TABLE OF CONTENTS

(1)     Organization and Segment Information

     On February 12, 2001, Potomac Electric Power Company (Pepco or the
Company) and Conectiv announced that each company's board of directors
approved an agreement for a strategic transaction whereby Pepco would acquire
Conectiv for a combination of cash and stock valued at approximately $2.2
billion. After the closing of the acquisition on August 1, 2002, Pepco and
Conectiv became subsidiaries of a new holding company, Pepco Holdings, Inc.
(Pepco Holdings, formerly New RC, Inc.)

     Until August 1, 2002, Pepco was engaged in three principal lines of
business. These business lines consisted of (1) the provision of regulated
electric utility transmission and distribution services in the Washington,
D.C. (D.C.) metropolitan area, (2) the management of a diversified financial
investments portfolio and (3) the supply of energy products and services in
competitive retail markets. The Company's regulated electric utility
activities are referred to herein as the "Utility" or "Utility Operations,"
and its financial investments and competitive energy activities are referred
to herein as its "Competitive Operations." The Company's wholly owned
unregulated subsidiary, POM Holdings, Inc. (POM) was the parent company of
two wholly owned subsidiaries, Potomac Capital Investment Corporation (PCI)
and Pepco Energy Services, Inc. (Pepco Energy Services). The Company's
financial investment portfolio was managed by PCI and its competitive energy
products and services were provided by Pepco Energy Services. After the
merger, the stock of PCI and Pepco Energy Services was distributed as a
dividend to Pepco's new parent company, Pepco Holdings, which resulted in
Pepco Holdings becoming the new parent company of PCI and Pepco Energy
Services as well. Additionally, the Company has a wholly owned Delaware
statutory business trust, Potomac Electric Power Company Trust I, and a
wholly owned Delaware Investment Holding Company, Edison Capital Reserves
Corporation.

     The Company has identified the Utility's operations (Utility Segment)
and POM's operations (Competitive Segment) as its two reportable segments.
The following tables present condensed financial information for the three
and six months ended June 30, 2002 and 2001, respectively.

(2)   Summary of Significant Accounting Policies

     The information furnished in the accompanying consolidated financial
statements reflects all adjustments (which consist only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the Company's results of operations for the interim periods
presented. The accompanying consolidated financial statements and notes
thereto should be read in conjunction with the Company's 2001 Form 10-K.
Certain prior period amounts have been reclassified in order to conform to
the current period presentation.

     The accompanying consolidated financial statements present the financial
results of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions with wholly owned subsidiaries have been
eliminated. Investments in entities in which the Company has a 20% to 50%
interest are accounted for using the equity method.

     In 2002, the Emerging Issues Task Force issued a pronouncement entitled
EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities." EITF 02-3 addresses the
presentation of revenue and expense associated with "energy trading book"
contracts on a gross vs. net basis. Previously, the EITF concluded that
gross presentation was acceptable, but with the issuance of EITF 02-3 and the
subsequent guidance provided by the EITF, net presentation is required. EITF
02-3 is required to be implemented effective for the Company's third quarter
2002 reporting cycle. Pepco's Utility business does not enter into trading
activities that are subject to the provisions of the pronouncement. However,
Pepco Energy Services, which was wholly owned by Pepco at June 30, 2002, does
enter into such transactions and historically has classified these contracts
on a gross basis. The Company is in the process of completing its evaluation
of the extent of the revenue and expense reclassifications that will be
required and expects that the implementation of EITF 02-3, including the
reclassification of certain revenues and expenses, will not have an impact on
its overall financial position or net results of operations.

     On July 30, 2002, the Financial Accounting Standard Board issued SFAS
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or
disposal costs when they are incurred rather than at the date of a commitment
to an exit or disposal plan. The primary effect of applying SFAS 146 will be
on the timing of recognition of costs associated with exit or disposal
activities. In many cases, those costs will be recognized as liabilities in
periods following a commitment to a plan, not at the date of the commitment.
SFAS 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company is in the process of
assessing the provisions of SFAS 146 in order to determine its impact on its
financial position and results of operations.

(3)   Derivative Instruments and Hedging Activities

     PCI has entered into interest rate swap agreements for the purpose of
managing its overall borrowing rate and limiting its interest rate risk
associated with debt issued under its Medium Term Note (MTN) program. PCI
currently hedges 100% of its variable rate debt and approximately 20% of its
fixed rate debt for the MTN program. In accordance with the terms of the
swap agreements, PCI receives or pays the net difference between interest
payments and the rates from its swap counterparties, thereby minimizing its
interest expense and cash flow variations.

     PCI formally designated its interest rate swap agreements as both cash
flow hedge and fair value hedge instruments which, for accounting purposes,
are measured at fair market value and recorded as liabilities in the
Company's consolidated balance sheets. The effective portion of the change
in fair value of the interest rate swaps and natural gas futures, are
reported as a component of Accumulated Other Comprehensive Income (AOCI). As
a yield adjustment is realized, the related amounts reflected in AOCI are
subsequently reclassified into interest expense. The gain or loss on the
fair value hedge is recognized in earnings by calculating the change in the
fair value of the interest rate swap and the change in the fixed rate debt
obligation. Pepco Energy Services purchased natural gas futures contracts to
hedge price risk in connection with the purchase of physical natural gas for
delivery to customers in future months. Pepco Energy Services accounts for
its natural gas futures contracts as cash flow hedges of forecasted
transactions.

     Management at PCI and Pepco Energy Services assess interest rate and
natural gas price risks by continually identifying and monitoring changes in
the marketplace that may adversely impact expected future cash flows and by
evaluating hedging opportunities.

     AOCI is adjusted monthly for changes in the fair value of the interest
rate swaps and natural gas futures. During the three months ended June 30,
2002 and 2001, POM recorded a loss of $63 thousand and $48 thousand,
respectively, as a result of the change in the fair value of the cash flow
hedge and fair value hedge. Also, during the six months ended June 30, 2002
and 2001, POM recorded a loss of $426 thousand and a gain of $5 thousand,
respectively, as a result of the change in the fair value of its cash flow
hedge and fair value hedge. As of June 30, 2002, PCI recorded $791 thousand
as an interest rate swap asset and Pepco Energy Services recorded $2.5
million as sales commitments, both classified as other assets. As of
December 31, 2001, PCI recorded $2.9 million as an interest rate swap
liability classified in other liabilities, and Pepco Energy Services recorded
$1.6 million as commodity liabilities included in accounts payable and other
liabilities.

     PCI's interest rate swaps expire on March 24, 2004 and August 22, 2005.
PCI's fair value hedge expires on December 5, 2008. The expiration dates of
these instruments coincide with the maturity dates of the MTNs to which the
swaps relate. Pepco Energy Services' natural gas futures contracts expire at
various dates that coincide with the timing of delivery to customers.

     Through the year ended June 30, 2003, approximately $1.8 million of
income in AOCI related to the interest rate swaps and natural gas futures
contracts is expected to be reclassified into income as a yield or price
adjustment of the hedged items.

     In June 2002, Pepco Holdings entered into several treasury lock
transactions with a cumulative notional amount of $1.25 billion, in
anticipation of the issuance of several series of fixed rate debt starting
from the end of July 2002. These treasury lock transactions, which have been
designated as qualified cash flow hedges in accordance with the provisions of
SFAS 133, are intended to offset the changes in future cash flows
attributable to fluctuations in interest rates. The fair value of the
treasury locks resulted in a pre-tax loss of $10.4 million at June 30, 2002
($6.2 million after-tax), which is reported as a component of other
comprehensive loss in the shareholders' equity section of the accompanying
consolidated balance sheets and the pre-tax amount is recorded as a
liability. Upon issuance of the debt the net gain or loss on the settlement
of the treasury lock transactions will be amortized on Pepco Holdings'
consolidated statements of earnings and retained income over the life of the
related debt. As discussed in Note (6) Subsequent Event, herein, the debt
was not issued in July 2002. Pepco Holdings' management anticipates it will
be issued at a later date.

     The Company's components of comprehensive income are net income,
unrealized losses on marketable securities and unrealized losses on
derivative instruments. A detail of comprehensive income is as follows:

(4)   Treasury Stock Transactions

     At June 30, 2002, the Company held 11.4 million shares in treasury at a
total cost of approximately $280.3 million, which is reflected as a reduction
to shareholders' equity on the accompanying consolidated balance sheets.

(5)   Commitments and Contingencies

     On July 8, 2002, the Executive Committee of Pepco's Board of Directors
declared a special dividend of $.00271739 per day per share of common stock
for the period from July 1, 2002, through and including July 31, 2002 in
connection with Pepco's merger with Conectiv. The $.00271739 per day rate
applied to the entire quarter equals 25-cents per share. The total amount of
the dividend was approximately $9 million.

     Through June 30, 2002, the Company has credited approximately $187
million, including interest, to Maryland customers as their portion of
divestiture gain sharing. The Maryland Commission has instituted a case to
determine whether additional bill credits should be provided to the Maryland
customers.

     Through June 30, 2002, the Company has credited approximately $52
million, including interest, to D.C. customers as their portion of
divestiture gainsharing. The District of Columbia Commission has instituted
a case to determine whether additional bill credits should be provided to the
District of Columbia customers.

(6)  Subsequent Event

     Due to unfavorable market conditions at July 31, 2002, Pepco Holdings
did not proceed with the issuance of its series of fixed rate debt that were
hedged by the treasury lock transactions. However, Pepco Holdings will
continue to monitor market conditions and will complete the issuance at a
later date. If the offering is not completed in a reasonable period,
generally within 60 days, the treasury locks would be declassified as a hedge
and therefore the accumulated other comprehensive loss or gain would be
recognized immediately on Pepco Holdings' consolidated statement of earnings
and retained income. The fair value of the locks was a $54.3 million loss
position at July 31, 2002 ($32.4 million after tax).

                       Report of Independent Accountants

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

We have reviewed the accompanying consolidated balance sheet of Potomac
Electric Power Company and its subsidiaries (the Company) as of June 30,
2002, and the related consolidated statements of earnings and retained income
for the three and six month periods ended June 30, 2002 and 2001 and the
consolidated statements of cash flows for the six month periods ended
June 30, 2002 and 2001. These financial statements are the responsibility of
the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.

We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as
of December 31, 2001, and the related consolidated statements of earnings and
retained income, and consolidated statement of cash flows for the year then
ended (not presented herein), and in our report dated January 18, 2002, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of June 30, 2002, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.

PricewaterhouseCoopers LLP
August 9, 2002

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
           RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     For additional information, other than the information disclosed in the
Management's Discussion and Analysis of Consolidated Results of Operations
and Financial Condition section herein, refer to Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company's 2001 Form 10-K.

     In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in forward-looking
statements (as such term is defined in the Reform Act) made in this report on
Form 10-Q. Any statements that express, or involve discussions as to
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not statements of historical facts and may be forward-
looking.

     Forward-looking statements involve estimates, assumptions and
uncertainties and are qualified in their entirety by reference to, and are
accompanied by, the following important factors, which are difficult to
predict, contain uncertainties, are beyond the control of the Company and may
cause actual results to differ materially from those contained in
forward-looking statements:

     Any forward-looking statements speak only as of August 9, 2002, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors
emerge from time to time and it is not possible for management to predict all
of such factors, nor can it assess the impact of any such factor on the
business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-
looking statement.

     As discussed in Note 2. Summary of Significant Accounting Policies in
the Company's 2001 Form 10-K, the Utility's revenue for services rendered but
unbilled as of the end of each month is accrued and included in the accounts
receivable balance on the accompanying consolidated balance sheets. The
amounts received for the sale of energy and resales of purchased energy to
other utilities and to power marketers is included in Utility revenue.
Revenue from Pepco Energy Services' energy services contracts and from PCI's
utility industry services contracts is recognized using the percentage-of-
completion method of revenue recognition, which recognizes revenue as work
progresses on the contract. Revenue from Pepco Energy Services' electric and
gas marketing businesses is recognized as services are rendered.

     Based on the regulatory framework in which it has operated, the Company
has historically applied, and in connection with its transmission and
distribution business continues to apply, the provisions of Statement of
Financial Accounting Standards No. 71 (SFAS 71) "Accounting for the Effects
of Certain Types of Regulation." SFAS 71 allows regulated entities, in
appropriate circumstances, to establish regulatory assets and to defer the
income statement impact of certain costs that are expected to be recovered in
future rates.

     The Utility's capitalization policy is based on the FERC Uniform System
of Accounts. The original installed cost, including applicable overheads, is
capitalized for transmission and distribution assets. Replacement of a
"retirement unit" is capitalized. In general, replacement of a "minor item"
of property is charged to maintenance expense. General plant is capitalized
on initial construction; after initial construction, only expenditures above
$1,500 are capitalized. PCI, in general, capitalizes assets greater than
$1,000 and an estimated useful life of 1 year. In some cases, assets greater
than $500 are capitalized. Pepco Energy Services, in general, capitalizes
assets greater than $1,000.

OPERATING REVENUE

    The decrease in Utility operating revenue for the three month period
ended June 30, 2002, compared to the corresponding period in 2001, is
primarily attributable to an increase in customer migration to alternate
suppliers during the quarter.

     The decrease in Utility operating revenue for the six month period
ended June 30, 2002, compared to the corresponding period in 2001, is
primarily due to increased customer migration and milder weather. Heating
degree days were 13% below normal during the period and, in addition,
measures of temperature below 35 degrees Fahrenheit were 40% below the same
period last year. With normalized sales, utility earnings per share for the
six month 2002 period would have been approximately 6 cents higher.
Additionally, the six month ended June 30, 2001 results reflect a gain of
$50.2 million recorded in January 2001 on the sale of the Company's 9.72
percent interest in the Conemaugh Generating Station (Conemaugh).

     Competitive operating revenue increased for the three and six month
periods ended June 30, 2002 primarily due to the results of PCI's new energy
related lease and real estate investments, and due to the continued growth of
Pepco Energy Services' commodity businesses.

OPERATING EXPENSES

     Consolidated operating expenses decreased during the three and six
months ended June 30, 2002, compared to the corresponding periods in 2001,
primarily due to a decrease in the Utility's fuel and purchased energy
expense that resulted from the sale of its interest in Conemaugh in January
2001. The Utility's decrease in fuel and purchased energy expense was
partially offset by an increase in this expense at Pepco Energy Services due
to the continued growth of its commodity business. Also contributing to the
consolidated decrease in operating expenses for the three and six month
periods was a decrease in other operation and maintenance expense at PCI due
to lower business expenses incurred by one of PCI's subsidiaries.
Depreciation expense also decreased for the three and six month periods due
to PCI's sale of aircraft. Additionally, the three and six months ended
June 30, 2002 operating results include a $2.4 million pre-tax write-down of
a PCI real estate investment.

OTHER INCOME (EXPENSES)

Interest and Dividend Income

     The decreases in interest and dividend income during the three and six
month periods ended June 30, 2002, compared to the corresponding periods last
year, primarily resulted from the fact that there were less divestiture
proceeds invested in 2002. These proceeds, which were invested during the
first quarter of last year, were subsequently used during 2001 and into 2002
to pay income taxes associated with the divestitures, to reduce long-term
debt, to buy back common stock, and to satisfy divestiture customer gain
sharing commitments.

     The decreases in interest expense in the three and six month periods
ended June 30, 2002, compared to the corresponding prior periods, primarily
resulted from a reduction in the level of the Company's debt outstanding.
A portion of the proceeds from the divestiture of the generation assets
in December 2000 was used to retire debt.

     This amount represents the Company's share of the pre-tax income or loss
from entities in which it has a 20% to 50% equity investment. The Company's
most significant equity investment is the joint venture known as Starpower
Communications, LLC (Starpower) that was formed in 1997 between wholly owned
subsidiaries of PCI and RCN Corporation. Additionally, this line item
includes income from Pepco Energy Services' 50% share of the operations of
Viron/Pepco Services, Inc., that was created to provide energy-savings
performance contracting services to the Military District of Washington.

     Through June 30, 2002, Starpower has built sufficient advanced fiber-
optic network to currently reach in excess of 172,000 marketable homes. The
customer subscriber services base is composed of customers served by
Starpower's advanced fiber-optic network (On-network) and off of other
networks ahead of Starpower's build-out (Off-network). The On-network
customer subscriber services include cable television, local and long
distance telephone and high-speed Internet customer services and totaled
approximately 86,000 as of June 30, 2002, compared to approximately 72,000 at
December 31, 2001. The Off-network customer subscriber services include dial-
up Internet and resale local and long distance telephone and totaled
approximately 165,000 as of June 30, 2002, compared to approximately 184,000
at December 31, 2001. The decline in off-network customer subscriber services
over the past year is principally due to the loss of low-priced dial-up
Internet customers to other dial-up Internet service providers. Total
customer subscriber services including cable television, local and long
distance telephone and Internet subscribers were approximately 251,000 as of
June 30, 2002, compared to approximately 256,000 as of December 31, 2001.

     For the three and six months ended June 30, 2002, the Loss from Equity
Investments amount decreased compared to the corresponding periods last year
primarily due to the fact that Starpower's on-network business continued to
grow and mature from a startup operation. At June 30, 2002, PCI has a net
investment of approximately $149.8 million in Starpower.

INCOME TAX EXPENSE

     Income tax expense increased for the three months ended June 30, 2002,
compared to the corresponding period in 2001, primarily due the fact that the
prior year period contained tax benefits that were recorded by PCI that were
not reoccurring for the same period in 2002. This increase was partially
offset by a decrease in Utility tax expense due to its decrease in operating
income for the period. Income tax expense decreased for the six months ended
June 30, 2002, compared to the corresponding period in 2001, primarily due to
the fact that the prior year period includes taxes associated with the gain
on the divestiture of Conemaugh and taxes incurred on the interest income
earned on the proceeds of the divestitures in December 2000 and January 2001.
The Utility's decrease in operating income in the current period also
contributed to the decrease.

     Construction expenditures totaled $103.5 million for the six months
ended June 30, 2002 and are projected to total approximately $170 million for
the year ended December 31, 2002. For the five-year period 2002-2006,
Utility construction expenditures are projected to total $833.7 million.
These expenditures will be funded through cash provided from operations or
through funds received from the issuance of short term debt.

     Pepco has included a portion of its overhead expense in the tax basis of
its capital assets since 1987. During the three months ended June 30, 2002,
Pepco changed its method to allocate a portion of its overhead costs to the
cost of producing electricity. Since Pepco does not have an inventory
account for electricity, the effect of this change in method is to charge to
expense, for income tax purposes, overhead costs that had previously been
capitalized. Based on this change in method, the impact on the years from
1987 through 2000 has been incorporated into the 2001 Federal Income Tax
Return. In addition to various other deductions, this resulted in a refund
of $135.4 million being received by the Company in June 2002. Had the
Company not changed its method, the costs would have recovered over time
through tax depreciation.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     For information other than the disclosure contained below, refer to
Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Company's 2001 Form 10-K.

     The interest rate risk related to Pepco Holdings' treasury locks was
estimated as the potential $50.3 million decrease in fair value at June 30,
2002, that resulted from a hypothetical 10% decrease in the prevailing
interest rates.

PART II    OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

     For information other than the disclosure contained herein, refer to
Item 3. Legal Proceedings of the Company's 2001 Form 10-K. As disclosed in
Note 11, Commitments and Contingencies, of the Company's 2001 Form 10-K, on
April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at
a generating station that was owned by the Company at that time in Aquasco,
Maryland. As a result of this spill, on July 8, 2002, the State of Maryland
(State), Department of Environment, executed a settlement agreement that
reflects the full and final settlement of all claims and penalties that the
State may have against the Company for its violations of the State's
environmental laws as a result of the oil spill. The settlement agreement
stipulates that the Company must pay a total of $950,000 in penalties, which
are payable in two equal installments of $475,000, due on July 31, 2002 and
July 31, 2003, respectively. The Company will expense the full $950,000 in
the third quarter of 2002.

Item 5.    OTHER INFORMATION - Continued