<PAGE>

================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark one)

     [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
          ACT OF 1934

     For the quarterly period ended       March 31, 2002
                                    --------------------------------------------

                                       OR

     []   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the transition period from    ________________ to ________________

          Commission file number                       0-15472
                                   ---------------------------------------------

                        Environmental Power Corporation
             (Exact name of registrant as specified in its charter)

               Delaware                                04-2782065
     (State or other jurisdiction of      (IRS Employer Identification No.)
     incorporation or organization)

          One Cate Street, 4th Floor, Portsmouth, New Hampshire 03801
                    (Address of principal executive offices)
                                   (Zip code)

                                 (603) 431-1780
               Registrant's telephone number, including area code

--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No []

                  Number of shares of Common Stock outstanding

                    at  May 14, 2002       19,934,139 shares

                      The Exhibit Index appears on Page 32.

                           Total number of pages is 33.
================================================================================

<PAGE>
                         ENVIRONMENTAL POWER CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                                  Page No.
                                                                                                --------
<S>                                                                                                <C>
        Item 1.  Financial Statements:

        Condensed Consolidated Balance Sheets as
        of March 31, 2002 (unaudited) and December 31, 2001 ...................................     2

        Condensed Consolidated Statements of Operations (unaudited) for the Three Months
        Ended  March 31, 2002 and March 31, 2001  .............................................     3

        Condensed Consolidated  Statements of Cash Flows (unaudited) for the Three Months Ended
        March 31, 2002 and March 31, 2001  ....................................................     4

        Notes to Condensed Consolidated Financial Statements...................................    5-7

        Item 2.  Management's  Discussion  and Analysis of Financial  Condition  and Results of
        Operations.............................................................................    8-30

        Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................    30-31

PART II.  OTHER INFORMATION

        Item 5.   Other Information............................................................     32

        Item 6.   Exhibits and Reports on Form 8-K ............................................     32

        Signatures  ...........................................................................     33
</TABLE>

                                       1

<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                            March 31           December 31
                                                                              2002                 2001
                                                                         --------------       --------------
<S>                                                                      <C>                  <C>
ASSETS

CURRENT ASSETS:
  Cash  and  cash equivalents                                            $     263,666        $     468,271
  Restricted cash                                                            1,271,138            1,014,580
  Receivable from utility                                                    8,365,790            7,905,864
  Other current assets                                                         530,390              607,590
                                                                         --------------       --------------
       TOTAL CURRENT ASSETS                                                 10,430,984            9,996,305

PROPERTY, PLANT  AND  EQUIPMENT, NET                                           656,979              652,830

LEASE RIGHTS, NET                                                            2,124,252            2,161,503

ACCRUED POWER GENERATION REVENUES                                           65,284,987           63,648,995

GOODWILL                                                                     4,912,866            4,912,866

LICENSED TECHNOLOGY RIGHTS, NET                                              3,582,437            3,628,177

OTHER ASSETS                                                                   553,150              565,570
                                                                         --------------       --------------
       TOTAL ASSETS                                                      $  87,545,655        $  85,566,246
                                                                         ==============       ==============
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses                                  $   7,861,133        $   9,382,471
  Secured promissory note payable to related party                             750,000              750,000
  Other current liabilities                                                  1,543,885            1,363,108
                                                                         --------------       --------------
       TOTAL CURRENT LIABILITIES                                            10,155,018           11,495,579

DEFERRED GAIN, NET                                                           4,394,852            4,471,955

SECURED PROMISSORY NOTES PAYABLE
 AND OTHER BORROWINGS                                                        1,383,148            1,420,467
DEFERRED INCOME TAX LIABILITY                                                  179,396              146,396
ACCRUED  LEASE  EXPENSES                                                    65,284,987           63,648,995
                                                                         --------------       --------------
       TOTAL LIABILITIES                                                    81,397,401           81,183,392
                                                                         --------------       --------------
SHAREHOLDERS' EQUITY:
  Preferred Stock ($.01 par value; 2,000,000 shares authorized as of
       March 31, 2002 and December 31, 2001; no shares issued )                      0                    0
  Preferred Stock (no par value, 10 shares authorized; 10 shares
       issued as of March 31, 2002 and December 31, 2001)                          100                  100
  Common Stock ($.01 par value; 50,000,000 shares authorized;
       21,370,293 issued; and 20,251,653 outstanding as of
       March 31, 2002 and December 31, 2001)                                   213,702              213,702
  Additional paid-in capital                                                 6,848,796            6,850,046
  Retained earnings (accumulated deficit)                                      248,260           (1,518,390)
  Accumulated other comprehensive loss                                         (60,385)             (60,385)
                                                                         --------------       --------------
                                                                             7,250,473            5,485,073
  Treasury stock (1,118,640 common shares, at cost, as of
       March 31, 2002 and December 31, 2001)                                  (456,271)            (456,271)
  Notes receivable from officers and board members                            (645,948)            (645,948)
                                                                         --------------       --------------
       TOTAL SHAREHOLDERS' EQUITY                                            6,148,254            4,382,854
                                                                         --------------       --------------
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $  87,545,655        $  85,566,246
                                                                         ==============       ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.

                                       2

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                            Three Months Ended March 31
                                                                              2002                2001
                                                                         --------------     --------------
<S>                                                                      <C>                <C>
POWER GENERATION REVENUES                                                $  14,113,256      $  13,482,891

COSTS AND EXPENSES:
   Operating expenses                                                        5,144,733          4,957,240
   Lease expenses                                                            6,783,380          6,015,022
   General and administrative expenses                                       1,357,879            685,729
   Depreciation and amortization                                               135,971             86,547
                                                                         --------------     --------------
                                                                            13,421,963         11,744,538
                                                                         --------------     --------------

OPERATING INCOME                                                               691,293          1,738,353
                                                                         --------------     --------------

OTHER INCOME (EXPENSE):
   Interest income                                                               9,553             18,784
   Interest expense                                                            (30,499)           (69,303)
   Amortization of deferred gain                                                77,103             77,103
   Sales of NOx emission credits                                             2,428,200              ---
   Other income                                                                  2,000              ---
                                                                         --------------     --------------
                                                                             2,486,357             26,584
                                                                         --------------     --------------

INCOME BEFORE INCOME TAXES                                                   3,177,650          1,764,937

INCOME TAX EXPENSE                                                           1,411,000            777,000
                                                                         --------------     --------------

NET INCOME                                                               $   1,766,650      $     987,937
                                                                         ==============     ==============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
   Basic                                                                    20,251,653         11,406,783
   Diluted                                                                  20,273,141         11,407,990

EARNINGS PER COMMON SHARE:
   Basic                                                                 $        0.09      $        0.09
   Diluted                                                               $        0.09      $        0.09
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       3

<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Three Months Ended March 31
                                                                              2002               2001
                                                                         --------------     --------------
<S>                                                                      <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                             $   1,766,650      $     987,937
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
      Depreciation and amortization                                            135,971             86,547
      Deferred income taxes                                                     33,000             31,000
      Amortization of deferred gain                                            (77,103)           (77,103)
      Accrued power generation revenues                                     (1,635,992)        (1,865,208)
      Accrued lease expenses                                                 1,635,992          1,865,208
      Changes in operating assets and liabilities:
         Increase in receivable from utility                                  (459,926)          (358,169)
         Decrease (increase) in other current assets                            70,583           (594,054)
         Decrease in other assets                                                3,510             19,548
         (Decrease) increase in accounts payable and
           accrued expenses                                                 (1,521,338)           170,345
         Increase in long-term debt to supplier                                    528              1,863
                                                                         --------------     --------------
           Net cash (used in) provided by operating activities                 (48,125)           267,914
                                                                         --------------     --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Increase in restricted cash                                                 (256,558)          (211,503)
  Property, plant and equipment expenditures                                   (41,602)              ---
                                                                         --------------     --------------
           Net cash used in investing activities                              (298,160)          (211,503)
                                                                         --------------     --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Dividend payments                                                             (1,250)          (172,352)
  Net borrowings (repayments) under working capital loan                       180,249           (143,215)
  Repayment of secured promissory notes payable and
     other borrowings                                                          (37,319)           (37,083)
                                                                         --------------     --------------
           Net cash provided by (used in) financing activities                 141,680           (352,650)
                                                                         --------------     --------------

DECREASE IN CASH AND CASH EQUIVALENTS                                         (204,605)          (296,239)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                 468,271            307,666
                                                                         --------------     --------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                 $     263,666      $      11,427
                                                                         ==============     ==============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       4

<PAGE>

ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- BASIS OF PRESENTATION
-------------------------------

Our unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for annual financial statements. In the opinion
of management, we have included all adjustments, consisting of normal recurring
accruals, which we considered necessary for a fair presentation. The results of
operations for the three months ended March 31, 2002 are not necessarily
indicative of results to be expected for the year ending December 31, 2002. For
further information, refer to the consolidated financial statements and
footnotes included in our Annual Report on Form 10-K for the year ended December
31, 2001.

NOTE B -- EARNINGS PER COMMON SHARE
-----------------------------------

We compute our earnings per common share using the treasury stock method in
accordance with Statement of Financial Accounting Standard No. 128, "Earnings
per Share", or SFAS No. 128. We compute basic earnings per share by dividing net
income for the period by the weighted average number of shares of common stock
outstanding during the period. For purposes of calculating diluted earnings per
share, we consider our shares issuable in connection with stock options to be
dilutive common stock equivalents when the exercise price is less than the
average market price of our common stock for the period. We exclude antidilutive
common stock equivalents from the calculation of diluted earnings per share. The
following table outlines the calculation of basic earnings per share and diluted
earnings per share for the three months ended March 31, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                      Income              Shares             Per Share
                                                                    (Numerator)       (Denominator)           Amounts
                                                                ----------------    ------------------    -------------
<S>                                                                 <C>                    <C>                  <C>
Three Months Ended March 31, 2002:
----------------------------------
Income available to shareholders                                    $ 1,766,650            20,251,653           $  .09
Effect of dividends to preferred stockholders                            (1,250)
                                                                ----------------    ------------------    -------------
Basic EPS - income available to common shareholders                   1,765,400            20,251,653              .09
Effect of dilutive securities:
   Assumed exercise of dilutive stock options                                                  21,488
                                                                ----------------    ------------------    -------------
Diluted EPS - income available to common shareholders               $ 1,765,400            20,273,141           $  .09
                                                                ================    ==================    =============

Three Months Ended March 31, 2001:
----------------------------------
Income available to shareholders                                    $   987,937            11,406,783           $  .09
Effect of dividends to preferred stockholders                            (1,250)
                                                                ----------------    ------------------    -------------
Basic EPS - income available to common shareholders                     986,687            11,406,783              .09
Effect of dilutive securities:
   Assumed exercise of dilutive stock options                                                   1,207
                                                                ----------------    ------------------    -------------
Diluted EPS - income available to common shareholders               $   986,687            11,407,990           $  .09
                                                                ================    ==================    =============
</TABLE>

                                       5

<PAGE>

NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No.
141, "Business Combinations". SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling of interest method of accounting. SFAS 141 also broadens
the criteria for recording intangibles separate from goodwill and revises
certain financial statement disclosures. The acquisition of Microgy in 2001 was
accounted for in accordance with SFAS 141.

In June 2001, The FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". The most significant changes made by SFAS No. 142 are: 1) goodwill and
indefinite-lived intangible assets will be tested for impairment at least
annually; 2) goodwill and indefinite-lived intangible assets will no longer be
amortized to income; and 3) the amortization period of intangible assets with
finite lives will no longer be limited to forty years. SFAS No. 142 also
requires a two-phase process for impairment testing of goodwill. The first
phase, which is required to be completed by June 30, 2002, screens for
impairment. If necessary, we would be required to complete a second phase by
December 31, 2002 to measure the impairment. Any identified impairments would be
treated as a cumulative effect of a change in accounting principle. The
provisions of SFAS 142 were applied to the goodwill and intangible assets
acquired in the Microgy acquisition. We did not have acquired goodwill or
intangible assets recorded on our balance sheet prior to the Microgy
acquisition. We adopted SFAS No. 142 on January 1, 2002 and expect to complete
the first phase of our impairment testing during the second quarter of 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective January 1, 2003. SFAS 143 addresses the
financial accounting and reporting for obligations and retirement costs related
to the retirement of tangible long-lived assets. We do not expect that the
adoption of SFAS 143 will have a significant impact on our consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective January 1, 2002. SFAS 144
supersedes FASB Statement No 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. We adopted SFAS No. 144 on January
1, 2002 and the adoption of this principle did not have a material effect on our
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 amends, among other things, the financial accounting and reporting for
extinguishment of debt obligations and certain lease modifications. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002 with regard to extinguishment of debt obligations and is effective for
transactions occurring after May 15, 2002 with regard to certain lease
modifications. The remaining provisions are effective for financial statements
issued on or after May 15, 2002. We

                                       6

<PAGE>

do not expect that the adoption of SFAS 145 will have a significant impact on
our financial statements.

NOTE D - GOODWILL AND INTANGIBLE ASSETS
---------------------------------------

Intangible assets are recorded at cost and consist of licensed technology rights
and goodwill. Licensed technology rights are being amortized using the
straight-line method over a useful life of 20 years. Goodwill represents the
excess of cost over the fair value of tangible and identifiable intangible
assets and is not being amortized pursuant to SFAS No. 142 "Goodwill and Other
Intangible Assets". We did not have acquired goodwill or intangible assets
recorded on our balance sheet prior to the Microgy acquisition. Accumulated
amortization of licensed technology rights was $127,563 as of March 31, 2002 and
$81,823 as of December 31, 2001. Amortization expense for licensed technology
rights was $45,740 for the three months ended March 31, 2002 and $-0- for the
three months ended March 31, 2001. The future estimated amortization expense for
licensed technology rights is as follows:

          For the year ended December 31,

                2002                                  $    185,500
                2003                                       185,500
                2004                                       185,500
                2005                                       185,500
                2006                                       185,500
          Thereafter                                     2,654,937
                                                    ---------------
               Total                                  $  3,582,437
                                                    ===============

NOTE E - SUBSEQUENT EVENT
-------------------------

On May 2, 2002, Benjamin Brant, a director of Environmental Power Corporation,
or EPC, and a former officer of our Microgy subsidiary, granted to EPC a
transferable one-year option to purchase 1,802,486 shares of his Common Stock at
$0.35 per share. EPC is required to exercise the option to purchase at least
342,857 of such shares by specified times. To the extent any portion of the
option expires unexercised, Mr. Brant would grant EPC a transferable right of
first refusal for the underlying shares for a 12 month period beginning upon
expiration of the option. Mr. Brant also agreed to deliver an additional 197,514
shares of his Common Stock to EPC in satisfaction of an obligation in the amount
of $69,129 to Microgy by a company of which Mr. Brant is a principal. Mr. Brant
had previously guaranteed this obligation to Microgy under a June 2001
agreement. Mr. Brant also agreed to a 24 month standstill whereby an additional
753,066 shares of his Common Stock would not be sold into the public markets.

On May 3, 2002, EPC exercised options to purchase 120,000 shares of Mr. Brant's
Common Stock by a cash payment of $42,000. On May 3, 2002, Mr. Brant also
delivered 197,514 shares of his Common Stock to EPC in full satisfaction of the
obligation to Microgy described in the previous paragraph.

                                       7

<PAGE>

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

OVERVIEW OF THE COMPANY

We are an independent developer and owner of electrical generating facilities
powered by non-commodity fuels and renewable energy sources. Since 1994, we
have owned a 22 year leasehold interest in an approximately 83 megawatt (net)
waste-coal fired facility located in Pennsylvania known as Scrubgrass.
Scrubgrass sells electricity to Pennsylvania Electric Company, or Penelec,
under a 25 year power sales agreement.

In 2001, we acquired all of the common stock of Microgy Cogeneration Systems
Inc., a privately held development-stage company based in Colorado. Microgy
holds an exclusive license in North America for the development and deployment
of a proprietary technology for the extraction of methane gas from animal
wastes and its use thereof to fuel generation of energy.

In recent years, we also held ownership positions in a 43 megawatt (net)
waste-coal fired project in development located in Pennsylvania, known as
Milesburg, and a 51 Megawatt (net) waste-coal fired facility located in Utah,
known as Sunnyside. Milesburg was involved in protracted litigation with, among
others, West Penn Power Company. We settled the Milesburg litigation in 1997
and sold Milesburg to West Penn. We sold Sunnyside in 1994 and, after the sale,
the purchasers sued us claiming breach of certain obligations in connection
with the sale. We counterclaimed for payment of certain obligations of the
purchasers.  The Sunnyside matters were settled in Fiscal 2001 by a payment to
us of $1,500,000 and the release of certain contingent liabilities.

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations compares the results of operations for the three months
ended March 31, 2002 with the results of operations for the three months ended
March 31, 2001. Unless otherwise indicated, all references to 2002 pertain to
the three months ended March 31, 2002 and all references to 2001 pertain to the
three months ended March 31, 2001. Fiscal 2002 pertains to the year ending
December 31, 2002 and Fiscal 2001 pertains to the year ended December 31, 2001.
Historical results and trends which might appear should not be taken as
indicative of future operations.

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains "forward-looking statements", as
defined by the Private Securities Litigation Reform Act of 1995, in order to
provide investors with prospective information about us. For this purpose, any
statements which are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors which could cause our actual results and events to differ materially
from those indicated by the forward looking statements. These factors include,
without limitation, those set forth below under the caption "--Certain Factors
That May Affect Future Results".

                                       8

<PAGE>

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that effect the reported amounts
of assets and liabilities at the date of the financial statements, the reported
amounts of revenues and expenses during the reporting period, and the
disclosure of contingent assets and liabilities at the date of the financial
statements.  Actual results could differ from those estimates. Management
believes the following critical accounting policies, among others discussed in
Note B to the audited consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2001, involve more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

SALE AND LEASE-BACK ACCOUNTING

Our 1990 sale of Scrubgrass Power Corporation, the original developer of the
Scrubgrass facility, was not treated as a sale for financial accounting
purposes. This was originally due to the existence of an option which enabled
us to reacquire Buzzard, then a wholly-owned subsidiary of Scrubgrass Power
Corporation, and lease the Scrubgrass facility for a substantial portion of its
commercial operation. We exercised our option and reacquired Buzzard in 1991 so
that we would have the right to lease the Scrubgrass facility. The
then-proposed lease provided Buzzard with a fair market value purchase option
to acquire the Scrubgrass facility at the end of the lease. This option meant
that we had retained substantial risks or rewards of ownership of Scrubgrass.
Therefore, we were not permitted to recognize the sale until 1993, when we
agreed to a modification to the proposed form of lease and relinquished the
fair market value purchase option. Accordingly, we removed from our
consolidated financial statements the gross assets and liabilities of the
Scrubgrass facility and reported a gain of $6,785,035 arising from the sale of
Scrubgrass. However, due to our anticipated involvement with the lease, we were
required to defer our gain over the 22 year minimum lease term, which commenced
on June 30, 1994. In connection with the operating lease, we incurred aggregate
costs of $3,279,060 to reacquire Buzzard, the lessee of Scrubgrass, and
capitalized these costs as the value of our lease rights. The value of our
lease rights is also being amortized over the 22 year minimum lease term, which
commenced on June 30, 1994.

LEASE EXPENSE RECOGNITION

We have a long-term lease agreement for Scrubgrass, which commenced on June 30,
1994, and continues for a 22 year minimum lease term. Under the terms of the
lease, Buzzard, as lessee, is required to pay the lessor a specified base rent,
which consists of all of the lessor's debt service, equity repayment, base
return on equity and related expenses. Buzzard is also required to pay the
lessor an additional rent of 50 percent of the net cash flows Buzzard receives
from the operation of Scrubgrass. The lessor's specified base rent increases
over time and is based on schedule which follows the expected receipt of
revenues. In accordance with accounting principles generally accepted in the
United States of America, we are required to aggregate the estimated lease
payments over the life of the lease and recognize them on a straight-line basis
over the 22-

                                       9

<PAGE>

year lease term. As such, during the earlier years of the lease agreement, a
portion of our lease expenses will be paid in cash and a portion will be
recorded to a liability. As of March 31, 2002, we have an accrued lease expense
of $65,284,987 recorded on our consolidated balance sheet. This liability
represents accumulated lease expenses recorded on a straight-line basis in
previous years which have not been paid to the lessor. In the later years of
the lease, we expect that our cash payments to the lessor will exceed the lease
expenses recorded on a straight-line basis and the accrued lease expense will
be decreased and reach zero by the end of the lease term.

Our lease expense components, which are discussed in the following paragraphs,
consist of:

   o   specified base rent payments calculated on a straight-line basis;
   o   additional rent; and
   o   current period adjustments resulting from differences between actual
       lease billings and projected lease billings.

As noted above, Buzzard, as lessee, is required to pay the lessor a specified
base rent, which consists of all of the lessor's debt service, equity
repayment, base return on equity and related expenses. The lessor's debt
service largely consists of debt obligations with variable interest rates.
Therefore, in order to calculate future minimum lease payments, we estimate an
average interest rate which will be payable in the future for each variable
rate debt obligation.  Since actual interest rates will differ from these
estimates, our actual lease expense reported in future periods will differ from
these estimates and the differences may be material.

In order to calculate the straight-line lease expense, we take the total
estimated future minimum lease payments over the lease term and divide it by
the lease term to get an annual lease expense. The annual lease expense is then
compared to the total amount projected to be billed by the lessor in each
period, and the difference is reported as a straight-line lease expense in our
consolidated financial statements. Any differences between actual lease
billings and projected lease billings, which principally result from variances
between actual interest rates and projected interest rates, are reported as a
lease expense in the current period.

We are also required to pay the lessor an additional rent, in addition to the
specified base rent, which additional rent represents 50 percent of the net cash
flows Buzzard receives from the operation of Scrubgrass. We estimate and accrue
additional rent in the accounting period when we believe the cash flows were
generated from operations. However, because additional rent is based on cash
flows and not earnings, it is more subjective to determine when the cash flows
were generated from operations. Lease expenses may also cause large fluctuations
between accounting periods in our reported earnings since the specified base
rent and additional rent are not directly related to our earnings. Additional
rent is not part of the straight-line lease expense calculation.

REVENUE RECOGNITION

We record power generation revenues when electricity is transmitted to the
utility under the terms of the underlying power sales agreement. However, under
the terms of our long-term power sales agreement with Penelec, the same annual
generation of electricity is expected to result in

                                       10

<PAGE>

significant increases in revenues over the life of this agreement. For various
reasons, including the requirement that all the power generated by the
Scrubgrass facility be sold to one customer, we account for power generation
revenues under the lease accounting rules as if the power sales agreement was a
sublease to this customer. In accordance with accounting principles generally
accepted in the United States of America, we are therefore required to
aggregate the expected revenue to be received over the life of the power sales
agreement and recognize it on a straight-line basis over the 22-year lease
term. As such, during the early years of the power sales agreement with
Penelec, a portion of our power generation revenues will be received in cash
and a portion will be recorded to an asset. However, since we cannot predict
whether revenues would be collected over the entire life of the power sales
agreement, and absent revenues, whether Buzzard would be able to perform under
the lease, the recognition of revenue on a straight-line basis was limited to
the recognition of lease expense on a straight-line basis. As a result, net
income is not affected by straight-line lease and revenue accounting and our
financial statements are presented more conservatively. As of March 31, 2002,
we have an accrued power generation revenue of $65,284,987 recorded on our
consolidated balance sheet which is equal in amount to the accrued lease
expense. This asset represents accumulated revenue recorded on a straight-line
basis in previous years which has not been collected from Penelec. In the later
years of the power sales agreement, when the power rates are expected to
increase, we expect that our cash receipts from Penelec will exceed the
revenues recorded on a straight-line basis and the accrued power generation
revenue will be decreased and reach zero by the end of the lease term.

ACCOUNTING FOR INCOME TAXES

As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as our deferred gain and lease rights, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our deferred tax assets. As of March 31, 2002, we
have recorded a net deferred income tax liability of $179,121 on our
consolidated balance sheet. We have also recorded a valuation allowance of
$148,377 against our gross deferred income tax assets as of March 31, 2002, due
to uncertainties related to our ability to utilize some of our net operating
loss carryforwards before they expire. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish an additional valuation allowance which could
materially impact our financial position and results of operations.

                                     11

<PAGE>

INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the purchase
method of accounting for all business combinations and that certain acquired
intangible assets in a business combination be recognized as assets separate
from goodwill. SFAS No. 142 requires that goodwill and other intangibles
determined to have an indefinite life are no longer to be amortized but are to
be tested for impairment at least annually. We have applied SFAS No. 141 in our
accounting for the acquisition of Microgy. Accordingly, we identified and
allocated a value of $3,710,000 to Microgy's licensed technology rights and a
value of $4,912,866 to goodwill. The valuation of these intangible assets
required us to use significant judgment. On January 1, 2002, we adopted SFAS No.
142, which will require us to perform an initial impairment test during 2002 on
our acquired intangible assets and goodwill. The impairment testing required by
SFAS No. 142 will require us to use significant judgment and could require us to
write down the carrying value of our goodwill and other intangible assets in
future periods. We are currently evaluating whether SFAS No. 142 would have an
impact on our financial position.

RESULTS OF OPERATIONS

Net income increased to $1,766,650, or 9 cents per share, for 2002 from
$987,937, or 9 cents per share, in 2001. The increase in net income was
primarily attributable to an increase in power generation revenues and the sale
of NOx emission credits. The effect of these changes was offset in part by
increases in:

   o  operating expenses,
   o  general and administrative expenses,
   o  lease expenses, and
   o  income tax expense.

The reasons for the changes in our net results are discussed in more detail in
the following paragraphs.

Power generation revenues increased to $14,113,256 for 2002 from $13,482,891 in
2001 and all pertained to Scrubgrass. The increase in power generation revenues
during 2002 is primarily attributable to greater output from the Scrubgrass
facility and a 5% increase in rates billed to Penelec under the terms of the
power sales agreement. Scrubgrass, which operated at 95.4% of its capacity in
2002 as compared to 93.7% for 2001, had improvements in its capacity rate
primarily because of fewer unplanned shutdowns to respond to equipment
malfunctions and utility curtailments. These increases were partially offset by
a decrease in revenue recorded as a result of the straight-line accounting
treatment of revenues under the power sales agreement which amounted to
$1,635,992 in 2002 and $1,865,208 in 2001.

                                     12

<PAGE>

Operating expenses increased to $5,144,733 for 2002 from $4,957,240 in 2001 and
all pertained to Scrubgrass. The increase in operating expenses was primarily
due to:

   o  higher fuel expense from cost escalations in certain fuel supply
      agreements;
   o  higher fuel expense from changes in fuel mix and the quality of fuel
      sources;
   o  higher fuel expense from the improvement in facility output;
   o  increases in maintenance expense due to differences in the timing of
      maintenance purchases between periods;
   o  increases in operator fees due to
      contract escalations in the operations and maintenance agreement; and
   o  increases in ash handling charges due primarily to lower quality fuel.

These increases in operating expenses were partially offset by decreases in
labor and labor related costs due to fewer employees in 2002 and reductions in
employee benefit costs.

Lease expenses increased to $6,783,380 for 2002 from $6,015,022 in 2001 and all
pertained to Scrubgrass. The increase in lease expenses during 2002 is primarily
attributable to:

   o  increases in scheduled base equity rents;
   o  an increase in additional rent paid to the lessor, which amounts to 50
      percent of the net available cash flows from Scrubgrass, as a result of
      increases in available cash flows from Scrubgrass. During 2002, such
      cash flows included income from sales of NOx emission credits and the
      benefit of exceptionally low interest rates; and
   o  increases in scheduled principal payments for the Scrubgrass debt which
      were billed to us under the terms of the lease.

These increases in lease expenses were partially offset by:

   o  decreases in the lessor's loan costs, which are passed along to us as a
      lease expense, due to lower average interest rates on the tax exempt
      bonds and variable rate term loans and reduced outstanding balances on
      the Scrubgrass debt; and
   o  a decrease in lease expenses recorded as a result of the straight-line
      accounting treatment of lease expenses under the Scrubgrass lease which
      amounted to $1,635,992 in 2002 and $1,865,208 in 2001.

General and administrative expenses increased to $1,357,879 for 2002 from
$685,729 in 2001. The increase was primarily due to:

   o  Microgy overhead expenses following its acquisition on July 23, 2001;
   o  significant expenses related to the Microgy acquisition for
      post-acquisition integration, business development, and strategic
      planning; and
   o  increases in our labor force for planned business expansion.

Depreciation and amortization increased to $135,971 for 2002 from $86,547 in
2001. The increase was primarily attributable to depreciation and amortization
taken on licensed technology

                                     13

<PAGE>

rights and machinery and equipment modifications that were added during the
second half of 2001.

Interest expense decreased to $30,499 for 2002 from $69,303 in 2001. The
decrease was primarily due to lower variable interest rates and reduced average
outstanding balances for Scrubgrass debt. The decrease was partially offset by
interest incurred on the $750,000 loan made by Alco Financial Services, LLC in
September 2001, which loan is discussed further under Financing Activities.

Sales of NOx emission credits increased to $2,428,200 in 2002 from $-0- in 2001.
We received our next award of NOx emission credits in January 2002 for the ozone
seasons in 2003 through 2007. Similar to prior years, we expected that we may
not require a portion of these future NOx emission credits to maintain our
compliance with the applicable regulations and sold the anticipated excess NOx
emission credits in 2002 for $2,428,200. There were no sales of NOx emission
credits during 2001.

Income tax expense increased to $1,411,000 for 2002 from $777,000 in 2001. The
increase in income tax expense for 2002 is primarily attributable to the
increase in pre-tax earnings. The effective income tax rates were approximately
44% for both 2002 and 2001.

Earnings per common share amounted to 9 cents per common share in each of 2002
and 2001. While earnings per common share remained unchanged between such
periods, net income increased to $1,766,650 for 2002 from $987,937 in 2001. The
increase in net income was diluted by an increase in the weighted average common
shares outstanding due to the issuance of additional shares in the second half
of 2001 for the acquisition of Microgy.

2002 OUTLOOK

The following forward-looking information concerning our results of operations
for Fiscal 2002 is being compared to our historical results of operations for
Fiscal 2001:

Power generation revenues are expected to increase in Fiscal 2002 primarily due
to a 5% increase in rates billed to Penelec under the Scrubgrass power sales
agreement. This increase is expected to be partially offset by a decrease in
revenue recorded as a result of the straight-line accounting treatment of
revenue under the power sales agreement.

Operating expenses are expected to increase in Fiscal 2002 primarily due to:

   o  an escalation in rates for fuel supply agreements;
   o  changes in the scope of planned maintenance procedures and facility
      modifications; and
   o  a 5% escalation in operator fees under the terms of the operations and
      maintenance agreement.

Lease expenses are expected to increase in Fiscal 2002 primarily because:

   o  we have scheduled increases in base equity rent payments; and

                                     14

<PAGE>

   o  we expect additional rents paid to the lessor, which amount to 50 percent
      of the net cash flows from Scrubgrass, will increase due to projected
      increases in cash flows from Scrubgrass operations.

However, these increases may be partially offset because:

   o  we expect lower interest rates on the lessor's tax-exempt bonds and
      variable rate term loans to lessen the lessor's loan costs that would
      be billed to us under the terms of the lease;
   o  we expect lower outstanding balances for term loans to lessen the lessor's
      interest costs that would be billed to us under the terms of the lease;
   o  we expect the lessor to bill us lower scheduled term loan principal
      payments pursuant to the terms of the lease; and
   o  we expect to have a decrease in the lease expense recorded as a result of
      the straight-line accounting treatment of lease expenses under the lease
      agreement.

General and administrative expenses are expected to increase during Fiscal 2002
primarily because:

   o  we expect to make changes in our work force to seek to develop and
      accomplish our Microgy business plan;
   o  we continue to employ consultants for technical, financial, legal,
      marketing, public and investor relations and other strategic advice;
   o  Microgy corporate overhead would be included in our results of operations
      for all of Fiscal 2002 versus approximately five months in Fiscal 2001;
      and
   o  we expect numerous corporate expenses like insurance, office supplies,
      rent, legal, and travel to increase due to business expansion efforts.

Other income is expected to increase slightly in Fiscal 2002. During Fiscal
2002, we expect to report sales of NOx emission credits of approximately $2.4
million. In Fiscal 2001, we had other income of approximately $2.1 million from
the settlement of the Sunnyside litigation.

Excluding the effect of any share issuances or repurchases during Fiscal 2002,
our weighted average common shares outstanding would have increased from
14,144,222 shares in Fiscal 2001 to 20,251,653 shares in Fiscal 2002. We
expected this increase because our shares issued for the acquisition of Microgy,
which were weighted from the date they were issued in Fiscal 2001, were expected
to be outstanding for all of Fiscal 2002. This increase is expected to
significantly dilute our basic and diluted earnings per common share during
Fiscal 2002. However, as discussed in Part II - Item 5, we have repurchased, and
expect to repurchase in the future, shares during Fiscal 2002 from Benjamin
Brant, a director of EPC and former officer of Microgy. Absent new issuances,
the share repurchases from Mr. Brant are expected to reduce our weighted average
common shares outstanding in Fiscal 2002 to below the 20,251,653 shares
outstanding as of the beginning of Fiscal 2002.

                                     15

<PAGE>

RECENTLY ISSUED ACCOUNTING STANDARDS

There are five recently issued accounting standards which are described in Note
C to the Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

We had cash used by operating activities of $48,125 in 2002 and cash provided by
operating activities of $267,914 in 2001. During these periods, our only sources
of cash from operating activities were operating profits from Scrubgrass,
proceeds from the settlement of the Sunnyside litigation, proceeds from sales of
NOx emission credits and investment earnings.

Our net income during 2002 and 2001 contributed a significant portion of cash to
operations. The following non-cash charges and credits, which did not impact our
cash flows, need to be considered in order to reconcile our 2002 net income to
our net cash used in operating activities.

Depreciation and amortization - During 2002, we recognized amortization for
licensed technology rights of $45,740, lease rights of $37,251, and deferred
financing costs of $15,527 and depreciation for machinery and equipment
modifications of $32,025 and equipment and furniture of $5,428.

Deferred income taxes - Our deferred tax liability increased to $179,396 as of
March 31, 2002 from $146,396 as of December 31, 2001. The increase is due to
deferred income tax expense reported in 2002.

Deferred gain, net - Our deferred gain, net, decreased to $4,394,852 as of March
31, 2002 from $4,471,955 as of December 31, 2001. The decrease is due to the
amortization of the deferred gain related to Scrubgrass, which is being
amortized on a straight-line basis over 22 years.

We also offer the following information to discuss changes in operating assets
and liabilities which most notably impacted our cash position during 2002:

Receivable from utility - Our receivable from utility increased to $8,365,790 as
of March 31, 2002 from $7,905,864 as of December 31, 2001. The increase was
primarily due to more output at the Scrubgrass facility and a 5% increase in
rates billed to Penelec under the terms of the power sales agreement.

Other current assets - Our other current assets decreased to $530,390 as of
March 31, 2002 from $607,590 as of December 31, 2001. The decrease was largely
attributable to seasonal reductions in prepaid insurance.

Accounts payable and accrued expenses - Our accounts payable and accrued
expenses decreased to $7,861,133 as of March 31, 2002 from $9,382,471 as of
December 31, 2001. The decrease was primarily because:

                                    16

<PAGE>

   o  accrued bond interest due to the lessor decreased by approximately
      $1.2 million largely due to lower average interest rates and shorter bond
      maturities;
   o  accrued lease expenses as of December 31, 2001 included higher scheduled
      principal payments on the lessor's terms loans; and
   o  certain costs which are paid annually during the first quarter and accrued
      monthly during the calendar year had only three months of expense accrual
      as of March 31, 2002 versus 12 months of expense accrual as of
      December 31, 2001.

The decrease in accounts payable and accrued expenses was partially offset by:

   o  higher corporate taxes payable as of March 31, 2002 due to increases in
      taxable earnings during 2002 and because Pennsylvania taxes for Fiscal
      2001 were not paid until April 2002;
   o  higher scheduled base equity rent and additional rent payments due as of
      March 31, 2002; and
   o  increases in operating expenses included in accounts payable and accrued
      expenses due primarily to cost escalations in operating agreements.

Investing Activities

Our cash used in investing activities was $298,160 in 2002 and $211,503 in 2001.
Our investing activities were concentrated primarily in the following areas:

Restricted cash - We are contractually required to make scheduled deposits to a
restricted maintenance fund for Scrubgrass to ensure that funds are available in
the future for scheduled major equipment overhauls. We are allowed to use
restricted cash for major equipment overhauls subject to certain restrictions.
We made scheduled deposits to the restricted major maintenance fund of $252,594
in 2002 and $197,548 in 2001. There were no payments for major equipment
overhauls made during 2002 and 2001. The remaining changes to restricted cash
primarily pertain to investment earnings on available cash balances. Major
equipment overhauls are subject to certification by an independent engineer and
are performed on a pre-established schedule which can differ widely from year to
year. The selection of equipment for service and/or replacement each year
depends on factors such as the condition of the equipment, expected wear and
tear, and recommendations made by equipment manufacturers. Beginning in February
2002, we are required to make deposits to the restricted major maintenance fund
of $92,331 per month through April 2005. The required monthly payment is subject
to possible recalculation after each annual maintenance outage to ensure that
funds are sufficient to cover the long-term schedule of major equipment
overhauls.

Property, plant and equipment - We made property, plant and equipment
expenditures of $41,602 during 2002 for office equipment at our corporate
headquarters.

Project development activities - We expect to begin the sale and/or development
and construction of facilities using Microgy's licensed technology during 2002.
To the extent we are the owner of these facilities, we will require financing to
complete the development and construction of the facilities which is discussed
under financing activities.

                                    17

<PAGE>

Financing Activities

We had cash provided by financing activities of $141,680 in 2002 and cash used
in financing activities of $352,650 in 2001. Our financing activities are
concentrated primarily in the following areas:

Related Party Loan - On September 14, 2001, we borrowed $750,000 from Alco
Financial Services LLC, or Alco, to fund certain expenses related to the
acquisition of Microgy and provide additional working capital for our expansion
efforts. Robert Weisberg, one of our directors, is the President, Director and a
member of Alco. The loan is evidenced by a one-year promissory note which bears
interest at the prime rate plus 3.5%. We also pay an administrative fee of 0.6%
per month. The loan is secured by all of EPC's assets, except for the stock of
Buzzard, which is already pledged to the lessor of Scrubgrass. In connection
with the loan, we granted Alco five year warrants to purchase 50,000 shares of
common stock at $0.60 per share. In April 2002, the principal repayment terms of
the loan were modified so that all principal is now due by April 1, 2003. During
2002 and 2001, there were no borrowings or repayments under this loan.

Dividends -Since March 2001, the Board of Directors has not declared any
dividends on our common stock. Due to the recent acquisition of Microgy and
anticipated expansion of our business, the Board of Directors has concluded that
available cash flows should be used for operating and investing activities for
the foreseeable future. We paid dividends to a preferred stockholder of $1,250
during each of 2002 and 2001. We also had dividends payable of $171,102 as of
December 31, 2000, which were declared during the fourth quarter of 2000 and
paid on January 10, 2001. As such, we paid aggregate dividends of $1,250 in 2002
and $172,352 in 2001.

Working Capital Loan - Buzzard may borrow up to $4 million under a Lessee
Working Capital Loan Agreement with the lessor of Scrubgrass for ongoing working
capital requirements of this project. The outstanding borrowings under this loan
were $1,297,154 as of March 31, 2002 and $1,116,905 as of December 31, 2001. As
discussed below, the Lessee Working Capital Loan Agreement expires in December
2002 and is in the process of being refinanced. Under the existing terms of this
loan, we were required to pay the outstanding balance to zero for a minimum of
twenty days during 2001 and 2002. We have already met the paydown requirement
for this loan during 2002.

Refinancing at Scrubgrass - NEG, the manager of Scrubgrass, continues to be in
long-term refinancing discussions with the lending agent for the project. NEG is
addressing the following financing matters:

   o  Buzzard's Lessee Working Capital Loan commitment expires in December 2002.
   o  Buzzard is expected to require additional working capital beginning in
      July 2003, when Penelec's contracted payment terms will be extended by
      20 days.

NEG presently has a letter of intent with the lending agent to provide a new
working capital facility which is expected to address these financing matters.
Under the terms of the proposed working capital facility, the available
borrowings would be increased from $4 million to $10 million through 2005 with
annual paydown requirements to $8 million in 2003 through 2005. After 2005, the
available working capital facility and annual paydown requirements would reduce

                                     18

<PAGE>

incrementally until the expiration of the proposed working capital facility in
2008. Due to its credit constraints, the lending agent is expected to transfer a
portion of its existing Scrubgrass loan commitments to another financial
institution in order to provide the proposed working capital facility. At this
time, we anticipate the provisional agreement would eventually be finalized.
However, present uncertainties in the financial markets have caused delays in
locating a suitable financial institution for the lending agent's transferable
loan commitments. Should there be continued delays in finalizing the working
capital facility, our distributions from Scrubgrass may be delayed or reduced.
As time passes, there can also be no assurance that the terms of the provisional
agreement would not be amended to reflect changes in market conditions.

Scrubgrass Debt Obligations

Buzzard and the lessor have various debt obligations related to Scrubgrass.
Under the terms of the Scrubgrass lease, Buzzard is required to pay the
principal, interest and fees for the lessor's debt obligations as a base lease
payment. As such, Buzzard is committed to pay all of the Scrubgrass debt
obligations as either a debt or lease obligation. Scrubgrass had the following
debt obligations as of March 31, 2002 and December 31, 2001:

<TABLE>
<CAPTION>
                                         Balance at       Balance at                               Matures
    Description of the Obligation         3/31/02          12/31/01             Interest Rate      Through
------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>            <C>                         <C>
Buzzard's lease obligations:
   Variable rate tax-exempt bonds       $135,600,000     $135,600,000   Quoted Bond Rates           2012

   Swap rate term loan                    10,185,166       10,669,663   7.6725%                     2005

   Variable rate term loan                 8,028,572        8,344,479   LIBOR + 1.250%              2004
Buzzard's debt obligations:
   Variable rate term loan                   948,428          985,437   LIBOR + 1.250%              2004

   Working capital loan                    1,297,154        1,116,905   LIBOR + 1.250%              2002
</TABLE>

Buzzard's lease obligations for the lessor's debt are not reported in our
consolidated financial statements. As these debt obligations mature, they will
be billed by the lessor to Buzzard and reported as a lease expense in our
consolidated financial statements. Buzzard made principal repayments on its
variable rate term loan of $37,319 in 2002 and $37,083 in 2001.

Notes Receivable from Officers and Board Members - We have outstanding notes
receivable from officers and board members for shares purchased in connection
with stock option plans which amounted to $645,948 as of March 31, 2002 and
December 31, 2001. These notes, which are secured by the underlying shares of
stock, are payable upon demand and bear interest at a floating rate which is
payable monthly. The were no borrowing or repayments under these outstanding
notes receivable during 2002 and 2001.

                                     19

<PAGE>

Sunnyside Contingent Obligations

We had contingent obligations of $1,218,078 on our consolidated balance sheet as
of December 31, 2000. The contingent obligations were principally expenses for
the sale of Sunnyside which were payable upon collection of certain obligations
from the purchasers of Sunnyside. On April 10, 2001, we received aggregate
proceeds of $1,500,000 from the purchasers of Sunnyside and resolved a
litigation by executing a Binding Settlement Agreement. In this agreement, we
were formally released from contingent obligations of $177,962. We have also
been released by the statute of limitations or the terms of the underlying
agreements from additional contingent obligations of $457,086. We reported the
settlement proceeds of $1,500,000 and the released liabilities of $635,048 as
other income in our consolidated financial statements for Fiscal 2001.

Because of the terms of this settlement agreement, which terms represented a
substantial compromise of our previous claims against the purchasers of
Sunnyside, we are presently considering our rights and obligations with respect
to the remaining contingent obligations of $583,030. Until we resolve these
remaining issues, the unsettled contingent obligations will remain recorded in
secured promissory notes and other borrowings in our consolidated financial
statements.

Cash Flow Outlook

During Fiscal 2002, we expect to principally fund our business activities from
available cash balances, investment earnings, proceeds from sales of NOx Credits
and additional cash which may become available from Scrubgrass. As discussed in
our previous filings, we are not able to receive distributions from Scrubgrass
until all operating expenses, base lease payments, restricted cash deposits and
other subordinated payments of Scrubgrass are satisfied. Nevertheless,
Scrubgrass cash flows in Fiscal 2002 are expected to be sufficient to satisfy
all of these restrictions and provide us with continuing distributions for the
foreseeable future.

On March 31, 2002, our unrestricted cash balance decreased to $263,666 from
$468,271 as of December 31, 2001. On March 31, 2002, our restricted cash balance
increased to $1,271,138 from $1,014,580 as of December 31, 2001. As discussed
further under investing activities, we are allowed to spend restricted cash to
fund the cost of major equipment overhauls at Scrubgrass subject to certain
restrictions.

As of May 7, 2002, we have received year-to-date distributions from Scrubgrass
of $3,321,536 compared to distributions of $298,750 for the same period in 2001.
Scrubgrass has been operating favorably with annual capacity rates in excess of
90% for the last two years. Since Scrubgrass is so highly leveraged with
variable rate debt, the recent trend of low interest rates and favorable
operations has allowed Scrubgrass to generate unprecedented cash flows from its
operations. Further, year-to-date distributions as of May 7, 2002 included a
distribution of our revenues from 2002 sales of NOx emission credits from
Scrubgrass. Assuming the continuing trends of favorable operations and low
interest rates, we expect to receive record levels of distributions from
Scrubgrass in Fiscal 2002. Therefore, for the next twelve months, we expect that

                                     20

<PAGE>

distributions from Scrubgrass, combined with our current cash balances, would
likely be sufficient to fund:

   o  EPC's corporate overhead requirements;
   o  Microgy's corporate overhead requirements prior to the development or
      construction of power projects;
   o  repayment of the Alco loan to the extent the loan is not refinanced
      or replaced.

However, in case Scrubgrass distributions are less than anticipated, or
corporate overhead expenses are greater than anticipated, we are engaging in
discussions with various potential sources of loans or equity. We may also need
to expand our business, including our staff and internal systems, more quickly
if market response to our Microgy products are greater than our current
expectations. Therefore, we believe it is necessary to explore these
possibilities for additional financing in case further expansion of our business
is restricted by our available resources. There can be no assurance that such
financing would be obtained or, if obtained, would be on terms acceptable to us.

During Fiscal 2002, Microgy plans to commence the sale, development and
construction of projects based upon the anaerobic digestion technology licensed
to us. Our present business strategy generally anticipates the outright sale of
facilities; however, in some circumstances, we expect that Microgy may own some
or even a majority of the projects. We anticipate that, to the extent Microgy is
the owner of projects, project financing may be obtained in the form of a credit
facility with one or more lenders, the sale of tax exempt or taxable bonds to
investors or equity or other financing. Microgy can offer no assurance that it
will be able to secure project financing in the amount required to fulfill any
development or construction requirements, that project financing will be
obtained in time to meet such requirements, or that any such proposed project
financing, if obtained, will be on terms acceptable to Microgy. However, to the
extent Microgy is the owner of projects, Microgy will need to obtain financing
to allow it to develop and construct such projects.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q.

MICROGY, A COMPANY THAT WE RECENTLY ACQUIRED, HAS VERY LITTLE OPERATING HISTORY
FROM WHICH TO EVALUATE ITS BUSINESS AND PRODUCTS.

Microgy was formed in 1999 and is still in the development stage. Microgy
intends to develop facilities which use environmentally friendly anaerobic
digestion and other technologies to produce bio-energy from animal and organic
wastes. Because a large part of our future business is anticipated to involve
Microgy's bio-energy projects, your investment decision will likely be based in
large part on an enterprise with very little operating history upon which to
judge. We are unable to determine whether our investment in Microgy will prove
to be financially advantageous.

                                     21

<PAGE>

MICROGY HAS EXPERIENCED LOSSES TO DATE AND WE ANTICIPATE IT WILL CONTINUE TO
EXPERIENCE LOSSES IN THE FORESEEABLE FUTURE.

Microgy had accumulated losses of approximately $2.6 million from inception in
1999 through March 31, 2002. We expect our Microgy subsidiary to continue to
incur losses, reduce our earnings or, as the case may be, add to our earnings
deficit as we seek to develop its business. These ongoing losses will likely
adversely affect our financial condition into the foreseeable future.

WE HAVE NOT COMPLETED OUR PLANS FOR DEPLOYMENT OF OUR ANAEROBIC DIGESTER
TECHNOLOGY AND THEREFORE, CANNOT PREDICT ITS RELATED COSTS OR OUTLOOK FOR
PROFITABILITY.

The strategic implementation planning necessary to determine our course of
action for deployment of our anaerobic digester technology has not been
completed. Accordingly, no decision has been made as to whether we will sell,
install and operate, or develop and own the related facilities. In addition, we
do not have experience in, or a basis for, predicting the general and
administrative and other costs associated with developing anaerobic digester
facilities. Because of this we are unable to determine when or if these
facilities will generate a profit. If the organizational, structural, staffing
and other overhead costs associated with the anaerobic digester facilities
outstrip any profits, the value of your investment will be adversely affected.

IF WE ARE UNABLE TO OBTAIN NEEDED FINANCING FOR MICROGY'S ANAEROBIC DIGESTION
BIOENERGY PROJECTS, THE VALUATION OF OUR MICROGY INVESTMENT MAY BE REDUCED
SIGNIFICANTLY.

We are considering corporate, project and group financing to fund the cost of
development for our anaerobic digestion bioenergy projects. We are likely to
require financing with more favorable rates and terms than are generally
available and such financing may be difficult to obtain. If we are unable to
obtain such financing, our initial valuation of our Microgy investment may be
reduced significantly, and we may be required to substantially curtail our
business or close any anaerobic digester projects. This financing will depend on
the lender's or investor's review of the financial capabilities of us as well as
specific project or projects and other factors, including their assessment of
our ability to successfully construct and manage the projects.

MICROGY'S TECHNOLOGIES COULD BECOME OBSOLETE BEFORE COMMERCIAL DEPLOYMENT,
REDUCING THE VALUE OF YOUR INVESTMENT.

We do not expect to commercially deploy Microgy's licensed anaerobic digestion
bioenergy technologies until we further develop Microgy's business plan, decide
on project structures and arrange necessary financing. Current solutions or
solutions that may be developed in the future by competitors could make our
anaerobic digestion bioenergy technologies obsolete before they are commercially
deployed. Accordingly, we cannot guarantee that our technologies will ensure a
competitive position within the marketplace in the future. If we are unable to
obtain a competitive position in the agricultural and alternative power
generation markets, the value of your investment will be reduced.

                                     22

<PAGE>

IF WE EXPERIENCE DELAYS IN OBTAINING THE TECHNICAL INFORMATION AND SPECIFICS
NEEDED TO BUILD OUR LICENSED ANAEROBIC DIGESTER TECHNOLOGIES, OUR BUSINESS COULD
BE HARMED AND THE VALUE OF YOUR INVESTMENT COULD BE REDUCED.

The company from which we license intellectual property regarding our anaerobic
digestion bioenergy products still holds trade secret and other proprietary
information that is important to us. In the past, Microgy has experienced delays
in obtaining and completing information necessary to successfully develop
anaerobic digester projects. The inability to readily obtain this information
from our licensor could delay our product offerings, make them more expensive to
bring to market and reduce the value of your investment.

THE MARKET FOR ANAEROBIC DIGESTER BIOENERGY TECHNOLOGY IS CROWDED AND OUR MARKET
SHARE MAY NOT BE SUFFICIENT TO BE PROFITABLE.

There are many companies that offer anaerobic digester systems. We believe that
at least 60 companies offer complete systems or components to these systems in
the U.S. market. The presence of these companies may dilute our market share to
a degree that we are not profitable.

WE CURRENTLY RELY ON THE SCRUBGRASS PROJECT FOR ALL OF OUR OPERATING REVENUE.

We own a 22 year leasehold interest that commenced in 1994 in our Scrubgrass
project, a waste coal fired electric generating facility in Pennsylvania.
Because all of our operating revenue currently results from the Scrubgrass
project, we are dependent on its successful and continued operation experiences.
Significant unscheduled shutdowns or large increases in interest rates at
Scrubgrass could reduce our cash flows. This may necessitate a substantial
curtailment of our operations and require the termination of any anaerobic
digester projects and would have an adverse effect on our results of operations.

WE DO NOT CONTROL THE MANAGEMENT OF THE SCRUBGRASS PROJECT, OUR PRIMARY REVENUE
GENERATING ASSET.

We have a management services agreement with PG&E National Energy Group, or NEG,
to manage our Scrubgrass project and a 15-year operations and maintenance
agreement with PG&E Operating Services Company to operate the facility. Under
the terms of these agreements, there are provisions that limit our participation
in the management and operation of the Scrubgrass project. Because we do not
exercise control over the operation or management of our Scrubgrass project,
decisions may be made, notwithstanding our opposition, that may have an adverse
effect on our business.

                                     23

<PAGE>

OUR CURRENT POWER GENERATION REVENUE IS DERIVED FROM ONLY ONE CUSTOMER, THE LOSS
OF WHICH WOULD SEVERELY HARM OUR FINANCIAL CONDITION AND THE VALUE OF YOUR
INVESTMENT.

Our current Scrubgrass project power generation revenue is earned under a
long-term power purchase agreement with one customer, Pennsylvania Electric
Company, or Penelec. We expect that the concentration of our revenue with this
customer will continue for the foreseeable future. If this customer goes out of
business or defaults on its payments to us, our financial condition will be
adversely affected.

A LARGE INCREASE IN INTEREST RATES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

Our Buzzard subsidiary is leveraged with variable rate and fixed rate debt and
lease obligations. Should market interest rates rise significantly, our
operating results will be adversely impacted.

OUR LONG TERM SCRUBGRASS PROJECT POWER SALES AGREEMENT IS SUBJECT TO MARKET
CONDITIONS IN ITS LATER YEARS WHICH MAY AFFECT OUR PROFITABILITY.

The Scrubgrass project generates electricity that is sold at rates established
under a long-term power sales agreement with Penelec, approved by the
Pennsylvania Public Utility Commission. Contracted rates in the later years of
the agreement are determined with reference to then existing market conditions.
Therefore, low wholesale energy rates during the later years of the power sales
agreement would negatively impact our profitability and could affect our
financial position.

PAYMENT TERMS WITH OUR SCRUBGRASS PROJECT CUSTOMER WILL CHANGE IN 2003 AND, IF
OUR WORKING CAPITAL IS NOT INCREASED TO ACCOMODATE THE CHANGE, OUR CASH
AVAILABLE FOR OTHER USES WILL BE SIGNIFICANTLY LIMITED.

In 2003, the payment schedule on our Scrubgrass power sales agreement will be
modified to allow Penelec more time to pay us for the power that we produce.
This will reduce our working capital and could limit our ability to service our
debt or allocate resources to other projects.

OUR TECHNOLOGY FOR GENERATING POWER FROM WASTE COAL AT OUR SCRUBGRASS PROJECT IS
RELATIVELY NEW AND UNPROVEN AND ITS EFFECTIVENESS AND EFFICIENCY CANNOT BE
ANTICIPATED.

Our Scrubgrass project employs circulating fluidized bed technology to produce
electricity. Certain aspects of this technology, as well as the conversion of
waste products into electricity, are relatively new concepts and have only been
in existence in the United States over approximately the last 20 years. In
addition, the long-term costs and implications of maintaining this technology
have not been

                                     24

<PAGE>

established by historical industry data. Accordingly, this technology carries
greater risk of failure than proven power generation technologies with more
established histories.

WE ARE A SMALL COMPANY AND THE ENTRANCE OF LARGE COMPANIES INTO THE ALTERNATIVE
FUELS AND RENEWABLE ENERGY BUSINESS WILL LIKELY HARM OUR BUSINESS.

Competition in the traditional energy business from electric utilities and other
energy companies is well established with many substantial entities having
multi-billion dollar multi-national operations. Competition in the alternative
fuels and renewable energy business is expanding with growth of the industry and
advent of many new technologies. Larger companies, due to their better
capitalization, will be better positioned to develop new technologies and to
install existing or more advanced renewable energy generators, which could harm
our market share and business.

IF WE ARE UNABLE TO OBTAIN SUFFICIENT WASTE RESOURCES OUR RENEWABLE ENERGY
TECHNOLOGIES WILL NOT LIKELY OPERATE PROFITABLY.

The performance of our renewable energy technologies is dependent on the
availability of certain waste resources to produce the raw energy and meet
performance standards in the generation of power or fuel. Lack of these waste
resources or adverse changes in the nature or quality of such waste resources
would seriously affect our ability to develop and finance projects and to
efficiently operate and generate income. In such circumstances, our revenue and
financial condition will be materially and negatively affected. We cannot be
sure that waste resources will be available in the future for free or at a price
that make them affordable for our waste-to-energy technologies.

OUR RELIANCE ON LICENSES, AGREEMENTS AND BUSINESS ALLIANCES LINKS OUR FATE TO
THE FATE OF THESE BUSINESSES, OF WHICH WE CANNOT PREDICT OR CONTROL.

We intend to rely on a network of various licenses, agreements and alliances
with other businesses to provide important technologies and services for our
businesses. Specifically, we rely on third party companies for the operation and
maintenance of our Scrubgrass project and for the technology upon which we base
our proposed anaerobic digester projects. The termination of any of these or
other material license, agreement or business alliance will have a detrimental
impact on the success of one or all projects or categories of projects and
negatively impact our revenue. We cannot predict or control the fate of these
other businesses on which we rely.

BECAUSE WE HAVE NOT FILED PATENTS TO PROTECT MICROGY'S INTELLECTUAL PROPERTY, WE
MIGHT NOT BE ABLE TO PREVENT OTHERS FROM EMPLOYING COMPETING PRODUCTS.
CONVERSELY, OTHERS WHO HAVE FILED FOR PATENT OR OTHER PROTECTION MIGHT BE ABLE
TO PREVENT US FROM EMPLOYING OUR PRODUCTS.

Neither we nor, it is believed, our primary licensor have filed any patent
applications on the intellectual property Microgy plans to use. Should we or our
primary licensor decide to file patent applications,

                                     25

<PAGE>

there can be no assurance that any patent applications relating to our existing
or future products or technologies will result in patents being issued, that
any issued patents will afford adequate protection to us, or that such patents
will not be challenged, invalidated, infringed or circumvented. Furthermore,
there can be no assurance that others have not developed, or will not develop,
similar products or technologies that will compete with our products without
infringing upon, or which do not infringe upon, our intellectual property
rights.

Third parties, including potential competitors, may already have filed patent
applications relating to the subject matter of our current or future products.
In the event that any such patents are issued to such parties, such patents may
preclude our licensors from obtaining patent protection for their technologies,
products or processes. In addition, such patents may hinder or prevent us from
commercializing our products and could require us to enter into licenses with
such parties. There can be no assurance that any required licenses would be
available to us on acceptable terms, or at all.

We rely heavily on confidentiality agreements and licensing agreements to
maintain the proprietary nature of our base of technologies relating to
currently licensed technologies. To compete effectively, we may have to defend
the rights to our intellectual property from time to time. The defense costs can
be significant. As such, we may lack the financial resources to adequately
defend our intellectual property.

OUR LICENSE FOR MICROTURBINE TECHNOLOGY IS FROM A SMALL COMPANY THAT HAS NOT
COMPLETED THE DEVELOPMENT OF THE TECHNOLOGY AND IS THEREFORE OF AN UNCERTAIN
VALUE.

Our Microgy subsidiary has entered into a license agreement for applications of
microturbine technology which is owned and being developed by Electric Power
International, Inc., which itself is a small company with limited resources.
Electric Power International has not yet completed development of the
microturbine technology and may not have the resources available to do so. As a
result, the value of this license agreement is of uncertain value.

THE LARGE AMOUNT OF OBSTACLES NECESSARY TO OVERCOME FOR THE DEVELOPMENT OF POWER
PROJECTS INCREASES THE POSSIBILITY THAT SUCH PROJECTS WILL INCUR COSTLY DELAYS.

In our development of power projects for ourselves or on behalf of our
customers, we will be required to enter into or obtain some or all of the
following:

   o  site agreements;
   o  supply contracts;
   o  design/build or other construction related agreements;
   o  power sales contracts;
   o  various co-product sales agreements;
   o  waste disposal agreements;
   o  licenses;
   o  environmental and other permits;

                                     26

<PAGE>

   o  local government approvals; and
   o  financing commitments required for the successful completion of
      development projects.

Our failure to accomplish any of these objectives could materially increase the
cost or prevent the successful completion of development projects and incur the
loss of any investment made. These events could adversely affect our business
and results of operations and the value of your investment.

SYSTEM FAILURE OF OUR POWER GENERATION PROJECTS WILL REDUCE OUR REVENUE.

Whether we have sold our facilities to customers or continue to own them, our
revenue and our performance under various agreements will depend on the
efficient and uninterrupted operation of our bioenergy plants and systems,
including automated control systems. Any system failure that causes
interruptions in our operations could have a material adverse effect on our
business, results of operations and financial condition. As we expand our
operations, there will be increased stress placed upon hardware and information
traffic management systems. There can be no assurance that we will not
experience system failures. In addition, our systems and operations are
vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins and similar events. Our systems and
operations will also face contamination due to the actions of farmers and others
who may have access to our sites. We do not presently have redundant systems or
a formal disaster recovery plan to mitigate the risk of losses that may occur.
There can also be no assurance that any business interruption or property and
casualty insurance that we would carry in the future would be sufficient to
compensate for any losses that may occur.

SCHEDULED AND UNSCHEDULED SHUTDOWNS OF OUR POWER GENERATION PROJECTS WILL REDUCE
OUR REVENUE.

Our Scrubgrass project and any future power generation projects we develop will
experience both scheduled and unscheduled shutdowns. Periodically, power
generation projects incur scheduled shutdowns in order to perform maintenance
procedures to equipment that cannot be performed while the equipment is
operating. Occasionally, our power generation projects may also incur
unscheduled shutdowns and be required to temporarily cease operation or to
operate at reduced capacity levels following the detection of equipment
malfunctions, or following minimum generation orders received by the utility.
During periods when these projects shutdown or operate at reduced capacity
levels, we may incur losses due to reduced operating revenue and due to
additional costs that may be required to complete any maintenance procedures.

OUR POWER GENERATION ACTIVITIES EXPOSE US TO SIGNIFICANT LIABILITY THAT OUR
INSURANCE CANNOT COVER.

Our power generation activities involve significant risks to us for
environmental damage, equipment damage and failures, personal injury and fines
and costs imposed by regulatory agencies. In the event a liability claim is made
against us, or if there is an extended outage or equipment failure or damage at
our power plant for which it is inadequately insured or subject to a coverage
exclusion, and we are

                                     27

<PAGE>

unable to defend such claim successfully or obtain indemnification or warranty
recoveries, there may be a material adverse effect on our financial condition.

POOR FUEL AND OTHER MATERIALS QUALITY WILL EXPOSE US TO ENVIRONMENTAL LIABILITY
AND REDUCE OUR OPERATING RESULTS.

For our Scrubgrass project, we obtain waste coal primarily from coal mining
companies on a long-term basis because waste coal is plentiful and generally
creates environmental hazards, such as acid drainage, when not disposed of
properly. The waste coal is burned in the Scrubgrass project using a circulating
fluidized bed combustion system. During the circulating fluidized bed combustion
process, the waste coal is treated with other substances such as limestone.
Depending on the quality of the waste coal and the limestone, the facility
operator may need to add additional waste coal or other substances to create the
appropriate balance of substances which would result in the best fuel or sorbent
consistency for power generation and compliance with air quality standards.
Therefore, the cost of generating power is directly impacted by the quality of
the waste coal which supplies the Scrubgrass project. Certain conditions, such
as poor weather, can create situations where the facility operator has less
control over the quality of the waste coal. Poor fuel quality may impact our
future operating results.

THE COMPOSITION OF EFFLUENTS FROM OUR ANAEROBIC DIGESTER FACILITIES IS NOT
CERTAIN AND MAY EXPOSE US TO LIABILITY.

We do not have experience in blending the wastes that will occur in our
anaerobic digester facilities. Such blends could result in unpredictable
regulatory compliance costs, related liabilities and unwanted materials in waste
effluents and coproducts, all of which could harm our financial condition.

OUR SALE OF POWER INTO UNREGULATED AND RETAIL MARKETS WILL LIKELY SUBJECT OUR
REVENUE TO LARGE SWINGS OR A PROLONGED DEPRESSION OF PRICES.

Electricity is a commodity available from a large amount of sources with no
pricing control. When we sell power under long term supply contracts or into the
unregulated wholesale and retail markets, we will be subject to very competitive
pricing pressures and market risks. Low energy rates would negatively impact our
profitability and could adversely affect our financial condition.

OUR PRODUCTS AND SERVICES INVOLVE LONG SALES CYCLES THAT RESULT IN HIGH COSTS
AND UNCERTAINTY.

The negotiation of the large number of agreements necessary to sell, develop,
install, operate and manage any of our facilities, as well as to market the
energy and other co-products and to provide necessary related resources and
services, involves a long sales cycle and decision-making process. Delays in the
parties' decision-making process are outside of our control and may have a
negative impact on our cost of sales, receipt of revenue and sales projections.
We estimate that it can take from six months to a year or more to obtain
decisions and to negotiate and close these complex agreements.

                                     28

<PAGE>

BECAUSE THE MARKET FOR RENEWABLE ENERGY AND WASTE MANAGEMENT IS UNPROVEN, IT IS
POSSIBLE THAT WE MAY EXPEND LARGE SUMS OF MONEY TO BRING OUR OFFERING TO MARKET
AND THE REVENUE THAT WE DERIVE MAY BE INSUFFICIENT TO FUND OUR OPERATIONS.

Our business approach to the renewable energy and waste management industry may
not produce results as anticipated, be profitable or be readily accepted by the
marketplace. We cannot estimate whether demand for our bio-energy products will
materialize at anticipated prices, or whether satisfactory profit margins will
be achieved. If such pricing levels are not achieved or sustained, or if our
technologies and business approach to the energy industry do not achieve or
sustain broad market acceptance, our business, operating results and financial
condition will be materially and negatively impacted.

IF WE VIOLATE PERFORMANCE GUARANTEES GRANTED TO PENELEC, WE WILL BE REQUIRED TO
PROVIDE THEM WITH AN INCENTIVE PAYMENT.

Our agreement for the sale of power to Penelec contains a provision that
requires our Scrubgrass project to provide Penelec a certain percentage of its
average output over a given period of time. If we do not comply with this
performance guarantee, we will be required to compensate Penelec with an
incentive payment. The payment of an incentive payment would have an adverse
effect on our financial condition.

OUR PRODUCTS AND SERVICES WILL BE SUBJECT TO NUMEROUS GOVERNMENTAL REGULATIONS.

We expect to provide services involving government regulation, which will
subject us to certain regulatory policies and procedures. Compliance with these
regulations could be costly and harm our financial condition. Many of these
regulations cover air and water quality and related pollution issues. These
regulations are mandated by the United States Environmental Protection Agency
and various state and local governments. More specifically, our activities in
anaerobic digestion and/or nutrient management related to animal manure, and
other wastes, as well as the air emissions and waste effluent control from our
facilities will involve a permitting process and other forms of scrutiny from
these agencies. In addition, our activities will fall under a number of health
and safety regulations and laws and regulations relating to farms and zoning.

OUR POWER PRODUCING ACTIVITIES COULD BE SUBJECT TO COSTLY REGULATIONS AND
TARIFFS.

Our Scrubgrass project and many of our planned bio-energy projects may or do
produce power for sale to the electric grid. As such, the sale of this power may
come under the regulations of various state public utility commissions. These
commissions set the price tariffs under which energy can be sold or purchased
and they set the design standards for the interconnection of power producing
equipment with the electric power grid. Most of our power projects where
electricity is sold to the grid will come under regulation by these commissions.
These regulations may impede or delay the process of

                                     29

<PAGE>

approving and implementing our projects. Substantial delays may materially
affect our financial condition.

Government regulations can be burdensome and may result in delays and expense.
In addition, modifications to regulations could adversely affect our ability to
sell power or to implement our chosen strategy for the sale of power. Subsequent
changes in the applicable regulations could also affect our ability to sell or
install new facilities or develop and install facilities in an efficient manner
or at all. Failure to comply with applicable regulatory requirements can result
in, among other things, operating restrictions and fines which could harm our
financial condition.

WE DEPEND ON A SMALL NUMBER OF KEY EXECUTIVES AND OUR BUSINESS COULD SUFFER IF
THEY WERE TO LEAVE.

We employ a small group of skilled individuals to accomplish our goals. We
believe our performance is substantially dependent on the continued employment
and performance of our senior management. Many of these individuals are not
currently subject to employment agreements or employee non-compete agreements.
If we fail to retain the services of one or more of these persons, our business
could suffer significantly. We do not maintain key-man insurance on the life of
any of our officers at this time.

OUR PLANS TO ENTER INTO THE ANAEROBIC DIGESTER MARKET WILL REQUIRE THE RETENTION
OF SKILLED EMPLOYEES AND CONTRACTORS, THE SUCCESS OF WHICH CANNOT BE ASSURED.

In order for us to enter into the anaerobic digester market we will be required
to hire and retain highly skilled employees and independent contractors. It is
anticipated that such persons will be difficult to locate and engage. If we are
not successful in hiring and retaining qualified persons, our entrance into the
anaerobic digester market will not likely be successful and the value of your
investment will be impaired.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our most significant market risk exposure is changing interest rates which may
affect our short-term investments, debt and certain of our lease expenses. We
offer the following information about these market risks:

Short-term investments - We invest cash balances which are in excess of our
normal operating requirements in short term investments generally with
maturities of 3 months of less. Because of the short duration of these
investments, we do not believe our short-term investments are subject to
material market risk.

Debt - We have borrowings which bear interest at variable rates which are based
on the London Interbank Offering Rate. We monitor market conditions for interest
rates and, from time to time, enter into interest rate swaps to manage our
interest payments. The interest rate swaps have the

                                     30

<PAGE>

effect of converting the variable rate borrowings to fixed rate borrowings for
specified time periods.

Lease Expense - As a lease cost of the Scrubgrass Project, we are required to
fund the lessor's debt service which consists of fixed rate borrowings and
borrowings which bear interest at variable rates based on either quoted bond
rates or the London Interbank Offering Rate. The manager of the Scrubgrass
Project monitors market conditions for interest rates and, from time to time,
enters into interest rate swaps to manage the lessor's interest payments for the
Scrubgrass Project. The interest rate swaps have the effect of converting the
variable rate borrowings to fixed rate borrowings for specified time periods.

As of March 31, 2002, the aggregate outstanding balance of our variable rate
debt obligations was $2,245,582. As of March 31, 2002, the aggregate outstanding
balance of the lessor's variable rate debt obligations, which are passed along
to us as a lease expense, was $143,628,572. Based on these balances, an
immediate change of one percent for the variable interest rates would cause a
change in interest expense of $22,456 and lease expense of $1,436,286. Our
objective in maintaining these variable rate borrowings is to achieve a lower
overall cost when compared to fixed-rate borrowings. We believe the lessor has
the same objective for maintaining their variable rate borrowings.

                                     31

<PAGE>

                          PART II. OTHER INFORMATION
                          --------------------------

ITEM 5.  OTHER INFORMATION

On May 2, 2002, Benjamin Brant, a director of EPC and a former officer of our
Microgy subsidiary, granted to EPC a transferable one-year option to purchase
1,802,486 shares of his Common Stock at $0.35 per share. EPC is required to
exercise the option to purchase at least 342,857 of such shares by specified
times. To the extent any portion of the option expires unexercised, Mr. Brant
would grant EPC a transferable right of first refusal for the underlying shares
for a 12 month period beginning upon expiration of the option. Mr. Brant also
agreed to deliver an additional 197,514 shares of his Common Stock to EPC in
satisfaction of an obligation in the amount of $69,129 to Microgy by a company
of which Mr. Brant is a principal. Mr. Brant had previously guaranteed this
obligation to Microgy under a June 2001 agreement. Mr. Brant also agreed to a 24
month standstill whereby an additional 753,066 shares of his Common Stock would
not be sold into the public markets.

On May 3, 2002, EPC exercised options to purchase 120,000 shares of Mr. Brant's
Common Stock by a cash payment of $42,000. On May 3, 2002, Mr. Brant also
delivered 197,514 shares of his Common Stock to EPC in full satisfaction of the
obligation to Microgy described in the previous paragraph.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

         (i)      Exhibit 11 - Computation of Earnings Per Share

         (ii)     Exhibit 10.74 - Stock Option and Right of First Refusal
                  Agreement dated as of May 2, 2002, by and between
                  Environmental Power Corporation and Benjamin Brant
                  (incorporated by reference to exhibit number 6 to Amendment
                  No. 1 of Form 13D for Benjamin Brant filed on May 13, 2002)

         (iii)    Exhibit 10.75 - Escrow Agreement dated as of May 3, 2002,
                  among Environmental Power Corporation, Benjamin Brant and US
                  Bank National Association, as Escrow Agent (incorporated by
                  reference to exhibit number 7 to Amendment No. 1 of Form 13D
                  for Benjamin Brant filed on May 13, 2002)

(b) Reports on Form 8-K

         (i)      On May 9, 2002, the Registrant disclosed pursuant to
                  Regulation FD the Letter to Shareholders dated May 6, 2002,
                  which is expected to be included in its 2001 Annual Report to
                  Shareholders.

                                     32

<PAGE>

                                    SIGNATURES
                                    ----------

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

ENVIRONMENTAL POWER CORPORATION


May 14, 2002                          /s/ William D. Linehan
                                    -----------------------------
                                      William D. Linehan
                                      Acting Treasurer and
                                      Acting Chief Financial Officer
                                      (principal accounting officer
                                      and authorized officer)

                                     33

