~approximately~~kwh $4than pricing for residential contracts.2 ~~million~~Despite ortypically 7%lower ofmargins ~~sales~~for commercial accounts, ~~compared with~~we ~~approximately~~believe ~~$2.0~~the ~~million~~administrative orcosts 9%(as a percentage of sales) for ~~the~~commercial ~~three~~accounts ~~months~~are ~~ended~~significantly ~~June 30,~~lower ~~2003.~~than ~~For~~for ~~the~~single ~~six~~and ~~months~~multi-family ~~ended June 30~~customers, ~~2004,~~and ~~general~~commercial ~~and~~accounts ~~administrative expenses~~provide ~~were~~attractive ~~approximately~~profit $7opportunities.6 ~~million~~In orgeneral, 7%when ofcommercial ~~sales,~~accounts ~~compared~~increase toas ~~$3.1 million~~a orpercentage 9% of ~~sales~~our ~~for~~portfolio, ~~the~~our ~~six~~overall ~~months~~gross ~~ended~~profit ~~June~~per ~~30,~~kwh ~~2003.~~will decrease.

20• Cost of electricity supply purchases: The price of natural gas is the primary driver of our electricity supply cost. We attempt to mitigate our exposure to price volatility by matching, as accurately as possible, power purchases to expected demand. For term customers, we generally purchase electricity supply to match the length of the customer’s contract. Single and multi-family customers are on the equivalent of month-to-month contracts, for which we purchase electricity on month-ahead and day-ahead contracts. In an environment of rapidly rising natural gas prices, we are unlikely to raise our month-to-month customers’ prices as quickly as our costs increase. We believe this is the primary reason that our gross profit has decreased from the three months ended March 31, 2005, as compared with the three months ended March 31, 2004.

~~We are~~• ~~benefiting~~Competitive ~~from~~pricing: ~~the~~As ~~fixed~~a ~~cost~~REP ~~leverage of our~~ operating ~~platform.~~in ~~Improved economies of scale largely account for~~ the ~~improved~~deregulated ~~ratio~~retail ofelectricity ~~general~~market ~~and administrative~~in ~~expenses for the three months ended June 30~~Texas, ~~2004.~~part Inof ~~the~~our ~~past year~~strategy weis ~~have~~to ~~also~~offer ~~automated~~electricity ~~many~~rates ~~processes,~~at ~~including~~a ~~payment~~discount ~~processing,~~to ~~and have greatly improved~~ the ~~efficiency~~affiliated ofREP’s ~~data~~“price-to-beat” ~~entry and receivables management~~rates. ~~These~~ ~~enhancements~~While ~~have~~this ~~increased~~strategy ~~productivity,~~has ~~reducing~~led ~~general~~to ~~and administrative costs per account.~~ significant

~~Salary expense~~21 overall will continue to increase in 2004 as a result of normal staff additions to accommodate growth, and for new employees in executive and middle management roles, specifically in the finance function as necessary to improve our systems of internal controls as discussed below in Item 4. Controls and Procedures. The positions added during the three months ended June 30, 2004 include Chief Financial Officer, Controller, Manager of Financial Reporting, and Human Resources Manager. However, we anticipate that the overall rate of increase in general and administrative expenses will be lower than the overall growth rate in sales.

~~Other~~growth ~~financing~~in ~~income (expense)~~our customer base, it can cause our margins to decrease during periods of rising supply costs if “price-to-beat” rates are not increased.

~~On July 16~~Selling, ~~2003,~~General ~~warrants to acquire 550,000 shares of common stock were granted to The Catalyst Fund Ltd.~~ and ~~certain other individuals in consideration of a~~ ~~term~~Administrative ~~loan.~~Expenses These warrants contained a put feature allowing the holders to exercise the warrants at a $1.00 per share exercise price, and then force us to repurchase them at market value upon the occurrence of certain events. In accordance with SFAS No. 150, the warrants were initially recorded as a discount to debt based on the close price of our common stock on the date of issuance ($1.90) minus the exercise price, multiplied by the number of warrants, or approximately $0.5 million. At each balance sheet date, any change in the close price of the common stock must be used to calculate and record financing expense or income amount to reflect the difference on that date between the market price of our stock and the exercise price of the warrants.

~~As of June 30~~ Selling, ~~2004, the Company’s stock closed at $4.40 per share. The~~ ~~decrease~~general inand ~~the~~administrative ~~market~~expenses ~~price~~as ~~from~~of ~~$8.50~~March ~~at December~~ 31, ~~2003~~2005, towere $47.905 atmillion ~~March~~compared with 31selling, ~~2004~~general ~~required~~and ~~the~~administrative ~~Company~~expenses ~~to record a decrease in the value~~ of ~~the puttable warrant obligation of approximately~~ $04.37 million ~~and $2.3 million~~ for the three ~~months~~ ~~ended June 30, 2004 and the six~~ months ended March ~~June 30~~31, 2004 ~~respectively~~, as ~~other~~an ~~financing~~increase ~~income~~of ~~in accordance with SFAS No~~59%. ~~150.~~

On July 8, 2004, the subject warrants were repurchased or amended to delete the put option; therefore, the income (expense) effect arising from their existence and described above will not be applicable to us from that date forward. See footnote 10, Subsequent Events, for further discussion of the repurchase of the warrants.

(In thousands)	Three Months Ended
(In thousands)	March 31, 2005		March 31, 2004


Billing fees	$	207	$	514
Sales commissions		1,540		799
Bad debt		1,787		1,334
Salaries and other		3,957		2,055


Total	$	7,491	$	4,702

21 Billing fees are primarily costs paid to third party EDI providers to handle transactions between us, ERCOT and the TDSPs in order to produce customer bills. Billing fees decreased to $0.2 million for the three months ended March 31, 2005, a decrease of $0.3 million, or 60% from $0.5 million for the three months ended March 31, 2004. Billing fees have decreased primarily as a result of a change in EDI providers. This change resulted in savings of approximately $0.2 million for the three months ended March 31, 2005, compared with the three months ended March 31, 2004.

~~Liquidity~~ Sales commissions are fees paid to employees and ~~Capital~~external contractors for new customer ~~Resources~~acquisitions. Sales commissions increased to $1.5 million for the three months ended March 31, 2005, an increase of $0.7 million, or 93%, from $0.8 million for the three months ended March 31, 2004. Sales commissions are primarily paid in three ways:

~~In this~~• ~~section,~~one-time wepayment ~~discuss~~upon ~~the~~collection ~~principal sources~~ of ~~capital~~the ~~required~~first ~~for~~month’s usbill to operate our business. We also identify known trends, demands, commitments, events or uncertainties which may affect our current and future liquidity or capital resources. Our principal sources of liquidity and capital resources are cash from ~~operations,~~the ~~private equity placements, revolving credit lines, payment terms from suppliers and term loan debt.~~ customer;

~~Our use~~• ofresidual ~~capital~~ongoing ispayments ~~primarily driven by working capital needed to operate~~ as a ~~Retail~~ ~~Electricity~~percentage ~~Provider~~of ~~(“REP”).~~the ~~We experience a time delay between purchasing electricity to flow to~~ customers’ ~~and~~bills ~~receiving~~or ~~payments~~an ~~from our~~amount ~~customers.~~per ~~This~~kwh ~~working~~delivered capital cycle is impacted by seasonality and customer count growth rates. On average, our days sales outstanding is approximately 45-50 days when considering both the billed and unbilled receivables concurrently. Pursuant to ~~our agreement with TXU PM, payments to TXU PM for monthly electricity purchases are made on~~ the ~~last business day of the month following delivery. The payment for electricity of $13.5 million for the month of May 2004 was made on July 2, 2004~~customer; ~~as a result, cash, cash equivalents,~~ and ~~accrued electricity costs as of June 30, 2004 are much larger than they would have been had the payment been made on June 30, 2004.~~

~~Seasonality impacts~~• ~~our~~payments ~~working~~to ~~capital~~Continental ~~needs,~~and asAmerican ~~the~~Airlines ~~hotter~~based ~~summer~~on ~~months~~miles ~~(driven~~earned by ~~air conditioning) increase our electricity needs during~~ the ~~second and third quarters, and commensurately reduces those needs in the first and fourth quarters. With respect to~~ customer ~~growth rates, our constant addition of customers drives an increasing need for working capital funding for electricity purchases~~. Over time, should our growth rate level off, we would anticipate funding working capital from cash reserves on hand. However, given our growth rates, we have continued needs for additional sources of working capital financing to purchase electricity and expand our operations. In addition to working capital, we spend capital for investments in operational infrastructure to serve our customers; however this amount is relatively minor compared to the working capital required for electricity purchases.

The ~~Our largest~~increase ~~cost~~ in ~~conducting~~sales ~~business~~commissions isfor the ~~purchase~~three ofmonths ~~electricity.~~ended ~~Our agreement~~March ~~with~~31, ~~TXU~~2005 PMcompared ~~provides~~with ~~both a source of electricity supply and vendor~~the ~~financing. Since~~three ~~our~~months ~~term~~ended ~~commercial~~March ~~customer~~31, ~~contracts generally have durations of one and two year terms~~2004, weis ~~endeavor~~primarily tothe ~~match~~result ~~term supply purchases to term customers obligations. We purchase electricity from TXU PM and from third parties based on our forecast~~ of customer ~~demand and monthly purchase limits imposed by TXU PM. Additionally~~growth, ~~TXU~~an ~~PM reserves the right to review the~~increase ~~credit-worthiness~~in ofnew ~~all~~commercial customers ~~with~~which ~~peak~~have ~~demand of at least one megawatt. We pay~~ a ~~monthly~~higher ~~credit~~acquisition ~~fee to TXU PM based on our monthly electricity purchases from TXU PM~~cost, asand ~~well as small, fixed monthly administrative fees. TXU PM also~~additional ~~provides~~commissions ~~credit~~incurred ~~guarantees~~in to2005 usrelated to ~~enable~~the usContinental ~~to purchase electricity from third parties, in return for a monthly fee. The agreement has an initial term of five years, expiring in April 2008,~~ and ~~renews~~American ~~thereafter~~Airline ~~on a year-to-year basis~~partner ~~unless either party gives notice of termination~~programs.

Bad ~~Purchasing this~~debt ~~electricity~~expense ~~exposes~~increased ~~the wholesale electricity provider~~ to ~~credit risk that may exist due to any payment risk~~$1.8 ~~Accordingly,~~million ~~TXU~~for PMthe ~~has~~ three ~~sources~~months ~~of security~~ended ~~from~~March us31, ~~to support this agreement. First~~2005, ~~TXU PM has a first lien on~~an ~~all~~increase of ~~our assets~~$0.5 ~~Second~~million, ~~our~~or ~~customer~~34%, ~~receipts~~from ~~are~~$1.3 ~~managed~~million ~~through~~for athe ~~lockbox arrangement~~three ~~controlled~~months byended ~~TXU~~March PM31, 2004. ~~Under~~Bad ~~the~~debt ~~lockbox arrangement~~expense, ~~certain~~as ~~cost~~a percentage of ~~goods~~ ~~sold~~total ~~items~~revenue ~~and~~decreased ~~TXU~~to ~~PM’s~~2.3% ~~monthly~~for ~~wholesale~~the ~~electricity invoice are~~three ~~paid~~months ~~during~~ended ~~each~~March ~~month~~31, ~~with~~2005, usfrom ~~receiving~~2.6% ~~any~~for ~~remaining~~the ~~funds~~three tomonths beended ~~used~~March ~~for operating~~31, ~~expenses~~2004. ~~TXU PM must approve all disbursements from our~~Bad ~~lockbox. Third,~~debt weexpense ~~are~~improved ~~required~~as ~~to post~~ a ~~cash~~result ~~collateralized letter~~ of ~~credit~~ ~~in an amount determined by TXU PM pursuant to~~ the ~~agreement~~implementation ~~between~~of ~~us and~~late ~~TXU~~fees, ~~PM.~~improved collection procedures,

~~As of~~improved ~~June 30, 2004, we had deposited approximately $3.6 million with JP Morgan Chase Bank to obtain letters of~~ credit ~~allowing~~check usprocesses ~~to purchase power on forward contracts from TXU PM, buy~~ and ~~sell power in~~ the ~~daily~~addition ~~balancing markets and pay TDSP invoices for metering charges passed through to customers on thirty-five day terms. As~~ of ~~June~~disconnection 30rights, ~~2004,~~which ~~approximately~~were ~~$3.1~~granted ~~million~~by ~~has been utilized under those facilities to purchase letters of credit. It is expected that as a result of~~ the ~~higher~~PUCT ~~levels of power purchases required~~ during ~~the~~2004 ~~summer of~~and ~~2004,~~implemented wein ~~will be required to increase~~ the ~~amounts~~third ofquarter ~~letters~~ of ~~credit to support those purchases~~2004. ~~We believe that we have sufficient liquidity (described below) to support the letters of credit that may be required.~~

We Salaries and ~~have~~other ~~several~~increased ~~sources~~to ~~of liquidity~~$4.0 tomillion ~~provide~~for the ~~increased~~three ~~level~~months ofended ~~working~~March ~~capital~~31, to2005, ~~support~~an ~~our~~increase ~~growth~~of in$1.9 ~~customer~~million, ~~load~~or ~~and~~93% ~~purchases~~from of$2.1 ~~power~~million ~~and~~for ~~other~~the ~~services~~three tomonths ~~support~~ended March 31, 2004. The ~~that~~primary ~~customer~~increases ~~growth~~in salaries and other are as follows:

• ~~Cash~~salaries ~~from operations: As the Condensed Statement~~ of ~~Cash Flows indicates, we generated approximately~~ $101.60 million ~~in cash during the first six months of 2004.~~;

• ~~Highbridge/Zwirn~~bank ~~Special~~fees ~~Opportunities~~of ~~Fund, L.P. Credit Facility: On July 8, 2004, we entered into a~~ $~~15.~~0 ~~million revolving credit facility (the “Facility”) with Highbridge/Zwirn Special Opportunities Fund, L~~.P.3 The Facility, which matures on July 8, 2007, may be used to provide working capital for our normal routine operations and for providing a cash reserve to collateralize letters of credit that we are required to post. The Facility is secured by a lien on substantially all of our assets, subject to the liens already held on such assets by TXU and/or JP Morgan Chase. No advances were made under the Facility at closing.million;

• ~~Equity:~~professional ~~During~~fees ~~the six months ended June 30, 2004, we raised approximately $0.7 million via private placement~~ of ~~168,754 shares of our common stock of~~ $~~4.00 per share and approximately $~~0.15 million; through the exercise of warrants to acquire 100,000 shares of common stock by a director of our company at $1.25 per share. These funds were designated to be used to support our continued operational expansions. On August 2, 2004, our common stock began trading on the Nasdaq SmallCap Market under the stock symbol GEXA. We believe that this milestone will provide additional visibility and ~~access to incremental investors and enhance the liquidity of our common stock.~~

~~We believe~~• ~~that~~telephone, ~~the~~rent ~~combination of cash flow from operations~~ and advances from the Highbridge/Zwirn Special Opportunities Fund, L.P. Credit Facility will provide the required liquidity to address our current growth rate in the Texas market in 2004. We continue to assess new deregulated markets in other ~~states;~~office ~~should~~expenses ~~we decide to enter any additional markets, it is expected that additional capital will need to be raised from the sale~~ of ~~equity, debt securities, or other borrowings~~$0.1 million.

23 Salaries expense has increased significantly year over year as a result of normal staff additions to accommodate growth and, as necessary, to improve our system of internal controls as discussed in Item 4. Controls and Procedures. The positions added during 2004 following the end of the first quarter included Chief Financial Officer, Corporate Controller, Manager of Financial Reporting, Manager of Human Resources, Director of Operations, Manager of Transaction Processing, a significant number of customer service representatives (approximately 16), and a significant number of information technology positions related to our relocating the GEMS billing system from Atlanta, Georgia, to Houston, Texas. Although salaries expense has significantly increased year over year, we anticipate that the overall rate of increase will be lower than the overall sales growth rate.

Bank fees are primarily related to customer lockbox processing and credit card processing. Credit card processing fees increased year over year due to the fact that during 2004, following the end of the first quarter, we began offering customers the alternative of paying their bill with a credit card on a recurring basis. These costs increased in line with our customer growth. Professional fees increased primarily as a result of legal and investment banker fees associated with the pending Merger with the FPL Group, Inc. Telephone, rent and other office expenses primarily increased as a result of the relocation of our corporate offices in 2004 and an upgrade of the customer service phone system.

Liquidity and Capital Resources

In this section, we discuss the principal sources of capital required for us to operate our business. We also identify known trends, demands, commitments, events or uncertainties which may affect our current and future liquidity or capital resources. Our principal sources of liquidity and capital resources are cash from operations, private equity placements, revolving credit lines, payment terms from suppliers and term loan debt.

Working capital (current assets less current liabilities) increased to $14.9 million as of March 31, 2005, compared with $12.3 million as of December 31, 2004. The primary components of the increase are:

•	Increase in current assets of $1.9 million. This is a result of an increase in cash of $2.3 million offset by a decrease in accounts receivable of approximately $1.0 million, an

increase in the deferred tax asset of approximately $0.5 million and an increase in other current assets of $0.1 million. This increase is primarily due to customer growth and seasonality.

•	Decrease in current liabilities of $0.7 million. The primary reasons are as follows:

•

Accrued electricity, accounts payable and other accrued expenses increased by $2.0 million due primarily to customer growth and seasonality.

•

Customer deposits increased by approximately $0.6 million due to customer growth.

•

Taxes Payable decreased by $3.3 million due to the payment of federal income tax for fiscal 2004 during the first quarter of 2005.

Our use of capital is primarily driven by working capital needed to operate as a REP. We experience a time delay between purchasing electricity to flow to customers and receiving payments from our customers. This working capital cycle is impacted by seasonality and customer growth rates. As of March 31, 2005, our days sales outstanding was approximately 40 days when considering both the billed and unbilled receivables concurrently. Pursuant to our agreement with TXU Portfolio Management Company LP (“TXU PM”), payments to TXU PM for monthly electricity purchases are made on the last business day of the month following delivery.

Seasonality impacts our working capital needs, as the hotter summer months (driven by air conditioning) increase our electricity needs during the second and third quarters, and commensurately reduces those needs in the first and fourth quarters. With respect to customer growth rates, our constant addition of customers drives an increasing need for working capital funding for electricity purchases. Over time, should our growth rate level off, we would anticipate funding working capital from cash reserves on hand. However, given our growth rates, we have continued needs for additional sources of working capital financing to purchase electricity and expand our operations. In addition to working capital, we spend capital for investments in operational infrastructure to serve our customers; however, this amount is relatively minor compared to the working capital required for electricity purchases.

Our largest cost in conducting business is the purchase of electricity. Our agreement with TXU PM provides both a source of electricity supply and vendor financing. Since our term commercial customer contracts generally have durations of one and two year terms, we endeavor to match term supply purchases to term customers obligations. We purchase electricity from TXU PM and from third parties based on our forecast of customer demand and monthly purchase limits imposed by TXU PM. Additionally, TXU PM reserves the right to review the credit-worthiness of all customers with peak demand of at least one megawatt. We pay a monthly credit fee to TXU PM based on our monthly electricity purchases from TXU PM, as well as small, fixed monthly administrative fees. TXU PM also provides credit guarantees to us to enable us to purchase electricity from third parties, in return for a monthly fee. The agreement has an initial term of five years, expiring in April 2008, and renews thereafter on a year-to-year basis unless either party gives notice of termination.

Purchasing this electricity exposes the wholesale electricity provider to credit risk that may exist due to any payment risk. Accordingly, TXU PM has three sources of security from us to support this agreement. First, TXU PM has a first lien on all of our assets. Second, our customer receipts are managed through a lockbox arrangement controlled by TXU PM. Under the lockbox arrangement, certain cost of goods sold items and TXU PM’s monthly wholesale electricity invoice are paid during each month with us receiving any remaining funds to be used for operating expenses. TXU PM must approve all disbursements from our lockbox. Third, we are required to post a cash collateralized letter of credit in an amount determined by TXU PM pursuant to the agreement between us and TXU PM.

As of March 31, 2005, we had deposited approximately $7.2 million with JP Morgan Chase Bank to obtain letters of credit allowing us to purchase power on forward contracts from TXU PM, buy and sell power in the daily balancing markets and pay TDSP invoices for metering charges passed through to customers on thirty-five day terms. We believe that we have sufficient liquidity (described below) to support the letters of credit that may be required.

We have several sources of liquidity to provide the increased level of working capital to support our growth in customer load and purchases of power and other services to support that customer growth:

•

Cash from Operations: During the three months ended March 31, 2005, we generated approximately $2.3 million in cash from operations. The primary source of cash during the three months ended March 31, 2005, was a decrease in accounts receivable of $1.0 million and an increase in accrued electricity of $1.5 million. Accounts receivables are then billed at the conclusion of a month’s electricity usage and due within 16 days of the invoice. The total time from revenue accrual to receipt of payment was approximately 40 days as of March 31, 2005.

•

Highbridge/Zwirn Special Opportunities Fund, L.P. Credit Facility (“The Facility”): On July 8, 2004, we entered into the Facility with Highbridge/Zwirn Special Opportunities Fund, L.P. The Facility, which matures on July 8, 2007, may be used to provide working capital for our normal routine operations and for providing a cash reserve to collateralize letters of credit that we are required to post. The Facility is secured by a lien on substantially all of our assets, subject to the liens already held on such assets by TXU and/or JP Morgan Chase. As of March 31, 2005, we were in compliance with all financial covenants under the credit agreement and we had no outstanding borrowings under the Facility.

•

Equity: During the three months ended March 31, 2005, we raised approximately $425,000 through the exercise of options to acquire 300,000 shares of common stock by a former officer of our Company. Of the 300,000 shares, 250,000 shares were exercised at $1.50 per share and the remaining 50,000 shares were exercised at $1.00 per share. These funds were designated to be used to support our continued operational expansions.

We believe that cash flow plus the advances from the Facility will provide the required liquidity to address our current growth rate in the Texas market in 2005. We continue to assess new deregulated markets in other states, and as of March 31, 2005, we are currently providing retail electricity service to customers in Massachusetts and have received approval to provide retail electricity service to customers in New York and Maine as of April 2005. We intend to expand our business by leveraging our relationships with existing customers in Texas that have operations in these other states without incurring significant additional operating costs.

Critical Accounting Policies

Following are critical accounting policies adopted by us for use in the preparation of key material financial data.

Normal Purchases and Sales Accounting

We use a combination of long term contracts, short term contracts, month-ahead purchases, and day-ahead purchases to match up with forecasted demand of our commercial customers on long term sales contracts, commercial customer on month-to-month contracts, and residential customers (which are all on month-to-month contracts). We apply the normal purchase, normal sale accounting treatment to our forward purchase supply contracts and our customer sales contracts. Accordingly, we record revenue generated from our sales contracts as energy is delivered.

Revenue and Cost Recognition

We record electricity sales under the accrual method and these revenues are recognized upon delivery of electricity to the customer’s meter. Electric services are accrued based upon estimated deliveries to customers as tracked and recorded by ERCOT multiplied by our average billing rate per kwh in effect at the time.

We use a revenue estimation method referred to as the “flow” technique. The flow technique of revenue calculation relies upon ERCOT settlement statements to determine the estimated revenue for a given month. Supply delivered to our customers for the month, measured on a daily basis, provides the basis for revenues. ERCOT provides net electricity delivered data in three time frames. Initial daily settlements become available approximately 17 days after the day being settled. Approximately 45 days after the day being settled, a ‘resettlement’ is provided to adjust the initial settlement to the actual supply delivered based on subsequent comparison of prior forecasts to actual meter reads processed. A final resettlement is provided approximately 180 days after power is delivered, marking the last routine settlement adjustment to the power deliveries for that day.

Because flow data for resettlements and final resettlements are not available in sufficient time to be booked to the appropriate period, the effect of such resettlements are booked in the month in which the cost of goods sold (“COGS”) effect of those resettlements is realized. This allows for a proper matching of revenues with COGS.

Sales represent the total proceeds from energy sales, including pass through charges from the Transmission and Distribution Providers (“TDSPs”) billed to the customer at cost. COGS includes electric power purchased and pass through charges from the TDSPs in the areas serviced by us. TDSP charges are costs for metering services and maintenance of the electric grid. TDSP charges are established by regulation by the PUCT.

The energy portion of our cost of goods sold is comprised of two components: bilateral wholesale costs and balancing/ancillary costs. These two cost components are incurred and recognized in different manners.

Bilateral wholesale costs are incurred through contractual arrangements with wholesale power suppliers for firm delivery of power at a fixed volume and fixed price. We are invoiced for these wholesale volumes at the end of each calendar month for the volumes purchased for delivery during the month, with payment due 30 days after the end of the month.

Balancing/ancillary costs are based on the customer load and are determined by ERCOT through a multiple step settlement process. Balancing costs/revenues are related to the differential between supply provided by us through its bilateral wholesale supply and the supply required to serve our customer load. We endeavor to minimize the amount of balancing/ancillary costs through our load forecasting and forward purchasing programs.

Unbilled Revenue and Accounts Receivable

At the end of each calendar month, revenue is accrued to unbilled receivables based on the estimated amount of power delivered to customers using the flow technique. Unbilled revenue also includes accruals for estimated TDSP charges and monthly service charges applicable to the estimated electricity usage for the period.

All charges that were physically billed to customers in the calendar month are recorded from the unbilled account to the customer receivables account. Accounts receivables are customer obligations billed at the conclusion of a month’s electricity usage and due within 16 to 30 days of the date of the invoice. Balances past due are subject to a late fee that is assessed on that billing.

The large number of customers and significant volume of transactions create a challenge to manage receivables as well as to estimate the account balances that ultimately will not be paid by the customers (“bad debt write-offs”). We use a variety of tools to estimate and provide an accurate and adequate allowance for doubtful accounts reserve; the allowance for doubtful accounts is expensed each month as a percentage of revenue based on the historical bad debt write-off trends that will result from that month’s gross revenues. For the three months ended March 31, 2005, and the three months ended March 31, 2004, our bad debt expense was approximately $1.8 million, or 2.3% of sales and $1.3 million, or 2.6% of sales, respectively.

We follow a consistent process to determine which accounts should be written off and compare the total actual write-offs to the estimated percentage of total revenue accrued and expensed each month. Past due accounts are regularly reviewed based on aging for possible

removal from service, in-house or external collections efforts, or write-off. For residential customers and commercial customers with balances less than $700.00, with some minor exceptions, the total balance for all accounts with any portion of their balance over 60 days past due is considered to be uncollectible and is written off, net of security deposits held for these accounts. Delinquent commercial accounts with balances greater than $700.00 are reviewed individually by in-house collections, and payment arrangements, removal from service and possible write-off of all or a portion of the receivable is determined on a case-by-case basis.

We have initiated a variety of actions targeted to reduce the amount of bad debt that we incur. The principal actions are as follows:

•

improved policies requiring credit reviews, deposits, and late fees; and

•

implemented more aggressive collection efforts including customer disconnections.

Accounts Receivable contains billed receivables, unbilled receivables and the allowance for doubtful accounts as follows:

(In thousands)	March 31, 2005			December 31, 2004


Billed receivables	$	19,735		$	20,259
Unbilled receivables		17,902			17,661
Allowance for doubtful accounts		(3,134	)		(2,434	)


Accounts receivable, net	$	34,503		$	35,486

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~For~~ In the three months ended March 31, 2005 we used a combination of long term contracts, short term contracts, month-ahead purchases, an inday-~~depth~~ahead ~~discussion~~purchases to match up with forecasted demand of our commercial ~~market~~customers ~~risks~~on long term sales contracts, ~~see~~commercial ~~“Risk~~customer ~~Factors”~~on month-to-month incontracts, and residential customers (which are all on month-to-month contracts). We apply the normal purchase, normal sale accounting treatment to our forward purchase supply contracts. Accordingly, we record ~~Form~~revenue 10generated from our sales contracts as energy is delivered to our retail customers, and direct energy costs are recorded when the energy under our long-~~KSB~~term ~~for~~forward ~~December~~physical delivery contracts is delivered. During the three months ended March 31, ~~2003~~2005, we did not use financial hedging, or derivative instruments in the future, although we may use derivatives for hedging purposes in the future. Additionally, we do not purchase power until we have locked in our respective customers for whom power will be supplied and purchased.

Commodity Price Risk

We are exposed to the impact of market fluctuations in the prices of electricity associated with the purchase and sale of electricity to our customers. We enter into short and long term agreements to purchase electricity; these contracts that qualify for the normal purchase and sale exemptions are described in Paragraph 10 of SFAS No. 133 and DIG Issue No. C15. For contracts qualifying for the scope exception, no recognition of the contract’s fair value in the Financial Statements is required until settlement of the contract. We have applied this scope exception for our contracts involving the purchase and sale of electricity at fixed prices in future periods. Income recognition and realization related to normal purchases and normal sales contracts generally coincide with the physical delivery of power.

Credit Risk

For an in-depth discussion of our credit risk and credit risk management initiative, see “Risk Factors” in our Form 10-KSB for the year ended December 31, 2003.

Equity Price Risk

On July 8, 2004, 458,333 warrants were repurchased and 91,667 warrants were amended to delete the put option feature; thus we no longer have any equity price risk. See Footnote 10, Subsequent Events for further discussion of the repurchase and amendment of these warrants.

Interest Rate Risk

We have a leveraged capital structure that could expose us to the risk of fluctuating interest rates. As of June 30, 2004, substantially all of our financial debt obligation is fixed rate debt obligation. Therefore, we are not subject to material interest rate risk.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and the participation of our management, including our Chief Executive Officer ~~(the “CEO”)~~ and our Chief Financial ~~Officer~~ ~~(the “CFO”)~~Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief ~~CEO~~Executive Officer and our ~~CFO~~ Chief Financial Officer concluded that our disclosure controls and procedures ~~are~~were ~~(i)~~effective ~~designed~~in timely accumulations and communicating to our ~~ensure~~management ~~that~~of the information required to be disclosed by us in the reports that we file or or submit under the ~~Securities~~ Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure; and (ii) that our disclosure controls and procedures are effective.

24 During the audit of our fiscal year end 2004, our independent auditors, Hein & Associates LLP (“Hein”), issued a material weakness letter noting significant deficiencies in our internal controls.

On ~~During~~ March 25, 2005, Hein issued a material weakness letter related to the audit of our ~~2003~~ fiscal year end, 2004 identifying a deficiency in our ~~auditors~~internal ~~issued~~controls. aThe ~~material~~deficiency ~~weakness~~identified ~~letter~~by ~~noting~~Hein ~~significant~~was ~~deficiencies~~that ~~with~~we ~~our~~did ~~internal~~not ~~controls.~~adequately Inprovide ~~addition,~~information to Hein regarding a control ~~the~~deficiency ~~Audit~~over ~~Committee~~input of rates into our ~~Board~~billing ofsystem ~~Directors~~and a resulting reserve accrual. In addition, ~~with~~Hein indicated that the ~~assistance~~Company ~~of independent~~failed ~~counsel,~~to ~~began~~fully aninvestigate ~~investigation~~and quantify the extent of the ~~issues~~error ~~raised~~caused by ~~our~~such control deficiency. The deficiency arose in connection ~~auditors,~~with ~~including~~our determination of the size of our ~~revenue~~reserve ~~calculation~~for ~~methods,~~customer ~~which~~credits ~~was~~to ~~completed~~be issued relating to errors in ~~the~~inputting rates on our billing system. The input errors were ~~first~~originally discovered by our management during the third quarter of fiscal 2004., ~~The~~and ~~Audit~~we set ~~Committee~~a ~~recommended~~reserve at that wetime ~~approve~~of an$500,000 ~~action~~for customer credits related to the input errors. ~~plan~~Prior (to receiving the ~~“Action~~letter ~~Plan”)~~from Hein, ~~which~~we ~~has~~made ~~been~~a ~~reviewed~~decision ~~and~~to ~~adopted~~increase byour ~~the~~reserve for ~~Board~~customer credits related to the input errors to $918,000 as of ~~Directors~~December 31, 2004. ~~The~~Hein ~~Action~~did not ~~Plan~~believe ~~requires~~we usadequately disclosed the input errors to ~~immediately~~them ~~undertake~~prior ~~and complete~~to aits ~~number~~audit of ~~actions.~~the 2004 ~~Below~~financials isand athat ~~list~~we offurther ~~key~~did ~~actions~~not ~~completed~~fully asinvestigate and quantify the extent of ~~June~~the ~~30,~~input ~~2004:~~errors in our original reserve estimates.

• Further, in ~~Instituted~~response ~~new~~to ~~document~~the ~~control~~initial ~~procedures~~inquiries of Hein related to this matter, ~~including~~the anAudit ~~updated~~Committee of ~~disaster~~our Board of Directors, with the assistance of external counsel, conducted a review of this matter through discussions with the outside auditor, review of the applicable documents and ~~recovery~~interviews and discussions with our management. The Audit Committee recommended an action plan related to this material weakness, which was implemented immediately and included the following findings and action items:

•29 ~~David Holeman elected as Vice President and Chief Financial Officer on June 2, 2004~~

• ~~Hired~~in ~~Controller~~2004, we created a Disclosure and ~~Manager~~Materiality ofCommittee ~~Financial~~that ~~Reporting~~includes our CEO, ~~each~~CFO, ~~with~~COO ~~experience~~and inthose staff people responsible for SEC reporting and ~~accounting~~monitoring of new or amended regulations, including the employee responsible for investor relations. The committee shall be responsible for the determination that disclosure of all material information has been made in each applicable proposed public filing or furnishing of information by us pursuant to the Securities Act of 1933, as amended, and ~~Human~~the ~~Resources~~Securities ~~Manager~~Exchange Act of 1934, as amended, and that all disclosures are made on a timely basis. Our outside accountants and counsel will be invited to participate in any meeting of this committee and the timing of those meetings will be set to ensure their attendance.

• ~~Created~~any ~~interim~~reserves ~~policies~~suggested by our management for inclusion in our financial statements must be disclosed to and ~~procedures~~approved by the Audit Committee and disclosed to our outside auditors, in each case with sufficient detail to enable an understanding of the reasons for the ~~issuance~~reserve. Upon establishment of ~~press~~any ~~releases~~such ~~and~~reserve, our management shall, in subsequent financial periods, perform the ~~preparation~~applicable investigation to confirm the need and size of ~~SEC~~such ~~reports;~~reserve, ~~final~~as ~~procedures~~applicable, ~~are~~and ~~being~~report ~~prepared~~those ~~for~~findings ~~Board~~to ~~approval~~the Audit Committee and outside auditors on a timely basis.

• ~~Established~~It anis ~~internal Disclosure Review Committee to review and coordinate SEC reports and prepared an interim policy regarding~~ the ~~notification~~audit ofcommittee’s ~~senior~~opinion ~~management and the Board of material developments; final policy is being prepared for board approval~~that:

~~Additionally, a~~• ~~list~~our company experienced two control deficiencies: (1) inadequate control over rates manually input into our billing system; and (2) inadequate disclosure to Hein and the Audit Committee of ~~key~~our ~~items~~discovery ~~currently~~of ~~being~~that ~~undertaken~~control indeficiency ~~connection~~and ~~with~~the reasons behind the ~~action~~creation ~~plan~~of ~~is presented~~a ~~below:~~reserve to our unbilled account in its financial statements;

• ~~All~~the ~~accounting~~control ~~policies~~deficiency related to differences between rates and ~~procedures~~the ~~are~~billing ~~being~~system ~~reviewed~~was fixed by us as of the third quarter of 2004 and ~~updated~~as of December 31, 2004, probably did not result in a material error to the Company’s financial statements; and

• Weno ~~have~~intentional ~~interviewed~~misconduct ~~three~~or ~~providers~~intentional ofomissions ~~Sarbanes-Oxley~~had ~~Act~~occurred ~~Section~~in ~~404~~connection ~~related~~with ~~services,~~the ~~and~~auditor ~~expect~~matters ~~that~~or ~~one~~the scope of ~~those~~investigation ~~providers~~by ~~will~~any beof ~~engaged~~our ~~and begin work during 2004~~employees.

• We will ~~Establishing~~continue ato ~~training~~evaluate ~~program~~the ~~for~~effectiveness ~~all~~of ~~relevant~~internal ~~personnel~~controls ~~regarding~~and ~~SEC~~procedures ~~reporting~~on an ongoing basis. It should be noted that in designing and evaluating the disclosure controls and procedures, ~~Sarbanes-Oxley~~management ~~Act~~recognizes ~~compliance~~that any controls and procedures, no matter how well designed and ~~related~~operated, ~~issues~~can ~~during~~provide only reasonable assurance of achieving the ~~third~~desired controlled ~~quarter~~objectives, and management necessarily is required to apply its judgment in evaluating the cost benefit relationship of ~~2004~~possible controls and procedures.

~~We are~~30 assigning high priority to the implementation of the Action Plan and will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controlled objectives, and management necessarily was required to apply its judgment and evaluating the cost benefit relationship of possible controls and procedures. Based on the evaluation described above and the implementation of the Action Plan to date, our CEO and CFO concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Based ~~There has~~on ~~been~~the noevaluation ~~change~~described inabove ~~our~~and ~~internal~~the ~~controls~~implementation ~~over~~of ~~financial~~the ~~reporting~~action ~~during~~plans ~~the~~described ~~period~~above, ~~ended~~our ~~June~~Chief ~~30,~~Executive ~~2004,~~Officer ~~with~~and ~~the~~Chief ~~exception~~Financial ofOfficer ~~the~~concluded, ~~items~~as ~~noted~~of ~~above~~March 25, 2005, that ~~has~~ ~~materially~~our ~~affected~~disclosure orcontrols isand ~~reasonably~~procedures ~~likely~~are toeffective ~~materially~~at ~~affect~~reaching ~~our internal~~that ~~control~~level ~~over~~of reasonable ~~financial reporting~~assurance.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

During In 2003, the Company was sued in the matter of Kyle Holland vs. Gexa Corp. et al. in the United States District Court, Western District of Texas. Mr. Holland alleged damages in connection with his acquisition of our common stock ~~in the Company~~. The ~~case~~complaint ~~remains~~seeks inunspecified ~~the~~damages. ~~preliminary stages~~On ~~due~~March to15, a2005, ~~delay~~this oncase ~~the~~was ~~part~~dismissed ofwithout ~~the~~prejudice ~~plaintiff~~for infailure ~~completing the~~to ~~steps~~state ~~to initiate~~ a ~~legal proceeding~~claim. ~~The~~On ~~Company~~April ~~intends~~12, to2005 ~~contest~~this ~~the~~case ~~suit~~ was ~~vigorously~~appealed. ~~The~~ ~~Company~~While ~~filed~~this alawsuit ~~motion~~is ~~to dismiss in the United States District Court,~~being ~~Western District of Texas court. As of June 30~~appealed, ~~2004,~~we ~~there~~believe ~~have~~it ~~been~~has no ~~significant changes~~merit toand ~~the~~we ~~status~~will ofcontest this ~~lawsuit~~suit vigorously.

On July 15, 2004, a class action lawsuit ~~captioned~~ Frederick T. Pappey, et al. vs. Gexa Corp., Neil Leibman, Marcie Zlotnik and Sarah Veach, Civil Action No. H-04-2869, was filed in the United States District Court for the Southern District of Texas, Houston District. The complaint ~~alleges that~~alleged, among other things, ~~the~~that ~~Company~~Gexa’s publicly filed reports and public ~~statements~~ statements contained false and misleading information, which resulted in damages to the plaintiff and members of the proposed class when they purchased Gexa’s securities. Specifically, the complaint alleged that Gexa overstated revenue during the second and third quarters of 2003 by $2.07 million and $2.05 million, respectively, by utilizing an ~~the~~improper ~~Company~~accounting method for calculating sales of electric power. The complaint ~~also alleges~~ alleged that ~~the~~Gexa’s conduct ofand the ~~Company~~conduct ~~and~~of the other defendants violated Sections 10(b) and 10b-5 and that the individual defendants violated Section 20(a) of the Securities ~~Exchange~~ Exchange Act of 1934. ~~and~~The ~~seeks~~complaint sought unspecified damages. ~~The~~On ~~Company~~December ~~believes~~20, ~~that~~2004, the lawsuit was dismissed without prejudice. While this lawsuit could be refiled at a later isdate, ~~without~~Gexa believes the lawsuit has no merit and ~~intends~~will tovigorously ~~contest~~defend ~~the~~any ~~matter~~such ~~vigorously~~refiled action.

On ~~August~~November 230, 2004, ~~the~~Gexa ~~Company~~entered ~~was~~into ~~sued~~a insettlement with Cappello Capital Corp., or Cappello, relating to the matter of ~~Capello~~Cappello Capital Corp. vs. Gexa Corp., originally filed in the Los Angeles Superior Court-West District. ~~The complaint~~Cappello’s ~~alleges~~complaint alleged a breach of contract regarding investment banker fees being claimed by ~~Capello~~Cappello ~~Capital Corp.~~ in connection with the credit facility with Highbridge/Zwirn Special Opportunities Fund, L.P. ~~The~~In ~~Company~~exchange ~~believes~~for ~~that~~Cappello’s agreement to dismiss the lawsuit and isrelease ~~without~~its ~~merit~~claims against Gexa, Gexa agreed to: (i) pay Cappello $275,000, (ii) issue to Cappello warrants dated November 1, 2004, to purchase 400,000 shares of Gexa common stock at an exercise price of $4.50 per share, and ~~intends~~(iii) issue to ~~contest~~Cappello an interest free unsecured promissory note in the ~~matter~~principal ~~vigorously~~amount of $500,000. Gexa accrued $1.2 million in the third quarter of 2004 in investment banking charges to other assets as deferred financing cost to be amortized over the life of the Highbridge facility.

On ~~The Company~~December is2, ~~involved~~2004, Gexa was sued in ~~various~~the ~~receivable~~matter ~~collections~~of ~~matters~~Essential asUtilities aCorporation ~~plaintiff~~v. ~~The~~Gexa ~~Company~~Energy ~~believes~~Corp., ~~that~~Cause ~~there~~No. ~~are~~04-12056, noin ~~pending~~the ~~matters~~191st ~~that~~District ~~will~~Court ~~have~~of aDallas County, ~~significant~~Texas. ~~impact~~The onpetition ~~the~~alleges ~~Company’s~~breach ~~financial~~of ~~position~~contract, orquantum ~~results~~meruit, ofconversion and ~~operations.~~unjust enrichment in

2631

~~Item~~connection 2.with ~~Changes~~the inalleged nonpayment ~~Securities,~~of ~~Use~~consultation fees. The amount of ~~Proceeds~~the claim is unknown. This case is in the preliminary stages, and ~~Issuer~~Gexa ~~Purchases~~intends ofto ~~Equity~~contest ~~Securities~~this suit vigorously.

~~None~~ On January 31, 2005, a lawsuit styled Griffin/Juban Capital Management, L.L.C. d/b/a GC Realty Services v. Gexa Corporation was filed in the 11th Judicial District Court of Harris County, Texas. This lawsuit claims that Gexa agreed to provide Continental frequent flyer miles to the plaintiff in turn for doing business with Gexa. The plaintiff has sued Gexa for breach of contract, fraud and negligent misrepresentation. The amount of damages sought in the lawsuit is unknown. This case is in the preliminary stages, and Gexa intends to contest this suit vigorously.

~~Item~~ On or 3about February 11, 2005, Gexa was made aware of a potential lawsuit that may be filed by Prenova, Inc. ~~Default~~and ~~Upon~~24 ~~Senior~~Hour ~~Securities~~Fitness USA, Inc. against Gexa and XERS, Inc. d/b/a XCEL Energy, Inc. The proposed complaint claims that Gexa failed to timely provide electrical service to 24 Hour Fitness and, as a result, they incurred substantial damages in the form of significantly higher rates for several months in 2004. The claimants have alleged damages in the amount of $150,000.00 plus interest and attorneys’ fees. If filed, Gexa intends to contest this suit vigorously.

~~None~~ The Company is also involved in various receivable collections matters as a plaintiff. Gexa believes that there are no pending matters that will have a significant impact on its financial position or results of operations.

Item 42. SubmissionUnregistered Sales of MattersEquity toSecurities aand VoteUse of Security HoldersProceeds.

~~None~~ On January 12, 2005 and February 7, 2005, the Company issued 4,250 and 15,535 shares of common stock respectively to Continental Airlines for services provided for the One Pass® partner program. The common stock was issued at market prices of $5.01 and $6.40 respectively on date of issuance. The shares of common stock were issued in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 as that did not involve a public offering.

Item 53. OtherDefaults InformationUpon Senior Securities.

On May 26, 2004, the Company entered into an employment agreement with David Holeman, Vice President & Chief Financial Officer, providing for an initial annual salary of $140,000 and grant of an option to purchase 50,000 shares of the Company’s common stock on the 91st calendar day after the date of the agreementNone. The option will be issued pursuant to the Company’s 2004 Incentive Stock Plan, which has been adopted by the Board and is to be submitted to the shareholders of the Company for approval within 12 months of the date of this agreement. The option will have an exercise price equal to the closing price of the common stock on the 91st calendar day after the date of the agreement and will vest one third on each of the first three anniversaries of the agreement. The agreement has a term of two years and provides for automatic one-year renewals thereafter unless either party gives 30 days written notice prior to the anniversary of the agreement. The agreement also provides for severance of 90 days in the first year and 180 days in the second year in the event the agreement is terminated without “cause” as defined in the employment agreement. The agreement also contains confidential information and non-solicitation provisions.

On AprilItem 12, 2004, the Company entered into a sublease agreement with Entergy Enterprises for office space to house its principal executive offices4. TheSubmission lease covers approximately 27,000 square feet of contiguousMatters rentalto area at 20 Greenway Plaza, Houston, Texas, 77046. The lease provides for a termVote of approximately sevenSecurity years terminating on January 31, 2011Holders.

~~Item 6~~None. ~~Exhibits and Reports on Form 8-K~~

(a)Item Exhibits:5. Other Information.

10None.1 ~~Lease Agreement dated April 12, 2004, between Entergy Enterprises, Inc. and the Company.~~

~~10.2~~32 ~~Employment Agreement dated May 26, 2004, between David Holeman and the Company.~~

31Item 6.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibits.

2.1	Amended and Restated Agreement dated as of October 21, 2003, among the Company, Gexa Gold Corp., Robert D. McDougal, Justin Rice, Gary Rice, and Neil M. Leibman	Exhibit 2.1 to Form 8-K/A, filed on December 9, 2003

*2.2	Agreement and Plan of Merger dated as of March 28, 2005, among FRM Holdings, LLC, WPRM Acquisition Subsidiary, Inc. FPL Group, Inc. and Gexa Corp.	Exhibit 2.1 to Form 8-K, filed on March 28, 2005

2.3	Voting Agreement	Exhibit 2.2 to Form 8-K filed on March 28, 2005

3.1	Articles of Incorporation of the Company.	Exhibit 3.1 to Form 8-K/A, filed on June 21, 2001

3.2	Bylaws of the Company.	Exhibit 3.2 to Form 8-K/A, filed on June 21, 2001

10.1	Form of Indemnification Agreement between the Company and each of its directors and certain officers	Exhibit 10.1 to Form 8-K, filed on January 31, 2005

10.2	Amendment to Amended and Restated Employment Agreement dated as of March 28, 2005, between Gexa Corp. and Neil M. Leibman	Exhibit 10.1 to Form 8-K, filed on March 28, 2005

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

~~31.2~~* ~~Certification~~Schedules and similar attachments to the Agreement and Plan of ~~Chief~~Merger ~~Financial~~have ~~Officer~~been omitted pursuant to ~~Rule~~Item ~~13a-14~~601(ab) ~~or 15d-14~~(a2) of ~~the~~Regulation ~~Exchange~~S-K. ~~Act~~The ~~pursuant~~Registrant towill ~~Section~~furnish ~~302~~supplementally a copy of any omitted schedule or similar attachment to the ~~Sarbanes-Oxley~~Securities ~~Act~~and ofExchange ~~2002~~Commission upon request.

~~32.1~~33 ~~Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

~~32.2~~SIGNATURES ~~Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

~~(b)~~Pursuant ~~Reports~~to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on ~~Form~~its behalf ~~8-K~~by the undersigned thereunto duly authorized.

~~Current~~Gexa ~~report on Form 8-K dated April 14, 2004 announcing that the Company was not able to file Form 10KSB on or before April 14, 2004 for the fiscal year ended December 31, 2003~~Corp.

~~Current~~By: ~~report~~/s/ onNeil ~~Form~~M. ~~8-K~~LeibmanNeil M. ~~dated~~Leibman, ~~April 29~~Chairman, ~~2004~~President ~~announcing the completion~~ and ~~results~~CEO(Principal ofExecutive aOfficer)Dated: ~~review~~May ~~of the~~12 ~~Company’s~~2005Houston, ~~internal controls by the Board of Directors Audit Committee and their independent counsel.~~ TX

~~Current~~By: ~~report~~/s/ onDavid ~~Form 8-~~K ~~dated~~. ~~May~~HolemanDavid 18K. Holeman, ~~2004~~Chief ~~announcing~~Financial ~~financial~~Officer(Principal ~~results~~Financial ~~for~~Officer)Dated: ~~the~~May ~~year and quarter ended~~12, ~~December 31~~2005Houston, ~~2003.~~ Texas

Current report on Form 8-K dated May 24, 2004 announcing financial results for the first quarter of 2004.

Current report on Form 8-K dated May 28, 2004 announcing a joint marketing partnership with American Airlines.

Current report on Form 8-K dated June 2, 2004 announcing the appointment of David Holeman as Vice President and Chief Financial Officer of the Company.

Current report on Form 8-K dated June 21, 2004 announcing the change of the Company’s physical address to 20 Greenway Plaza, Suite 600, Houston, Texas, 77046.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Gexa Corp.

By: /s/ Neil Leibman ————————Neil Leibman, Chairman and CEO(Principal Executive Officer)Dated: August 11, 2004Houston, TX

By: /s/ David Holeman ————————David Holeman, Chief Financial Officer(Principal Financial Officer)Dated: August 11, 2004Houston, Texas

EXHIBITS ARE ON FOLLOWING PAGES

2934

2.1	Amended and Restated Agreement dated as of October 21, 2003, among the Company, Gexa Gold Corp., Robert D. McDougal, Justin Rice, Gary Rice, and Neil M. Leibman	Exhibit 2.1 to Form 8-K/A, filed on December 9, 2003

*2.2	Agreement and Plan of Merger dated as of March 28, 2005, among FRM Holdings, LLC, WPRM Acquisition Subsidiary, Inc. FPL Group, Inc. and Gexa Corp.	Exhibit 2.1 to Form 8-K, filed on March 28, 2005

2.3	Voting Agreement	Exhibit 2.2 to Form 8-K filed on March 28, 2005

3.1	Articles of Incorporation of the Company.	Exhibit 3.1 to Form 8-K/A, filed on June 21, 2001

3.2	Bylaws of the Company.	Exhibit 3.2 to Form 8-K/A, filed on June 21, 2001

10.1	Form of Indemnification Agreement between the Company and each of its directors and certain officers	Exhibit 10.1 to Form 8-K, filed on January 31, 2005

10.2	Amendment to Amended and Restated Employment Agreement dated as of March 28, 2005, between Gexa Corp. and Neil M. Leibman	Exhibit 10.1 to Form 8-K, filed on March 28, 2005

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

Schedules and similar attachments to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

Filing Compare · GEXA CORP