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Executives

Robert Jaffe – Investor Relations

Steven S. Boss – Chief Executive Officer & Director

J. Robert Hipps – Interim Chief Financial Officer

Thomas L. Ulry – Senior Vice President Sales & Marketing

Analysts

Steven N. Bronson – Catalyst Fund GP, LLC

David J. Barnes – Nexus Advisory Corporation

Daniel Zeff – Zeff Capital Partners

Commerce Energy Group, Inc. (EGR) F1Q08 Earnings Call December 17, 2007 5:00 PM ET

Operator

Welcome to theCommerce Energy Group Incorporated fiscal 2008 first quarter earnings conferencecall. (Operator Instructions) As areminder, today’s conference is being recorded for replay purposes. I would now like to give thecall over to our host for today’s presentation, Mr. Robert Jaffe, InvestorRelations for Commerce Energy Group. Please proceed, sir.

Robert Jaffe

Thank you, operator. Good afternoon, everyone and thank you for joining us today to discuss CommerceEnergy’s fiscal 2008 first quarter financial results. On thecall today are StevenBoss, Chief Executive Officer and Bob Hipps, thecompany’s interim Chief Financial Officer. Tom Ulry, Senior Vice President,Sales & Marketing will beavailable during theQ&A.

First some housekeeping items. If you’d like to beadded to Commerce Energy’s email distribution list to receive companyinformation, or if you would like to changeyour contact information, please contact David [Sancunis] atPondel Wilkinson at310-279-5975. Please be advised thatthis conference call is being broadcasted live on theInternet at www.CommerceEnergy.com and www.Earnings.com. Aplayback of this call will beavailable for one year and can beaccessed on theInternet at bothwebsites.

Accompanying today’s discussion is aslide presentation which you will find on thecompany’s website. We encourage you tovisit our website and access theslides and follow along. Please notethat all of theinformation discussed on thecall today, including theinformation on theaccompanying slide, is covered under theSafe Harbor provisions of thePrivate Securities Litigation Reform Act.

Thecompany’s discussion today will include forward-looking information reflectingmanagement’s current forecast of certain aspects of thecompany’s future. Actual results coulddiffer materially from those stated or implied by our forward-lookingstatements, due to risks and uncertainties associated with thecompany’s business.

Certain risk factors associated with our business areset forth in thecompany’s filings with theSEC, and we suggest that you read these and allof our future filings. Thecompany disclaims any intent or obligation to update these forward-lookingstatements.

With that said, it’s my pleasure to turn the call over theSteven Boss, Chief Executive Officer of Commerce Energy

Steven S. Boss

Thank you, Robert and good afternoon, everyone. I will open with afew highlights before turning thecall over to Bob Hipps for amore detailed review of our financial and operational results. I will then provide some closing remarksbefore opening up thecall to any questions.

Earlier today, we announced our results for thethree months ended October 31, 2007 or our first quarter of fiscal 2008. For those following theslide presentation, please turn to slide 4.

Although we aredisappointed at havingto report a net incomeloss for the quarter,for fiscal 2008 first quarter, revenue increased 50% to more than $105 millionand gross profit grew 63% to $116.4 million compared with thefirst quarter of last year. Thesepositive results were offset by anincrease reserve for bad debtand higher professional fees.

Our customer base atOctober 31, 2007 was194,000 representing a20% increase over thesame quarter last year. We arereiterating our fiscal 2008 earnings and customer growth outlook of net income inthe range of $6.1million to $6.6 million equal to $0.20 to $0.22 pershare. We also expect year-over-yearcustomer growth of 8% to 10%.

Moving to slide 5, after five consecutive quarters of growthwe added 22,000 new customers inthe first quarter, butlost 24,000 inattrition due to thefollowing factors: number one is competition on rates behind two of our majormarkets. Dominion Energy of Ohio and Baltimore Gas& Electric default rates have been set ator below market levels, basically making itvery difficult to present avalue proposition to cause customers to switch.

Number two is moves. We have seen anincrease in movers inTexas. Texaswas recently rated as the10th highest state with movers. We continue to analyzethis population tobetter understand how best to manage it.

Third is service-related issues. InTexas, some challenges inour EDI infrastructure caused billing delays that subsequently lead to highcall volumes, all ofwhich contributed to aless than desirable customer experience. Theinfrastructure issues have been addressed and we arestarting to see asignificant improvement inour billing andcustomer care areas. Also, theincreased attrition inTexas is not necessarily abad thing inlight of our bad debt experience.

W have focused very much on dramatically upgrading thequality of our customer base through disconnecting customers that arehabitually late payers or non payers of their bill and for thefirst time being able to require -- since about July of last summer -- depositswhich allow us to prevent more credit-challenged customers from entering ourbook in thefirst place. This is important because Texasdid not let you decline service to acustomer based on acredit score, and theonly way to protect yourself against these customers getting into your book wasforcing deposits, which we arenow doing.

Our churn ratewas approximately 12% inthe firstquarter. Lowering our churn rateis a major area ofmanagement focus. We have invested inoperating, billing and customer service systems and personnel and expect to seeimproved results to this metric inupcoming periods.

Now I will turn thecall over to Bob Hipps.

J. Robert Hipps

Thank you, Steve. First let mefocus on our first quarter numbers, which areseasonally the lowestof the year. We’ll then close with afew comments on thequarter ending financial position and liquidity.

On slides 7, 8 and 9 arebar graphs of thecompany’s net income, net revenue and gross profit. We reported for thefirst quarter 2008 anet loss of $1.1 million compared to net income of $384,000 inthe first quarter oflast year, as Steve previously stated. Compared to thefirst quarter of last year, revenues and gross profit were up 50% and 63%respectively.

To provide alittle bit more detail about net revenue, retail national gasrevenues of $21.4 million were 36% higher than last year’s first quarter of$15.7 million, reflecting theimpact of theapproximately 300 C&I customers we acquired inthe first quarter oflast year and therefore were customers for allof the first quarterof this year.

Retail electricity revenues were up 58% to $84.2 millionfrom $53.4 million. Most of this loadgrowth has come inTexas where quarter-over-quartersales volumes increased 224%. Inthe first quarter ofthis year, sales to our Texascustomers -- now our largest electric market -- accounted for 55% of our totalelectric sales volumes, compared to only 27% during thefirst quarter of last year.

Gross margins from retail electricity sales increased to $15million compared with $8.4 million with the first quarter of last year, a 79%quarter-over-quarter increase. Thisincrease was driven by significant sales volume and higher gross margins inboth Texas and Maryland,our two growth electricity markets. Gross margins from retail natural gas sales declined slightly to $1.4million compared with $1.7 million in the comparable prior year quarter.

If you would turn to slide 10, you will seethat sales and marketing expenses increased 76% inthe quarter to $3.9million from $2.2 million inlast year’s first quarter. This is atrend we have highlighted inthe past year as wesignificantly expanded our customer acquisition efforts through mass marketing,advertising and sales programs, largely inTexas; outbound telesales tosmall business and sales through independent agents, door-to-doorsolicitations, network marketing organizations and online affiliates.

General and administrative expenses increased to $13.5million compared to $7.8 million for thefirst quarter of last year, anincrease of 71%. This increase reflects a$2.8 million increase inbad debt expenses resulting from a50% increase in netrevenues and higher bad debt reserves inTexas, higher payroll expensesand professional service fees related to year end SEC reports, and Commerce’sreview of its strategic alternatives.

Let mespeak briefly about our financial position as set forth on slide 11. Unrestricted cash and equivalents atOctober 31, 2007 totaled$5.4 million. Restricted cash atOctober 31, 2007 was $10.1million. Capital expenditures during thefirst quarter related primarily to investments inour billing, load forecasting and risk management systems and totaledapproximately $850,000. We continue toreview alternatives to better leverage our existing asset base and to fundcontinuing growth.

With that I’d like to turn the call back to Steve.

Steven S. Boss

Thank you, Bob. Moving to slide 13, highlighting our performance inthe first quarter,revenues were up 50%, gross profit grew by 63% to $16.4 million and we ended thequarter with 194,000 customers. As Isaid earlier, we arereiterating our year end guidance targets of $0.20 to $0.22 pershare. Also, as most of you know, inSeptember Commerce engaged afinancial advisor to evaluate thecompany’s strategic alternatives for enhancing stockholder value. Thecompany announced that ithad completed its review of thecompany’s strategic alternatives assisted by its financial advisor, RBCCapital Markets, and determined that its best course of action to maximizeshareholder value was to focus on continued execution of its businessplan. This decision was aresult of a detailedreview of thecompany’s major strategic alternatives, including asale of thecompany.

After this review, thecompany is determined that inlight of its present business model and its future opportunities itcan deliver the highestshareholder value by remaining astandalone company atthis time. We areconcerned about our bad debt and attrition and have been taking active measuresto remedy those problems and improve those metrics.

On theplus side, I also want to point out that inthe past week theCalifornia Public Utilities Commission issued adraft order instituting aninvestigation about thereopening of the Californiaelectric market. Inour opinion, the draftorder is very favorable inthat it leads theway into phase 2 of theproceedings without allowing for significant legal challenges. We continue to remain optimistic that over thecourse of the nextyear or so we can workwith the CaliforniaPublic Utilities Commission to present asignificant market opportunity to thecompany within the nottoo far distant future.

That concludes today’s formal remarks. Atthis time, I would like to open thecall to any questions from investors. Operator, would you please open thecall?

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question comes from theline of Steven Bronson of theCatalyst Fund. Please proceed, sir.

Steven N. Bronson –Catalyst Fund GP, LLC

Ifyou can expand alittle bit -- because I really haven’thad a chance to digestall ofthe numbers, becausethe press release came out pretty late. WhatI’m a little baffledby is obviously you mention inthe call that some of thegrowth is coming from Texas but alsothe risk for thebad debt.

Steven S. Boss

Yes.

Steven N. Bronson –Catalyst Fund GP, LLC

And, you’re spending more money on growing that market. How doyou feel confident about your forecasted earnings with what’s transpired inthe first quarter.

Steven S. Boss

Well, let meanswer it atthe high level andthen I’ll let Tom Ulry jump in. As Isaid in theprepared remarks, in Texasyou cannot credit qualify acustomer like we do inother markets, so somebody with alow credit score can getinto your book. That was happening to us early on inthe Texasmarket. Theonly way on a one-yearor less contract -- which is predominately theproducts we were selling -- that you can high grade your book, if you will, isby requiring deposits from more credit-challenged customers. We did not have thecapability to do thatuntil July.

So right now thecustomer growth that you see we feel is coming from much higher credit qualitycustomers. If you look atthe numbers that Igave earlier, about 7,000 customers amonth are being addedand we’re losing about 7,000 customers amonth. Part of theones we’re losing aredisconnects for failure to paybills which is some of what you seereflected in theincreased bad debt accrual. Theothers are where, ascontracts come up for renewal, we aremaking sure that they arecredit qualified customers and if they arenot, we are requiringdeposits.

So we think thecustomers we areadding right now aremuch higher quality customers than what you’re seeing exiting thebook, on average. Tom, would you like to jump inand amplify more?

Thomas L. Ulry

In addition to doing a better job atfiltering accounts coming into the company, wehave reviewed and identified a number ofopportunities on the side of the business where,through a series of letters and phone calls and other actions, you pursue yourcollection activity and a number of those opportunities have already beenaddressed and a couple more are ongoing.

But, by and large, I think we’re going to bemuch more efficient once weidentify somebody who represents anunacceptable level of risk, atgetting them out of thebook as quickly as wecan. I think those two actions lead us to believethat this is amanageable problem and that theresults in Q1 arenot what we expect them to begoing forward.

Steven N. Bronson –Catalyst Fund GP, LLC

Iguess what I’m hearing is most ofthe increased expenses is really contributed to this Texasissue? Because on acorresponding basis, if you look -- and again, I don’t have allthe numbers but I didpull down your presentation -- the G&A was up 71% year over year. Is that afair comparison?

Thomas L. Ulry

Yes.

Steven N. Bronson –Catalyst Fund GP, LLC

But, your revenue growth was 50%.

Thomas L. Ulry

Yes.

Steven N. Bronson –Catalyst Fund GP, LLC

Obviously that’s not an ideal ratio. What I’m trying to understand is, with thisgrowth obviously, there were some additional expenses. If you can give us somemore details on whatportion of that -- because the G&Awas obviously much higher than your growth. So, either it was all attributed toTexas or you also explained youhad some additional SEC costs. I’m just trying to understand thatdifference.

Steven S. Boss

Well, amajor part of theG&A increase is theincrease in thebad debt reserve. Wehave a budgeted baddebt reserve that had to beincreased based on experience that we were having inthe firstquarter. We’re hoping to return that to thebudgeted levels; maybe Bob Hipps can talk about that injust a minute. But, that’s part of themajor increase.

Theother part, which are basicallyone-time expenses, is theincreased professional and legal fees associated with thereview of thestrategic alternatives, which you will not seegoing forward.

Steven N. Bronson –Catalyst Fund GP, LLC

Would you say that’s obviously asmaller portion than thebad debt reserve?

Steven S. Boss

That’s correct. But, itwas still not trivial.

Steven N. Bronson –Catalyst Fund GP, LLC

Okay.

J. Robert Hipps

If you really back those two items out thegrowth in G&Aexpenses was pretty well inline with revenue growth. Our hope is wecan continue to control G&A expenses atabout these levels from apayroll viewpoint and getsome more leverage into thebusiness that way.

Steven S. Boss

Right now -- and we have said this before -- is that inorder to address theissues and we knew we had things that we had to work on because our ITsystems are still inthe process ofdevelopment. As aresult, with the salesgrowth that we experienced we needed to rely more on manual processes, whichmandated increased body counts. We’re rightnow start to see someof the ITsystems take over some of those processes. Our our goal is to start to work on theG&A side of thebusiness in futurequarters so we caneliminate some of themanual processes and rely on theIT systems.

Steven N. Bronson –Catalyst Fund GP, LLC

Well, letme get a chance togo through the Q when it’s filed. I’d like to just follow up with somequestions then. I do appreciate your time.

Steven S. Boss

Thank you, Steve.

Operator

Your next question comes from David Barns - Nexus AdvisoryCorporation.

David J. Barnes –Nexus Advisory Corporation

Good afternoon, guys. As it relatesto the bad debt, wasthere an accounting changeof some form orfashion that was undertaken to have allof this come to blossom, I would say, inQ1? Because when we look back to thefinal quarter of 2007, thebad debt issue wasn’t apparent; then for itto all to come toblossom in Q1 isunusual.

Steven S. Boss

Tom do youwant to address that? It’s not quitelike that but, I think Tom can gointo it in a littlebit more detail.

Thomas L. Ulry

Well, I can assure you that theauditors have been allover the numbers andhave scrutinized each quarter’s results. We had a numberof challenges operationally, most of itcontributed back to EDI on thecollection side of thebusiness that prevented us from being as aggressive and consistent inour collection efforts as we would normally have expected to beand thus you’ve seen anaging of the bucketsoccur during this period of time.

Soagain, we believe we’ve addressed anumber of those operational issues. TheEDI infrastructure hasbeen stabilized as Steve alluded to, although ithas required acouple more arms and legs to achieve that. Again, combined with theimproved screening and deposit requirements we’ve now implemented inTexas, we don’t anticipate thisbeing an ongoing trendin this particularmarketplace.

David J. Barnes –Nexus Advisory Corporation

So, as these accounts continue to age what you’re telling meis that you don’t look for this to persist through the upcoming quarters?

Thomas L. Ulry

I’m saying that anumber of opportunities have been identified. Some of those have been implemented, some of those arebeing implemented today that we believe we’ve got our arms around thesituation and again, I don’t believe this will bea long-term trend.

Steven S. Boss

We have implemented much more stringent collectionprocedures over thelast month or so andhave adapted our system accordingly sothat we’re identifying these customers ata much earlier stage inthe process,identifying them and following up and these arecapabilities that we didn’t have until within thelast month or so.

David J. Barnes –Nexus Advisory Corporation

In your presentation you referenced the customer growth rateto be at approximately10%. Two questions off ofthat. Number one, will you maintain thesame marketing expenses to achieve that growth rate? Is this adivergence from what we saw last year with a massive influx inaggregation of new customers?

Thomas L. Ulry

I would sayas it compares to lastyear, this year our focus is alittle more narrowed around primarily Texasand Ohio where last year thatalso included Maryland; theeconomics in Marylandcurrently don’t provide for avery attractive acquisition opportunity. So, we’ve moved our resources into Ohioand Texas. Ohiohas been soft sales sofar because it’s been largely warm and we found that few people were reallyconcerned with their heating bills. Morerecently, we’ve seen anuptick in salesthere.

Sales inTexas areactually running stronger than this time last year and we continue to beoptimistic in theTexas market on sales.

As far the spend, we do expect and we did budget for a slightly higher cost ofacquisition for our customers, largely because as the markets mature and more andmore folks are competing forthese customers; we expect our costs to go up.

We also have introduced, more aggressively this year,segmentation; targeted advertising and direct mail trying to reach thosecustomers and penetrate themarket that you don’t normally getwhen you use telemarketing, door-to-door and website.

So, again, going back to Steve’s comments earlier aboutimproving the qualityof the type ofcustomers we’re bringing into our books and not beso focused on thequantity of them; that is where our bigfocus is right now.

David J. Barnes –Nexus Advisory Corporation

Will you look to then have the same expenses for customer acquisition? Or will that diminish in so much that you’renow focusing on quality versus quantity?

Thomas L. Ulry

No, I think our costmight go up a littlebit just because the costto acquire each one of those is going to go upmaybe 10% to 12% over what itmay have been a yearago. Our taxes have been coming inreal reasonable. We plan for ahigher cost; I’m not sosure we’re seeing alot of that just yet.

Also, I would point out ayear ago, only about 25%, 20% of our sales were two-year deals. After thefirst quarter of this year, 41% of those sales were two-year contracts asopposed to primarily one-year contracts. The costof acquiring acustomer on a two-yearcontract through some channels is slightly higher but again, you’ve got acontract that hastwice the gross marginvalue associated with it. So, we thinkit’s a fair tradeoff.

And again, last year thetwo-year deals were primarily being sold inOhio on gas; where this year thetwo-year deals areprimarily being sold inTexas for power. Each of those contracts has alot more gross margin value associated with it.

David J. Barnes –Nexus Advisory Corporation

Tom, areyou seeing competition inthe business? Or, is this being driven by weather?

Thomas L. Ulry

Well, certainly inTexas thecompetition has becomepretty fierce. You go back ayear ago, you had 14 to 15 suppliers inthere competing. Today, you’ve got 20 to25 and everybody is being pretty aggressive.

Theweather certainly does have arole in it. Ohio,for example, it was sowarm until recently and then itgot real cold and itwas very tough; I mean we were selling, we were doing campaigns but we wereseeing a very softresponse so it didn’tmake sense to continue to spend money inOhio when we were doing better inTexas. You’ve got to go back and test your marketsand test your products and thepricing and when you start to gettraction you invest more into it; when you don’t, you shift thoseresources.

David J. Barnes –Nexus Advisory Corporation

There have been quite afew lendingamendments, the latestone coming on November20th. Ifyou could give some color or historical anecdotal evidence of thebenefits of going through this and what these amendments and theworking relationship with Wachovia, what benefits that’s bringing to thebottom line and/or top line for Commerce?

Steven S. Boss

Well, we feel we have avery strong relationship with Wachovia as evidenced by thelatest amendment which actually increased theterm of the deal. But basically when we went into this dealwith Wachovia, it wasstructured more as anasset-based loan instead of more of atrading type of loan that thelarger trading companies inthe space have withtheir lender. As aresult, there were certain excess availability covenants which basicallyprecluded us from using our own cash to payour supplier bills when they’re due towards theend of the month.

As Wachovia has gotten more familiar with thebusiness we have beenworking on trying to reduce those excess availability requirements sothat we can use moreof our own cash tofinance our workingcapital.

Operator

Your next question comes from Dan Zeff - Zeff Capital.Please proceed.

Daniel Zeff – ZeffCapital Partners

Itlooks like you’re going into some debt here too. Can you explain your long-term business planfrom here? Steve, given that you’ve abandoned your strategic alternatives, cashis dwindling, debt is going up, you’ve got covenant issues, your balance sheet hasdeteriorated remarkably over thelast year or two. I just wonder if youguys can stay inbusiness? How much debt areyou going to have at theend of the year?

Steven S. Boss

Dan, thedebt is basically short term and again, you’re seeing allof that appear in ouraccount receivables. We aredoing a couple ofthings to alleviate that. One is we havean intensive effort towork on the accountsreceivable issue and secure more timely payments, which will help. We arealso in theprocess of negotiating some supply arrangements that will take some of therequirements for deposits that we have to post with theutilities in order totransport gas orelectricity on their systems that would transfer those to asupplier and free up some additional cash. So, we’re working on those.

Daniel Zeff – ZeffCapital Partners

Where do you expect short term borrowings to be at the endof the year?

Steven S. Boss

Bob, can you?

J. Robert Hipps

I don’t have a good number for that right now.

Daniel Zeff – ZeffCapital Partners

Do you expect to be in debt though, at the end of the year?

J. Robert Hipps

I would expect to, particularly atthe end of eachmonth. Theother thing that we have to do, we will need to raise some capital this year inlarge part because on July 1st theagreement with Wachovia requires that we have $10 million inexcess availability. So we will have toraise some capital before then.

Daniel Zeff – ZeffCapital Partners

How will you raise capital?

J. Robert Hipps

Through private equity or through a partial investment inthe company from another company.

Daniel Zeff – ZeffCapital Partners

Are those being actively pursued now?

J. Robert Hipps

We’re in discussions with people now, yes.

Daniel Zeff – ZeffCapital Partners

On both of those fronts?

J. Robert Hipps

Yes.

Daniel Zeff – ZeffCapital Partners

Can you give us -- moving back to theincome statement -- agood idea, you know we sort of went back and forth with alot of those questions regarding bad debt etcetera. Arewe at good run ratesnow, all things takeninto consideration on theSG&A and theG&A lines? Or, arethose going to changedramatically up or down on aquarterly basis?

Steven S. Boss

You should seethem go down from thefirst quarter because of theone-time events that we described here. AsI said earlier, as more and more of theoperations can behandled through ITprocesses we can start to work on theheadcount, which we’re inthe process of doingnow as well.

Daniel Zeff – ZeffCapital Partners

Can you give us a range of the capital that you’re hoping toraise, the dollar amount that you need to raise?

Steven S. Boss

Well, thestandard private investment of public equity is generally targeted atabout 20% of your market cap. That should besufficient for thenear term. We’re exploring anumber of other options that hopefully will bemuch more favorable to thecompany than going that route.

Daniel Zeff – ZeffCapital Partners

Which include what?

Steven S. Boss

Some investments in the company by independent parties thatare interested in getting involved in this business.

Daniel Zeff – ZeffCapital Partners

So, you’re still exploring these alternatives but you’re nolonger working with the investment bank?

Steven S. Boss

That is correct. Theinvestment bank is still available for advice but, there’s no longer aformal process going on. Thealternatives have been explored, based on theresults of what we found out, we know more clearly thedirection we need to go and we’re pursuing avenues to accommodate that.

Daniel Zeff – ZeffCapital Partners

Does that include alarger competitor making aninvestment? What doyou mean when you say anindividual investment?

Steven S. Boss

Well, it could be a company, it could be a competitor, asupplier.

Daniel Zeff – Zeff Capital Partners

Okay. So, somebody thathas faith that thisbusiness is worthwhile?

Steven S. Boss

Correct.

Daniel Zeff – ZeffCapital Partners

Okay. Were there noforthcoming offers for thecompany at areasonable price?

Steven S. Boss

We did not see anything that we felt the shareholders wouldbe willing to approve.

Daniel Zeff – ZeffCapital Partners

Given that you’ve produced aloss in thefirst quarter and still have thesame outlook, I guess, you must have been very conservative inyour initial outlook, or else were hopeful that we’re going to reach thosenumbers. When doyou start to produce now that you have to make $7 million or $8 million innet income for thelast three quarters, when does that start to happen?

Steven S. Boss

The second quarter is where we start to get a lot of thegross margin from our natural gas book and that continues into the thirdquarter. So, you’ll find that those are generally our stronger quarters.

Daniel Zeff – ZeffCapital Partners

You don’t expect any other, obviously, bad debt shocks?

J. Robert Hipps

No more shocks. Wehave devoted a lot ofeffort to improving systems, putting new procedures inplace. The simple fact that we requiredeposits from lowcredit quality customers is paying off inmy book because about 80% of thepeople from whom we request deposits don’t provide them. That inmy view is good news. Itmeans they’re going somewhere else.

Daniel Zeff – ZeffCapital Partners

Do you expect profits for each of the next three quarters?

J. Robert Hipps

Yes.

Daniel Zeff – ZeffCapital Partners

Okay. So, longterm, I guess, back to Steve, assuming you getsome kind of capital influx inwhatever manner, what’s your strategy from there? Isthis a cash outflowbusiness over the nextfive or tenyears? Does thebalance sheet start to gradually improve?

Steven S. Boss

Itshould gradually improve. If you look atour guidance of $6 million of net income, we have between $4 million to $4.5 million of depreciation and amortizationwhich is a non-cash expense. Our ITbudget is under $6 million so, $4.5 million is covered by thedepreciation and amortization. Of the$6 million or so innet income we’re adding, what that would mean is you subtract the$1 million to $1.5 million delta and then we should beadding cash of say $4million to $4.5 million this year.

Operator

Your next question comes from David Barnes - Nexus AdvisoryCorporation.

David J. Barnes –Nexus Advisory Corporation

Gentlemen, arewe looking at aphenomenon with these bad debt ratiosand new deposit requisites for establishing accounts? Arewe looking at somesort of phenomena now where people arejust walking? Is this asystemic issue? Or is this justsomething that was particular to Commerce inthis particular market?

Steven S. Boss

Well Dave, I think you, and I’ll let Tom weigh inhere in aminute but, I think itwas particular to anumber of marketers and what you’re starting to see, I believe, will bea paradigm shift incustomer attitude or beliefs. Because up until thebeginning of this year, if amarketing company wanted to drop acustomer for non-payment they went back to aprovider of last resort and they never saw their lights go out. Now starting early this year, marketers thatwanted to drop acustomer had to do ahard disconnect, which we’re doing now, which means thelights physically go off and we getquite a few callbacks.They have five days to make their bills, to bring their account current andthen we have to reinstate them. Wedo sowith a reconnect feeand a deposit.

I think once customers that have switched really start torealize that thelights will go out their attitudes towards paying their bills is going to change.

Operator

At this time sir, we have no further questions inqueue.

Steven S. Boss

There’s just two other items Iwant to mention which arein thepress release in casepeople haven’t had achance to read ityet. We also announced thedays of our shareholders meeting as being March 27th. Itwill be inCosta Mesa, thedetails will be forthcomingand are inthe pressrelease.

Theother item that’s inour press release is that theboard last Friday decided torotate the chairmanshipof the company, and asa result, Mr. DennisLeibel has beenelected the newchairman effectiveFriday.

So, that pretty much concludes our comments today and wewanted to thank everybody for listening and their interest in the company.

Operator

Thank you very much, sir and thank you, ladies and gentlemenfor your participation intoday’s conference call. This concludesyour presentation for today. You may nowdisconnect.

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